Buy Tata Communications Ltd For Target Rs. 2,000 By JM Financial Services Ltd
Revenue growth in-line; but EBITDA impacted by one-offs
Tata Communications’ (TCOM) consolidated revenue was a tad better than expected at INR 59.9bn (up 3.3% QoQ and 5.2% YoY) vs. JMFe/consensus of INR 59.6bn/INR 59.7bn. Data revenue was a little higher than JMFe at INR 51bn due to slightly better core connectivity revenue while digital portfolio revenue was in line. Further, the management indicated that order book growth normalised and funnel additions moderated QoQ in 4QFY25, but the overall funnel continues to be healthy across India and internationally. However, consolidated EBITDA was 6-8% lower than JMFe/cons at INR 11.2bn due to multiple one-offs; the management expects EBITDA margin to normalise in 1QFY26. Further, it has maintained its guidance on margins gradually inching up from the current ~20% to 23-25% by FY27, driven by operating leverage and synergy benefits from acquisitions. We maintain our BUY rating on TCOM (revised TP of INR 2,000/share) based on 11x FY27 EV/EBITDA multiple for the data segment, (vs. 5-year historical average of 10.4x) as we expect data segment EBITDA to grow at a robust CAGR of ~24% over FY25-28E.
* Data revenue a tad better than JMFe at INR 51bn due to slightly higher core connectivity revenue, while digital portfolio revenue was in line: Consolidated revenue was a tad better than expected at INR 59.9bn (up 3.3% QoQ and 5.2% YoY) vs. JMFe/consensus of INR 59.6bn/INR 59.7bn. Data revenue was slightly higher at INR 51bn (up 3.9% QoQ and 9.6% YoY) vs. JMFe of INR 50.6bn due to: a) slightly better-than-expected core connectivity revenue at INR 26.6bn (up 2.5% QoQ and up 3.2% YoY); and b) largely inline digital portfolio revenue at INR 24.4bn (up 5.5% QoQ and up 17.5% YoY). Core connectivity revenue grew 2.5% QoQ while digital portfolio revenue grew 5.5% QoQ and 17.5% YoY, led by robust growth in cloud and cyber-security (up 18.9% QoQ and 28.8% YoY aided by deals signed in 1HFY25 translating into revenue in 4QFY25), media (up 13.9% QoQ and 13.9% YoY) and incubation portfolio (up 17.7% QoQ and 57.4% YoY). However, collaboration & CPaaS segment revenue was down 2.9% QoQ due to seasonality in the CPaaS business and a temporary customer-specific issue, though it was still up 8.8% YoY. Further, the management shared that no customer deal got cancelled due to the US tariff-led macro uncertainty, but few deals expected to be closed in 4QFY25 got rolled over to 1QFY26. Funnel additions have also moderated QoQ in 4QFY25 but overall funnel continues to be healthy across India and internationally.
* Cons EBITDA 6-8% lower than JMFe/cons at INR 11.2bn due to multiple one-offs; management expects EBITDA margin to normalise in 1QFY26: Reported EBITDA was 6- 8% lower than JMFe/consensus at INR 11.2bn (down 5% QoQ but up 6.2% YoY) due to multiple one-offs : a) spillover of cable cuts-related expenditure (though cable cut issue was largely resolved in 3QFY25); b) marketing expenses incurred in respect of the newly launched Vayu cloud platform; c) temporary customer-specific issue in the collaboration and CPaaS segment. Further, it was impacted by: a) adverse revenue mix with higher growth in the low-margin digital portfolio and b) continued provisioning done against receivables in the SAARC region due to geopolitical factors. Hence, EBITDA margin declined to 18.7% in 4QFY25 (vs. 20.4% in 3QFY25). However, the management guided for EBITDA margin to return to normative levels (of 20.4% seen in 3QFY25) in 1QFY26 and also maintained its guidance on margins gradually inching up to 23-25% by FY27, driven by operating leverage and synergy benefits from acquisitions. Core business EBITDA margin (ex-Kaleyra and Switch) was already 23.3% in FY25. Further, PAT was significantly higher at INR 10.4bn vs. JMFe/consensus of INR 3.4bn /INR 3.1bn, due to a) exceptional gain of INR 6.6bn on sale of property situated at Ambattur, Chennai; and b) one-time gain of INR 3.1bn on sale of white-label ATM business subsidiary (TCPSL).
* Capex moderated QoQ to INR 6bn (vs. INR 7.5bn in 3QFY25); net debt also down QoQ to INR 94bn, aided by cash flows from the land sale and the TCPSL divestment: Capex moderated QoQ to INR 6.0bn in 4QFY25 (vs. INR 7.5bn in 3QFY25); FY25 capex was at INR 23.3bn vs. INR 20.3bn in FY24. Net debt was also lower at INR 93.8bn at end-FY25 or net debt to EBITDA of 2.1x (vs. INR 105bn at end-3QFY25 or net debt to EBITDA of 2.2x and INR 91.3bn at end-FY24 or net debt to EBITDA of 2.2x), aided by cash flows from the land sale and the TCPSL divestment. Further, the management reiterated its ambition of bringing net debt to EBITDA down to under 2x.
* Maintain BUY rating on TCOM with revised TP of INR 2,000: We have cut our FY26-FY27 revenue/EBITDA estimates by up to 1%, factoring in the 4QFY25 results; hence our TP is marginally cut to INR 2,000 (from INR 2,030). We are building in a robust ~24% data segment EBITDA CAGR over FY25–28E driven by a) strong growth in digital portfolio, positioned strongly across key megatrends like cloud, AI, IoT etc.; b) overall EBITDA margin improving from current ~20% to ~23% by FY27 (lower end of management guidance of 23%-25%) as operating leverage and acquisition synergies are likely to be partly offset by adverse revenue mix. Hence, we reiterate our BUY rating on TCOM with a revised target price of INR 2,000/share, based on an 11x FY27 EV/EBITDA multiple for the data segment (vs. 5-year historical average of 10.4x). Key risks: a) weak global macro leading to deferment in discretionary tech spends; b) significant delay beyond FY27 to get to positive EBITDA margin in Digital portfolio segment; c) adverse AGR ruling.
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