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Data revenue growth muted; but profitability improved

Tata Communications’ (TCOM) consolidated revenue was slightly higher at INR 61bn (up 2.3% QoQ and up 6.5% YoY), vs. JMFe/cons of INR 60.3bn/INR 60.8bn due to higher voice revenue and TCTSL revenue. However, the data segment revenue was 0.7% lower than JMFe at INR 51.8bn due to lower digital portfolio revenue, though partly offset by slightly higher core connectivity revenue. Consolidated EBITDA was also slightly higher than JMFe at INR 11.6bn (but lower than cons of INR 12.2bn), led by 144bps QOQ improvement in data EBITDA margin. Net debt was up QoQ at INR 113bn at end 2QFY26 or net debt to EBITDA of 2.4x (vs INR 101bn at end 1QFY26 or net debt to EBITDA of 2.2x), primarily due to dividend payments of INR 7.3bn. We maintain our BUY rating on TCOM (revised TP of INR 2,250/share) based on 11x FY27 EV/EBITDA multiple for the data segment, (in line with 5-year historical average of 10.9x) as we expect data segment EBITDA to grow at a robust CAGR of ~22% over FY25-28E.

* Data revenue 2% lower than JMFe at INR 51.8bn due to lower digital portfolio revenue, while overall revenue slightly better on higher voice and TCTSL revenue: Consolidated revenue was slightly higher at INR 61bn (up 2.3% QoQ and up 6.5% YoY), vs. JMFe/cons of INR 60.3bn/INR 60.8bn) due to higher voice revenue (at INR 4.1bn vs JMFe of INR 3.9bn) and TCTSL revenue (at INR 2.6bn vs JMFe of INR 1.9bn). However, the data segment revenue was 0.7% lower than JMFe at INR 51.8bn (up 0.9% QoQ and 7.3% YoY), as digital portfolio revenue was 2% lower than JMFe at INR 25.4bn (up 1.3% QoQ and 14.9% YoY), though partly offset by slightly higher core connectivity revenue at INR 26.4bn (up 0.6% QoQ and up 0.9% YoY). The lower digital portfolio revenue growth was primarily on account of decline in cloud and cyber-security (down 11% QoQ but up 13.1% YoY) and media (down 4.2% QoQ but up 29.3% YoY on low base); though supported by healthy growth in Collaboration & CPaaS (up 7.4% QoQ and 12.9% YoY), incubation portfolio (up 7.8% QoQ but down 8.8% YoY) and next-gen connectivity (up 3% QoQ and up 28.8% YoY).

* Cons EBITDA also slightly higher than JMFe at INR 11.6bn, led by improvement in data EBITDA margin: Staff cost was higher at INR 12.7bn (up 4.3% QoQ); but this was partly offset by lower network cost at INR 27.2bn (down 0.5% QoQ), being 44.5% of revenues (vs. 45.8% of revenues in 1QFY26); and lower other operating costs at INR 9.4bn (up 7.4% QoQ). Hence, reported EBITDA at INR 11.7bn (up 3.2% QoQ and up 3.9% YoY), was slightly higher than JMFe of INR 11.6bn (but lower than cons of INR 12.2bn), resulting in EBITDA margin of 19.2% in 2QFY26 (vs. 19.1% in 1QFY26). This was primarily led by 144bps QoQ improvement in data EBITDA margin to 18.6% in 2QFY26. However, PAT was lower at INR 1.8bn vs. JMFe/cons of INR 2.6bn/INR 3.1bn due to lower other income (at negative INR 0.2bn vs JMFe of +INR 0.2bn), slightly higher tax, and one-off expenses of INR 0.2bn (staff optimisation cost of INR 1bn; partly offset by gain of INR 0.8bn on sale of property).

* Capex increased QoQ to INR 6bn (vs. INR 4.4bn in 1QFY26); while net debt up QoQ to INR 113bn: Capex increased QoQ to INR 6bn in 2QFY26 or 9.8% of revenue (vs. INR 4.4bn or 7.3% of revenue in 1QFY26). Further, management guided capex to be ~11-12% of sales. Separately, net debt was at INR 113bn at end 2QFY26 or net debt to EBITDA of 2.4x (vs INR 101bn at end 1QFY26 or net debt to EBITDA of 2.2x), primarily due to dividend payments of INR 7.3bn.

* Reiterate BUY rating on TCOM with revised TP of INR 2,250: We have cut our FY26 EBITDA estimate by 8% post management expressed uncertainty in achieving EBITDA margin of 20% in FY26, due to continued red sea cable cuts and deterioration in TCR’s profitability post introduction of new incentive compensation structure. However, we have slightly increased our FY27-FY28 revenue/EBITDA estimates by ~1%, factoring slightly higher revenue in connectivity business to account marginally for TCS-announced data centre opportunity. Further, we have rolled forward our valuations to Sep’27; hence, our TP has been revised upwards to INR 2,250 (from INR 2,000). We are building in a robust ~22% 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 ~19% 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 revised target price of INR 2,250/share, based on an 11x Sep’27 EV/EBITDA multiple for the data segment (in line with 5-year historical average of 10.9x). 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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