Company Update : Tata Communications by Motilal Oswal Financial Services Ltd
Subdued quarter, data margin continues to decline
* Consolidated gross revenue declined ~0.5% QoQ (+6.6% YoY) to INR59.6b (2% lower) in 1QFY26.
* Data revenue at INR51.3b (in line) grew 9.4% YoY (+1% QoQ), driven by ~17% YoY (~3% QoQ) growth in digital portfolio and ~3% YoY growth in Core-connectivity (though down ~1% QoQ).
* Consolidated net revenue (a proxy for gross margin) at INR32.9b declined ~1% QoQ (+1% YoY) due to continued weakness in net revenue growth for Data portfolio (up 2% YoY).
* Consolidated adjusted EBITDA grew 1% QoQ (flat YoY) to INR11.4b (3.5% miss) due to weaker revenue growth and higher staff costs (up 7% QoQ/9% YoY).
* Consolidated adjusted EBITDA margin expanded 35bp QoQ (but down 125bp YoY) to 19.1%, but came in ~30bp lower than our estimate due to weaker gross margin (lower net revenue) and rising contribution of lowermargin digital portfolio.
* Reported consol. PAT, including discontinued operations, came in at INR1.9b.
* Adjusted PAT declined ~55% QoQ (-15% YoY) to INR2.1b (~30% below our estimate) due to lower EBITDA, other income and high losses in discontinued operations.
* Net debt inched up to INR101b (vs. INR94b QoQ) due to weaker profitability and FCF outflow of INR6b.
* Committed capex moderated to ~INR4.4 in 1Q (vs. ~INR6b in 4QFY25), while cash capex declined ~13% QoQ to INR6.3b (though up ~17% YoY).
* Reported RoCE (annualized) declined further to 15.4% vs. 15.9% in 4QFY25.
Segmental details: 1Q data revenue up ~10% YoY, driven by ~17% YoY growth in Digital Portfolio; but data EBITDA margins continues to decline
Data segment:
* Gross revenue was up ~9% YoY at INR51.3b (+1% QoQ, ~1% below).
* Core-connectivity revenue declined ~1% QoQ to INR26.2b (+3% YoY), driven by ~2% QoQ decline (+7% YoY) in Enterprise revenue.
* Digital portfolio revenue was up 3% QoQ (+17% YoY) at INR25.1b (~2% beat), driven by higher growth in Next Gen connectivity (+31% YoY, 4% beat), Media (+16% YoY, 6% beat), Collaboration and CPaaS (+12% YoY, 3% beat). Cloud growth was robust at ~27% YoY (2% miss), while Incubation revenue grew 13% YoY (significant moderation QoQ, 16% miss).
* However, net revenue at INR29.7b grew by a modest 2% YoY (+2% QoQ) as digital portfolio net revenue grew ~9% YoY (vs. ~17% YoY growth in gross revenue).
* Data EBITDA at INR8.8b (-1% QoQ, -5% YoY) was ~6% below our estimate. EBITDA margin declined 30bp QoQ (-250bp YoY, 90bp miss) on account of lower gross margin and rising share of lower-margin digital portfolio in data mix (~49% vs. 47.8% QoQ).
Voice:
* Voice revenue at INR3.9b grew ~6% QoQ (though -7% YoY, 2% beat).
* Voice EBITDA declined 1% QoQ (-6% YoY) to INR436m (in line), as margin declined ~70bp QoQ to 11.1% (20bp miss).
Other segments
* The Campaign Registry (TCR) revenue grew ~5% QoQ to INR1.9b (+30% YoY), EBITDA grew ~4% QoQ to INR1.37b (2% miss), and margins contracted further ~40bp QoQ to 72.3% (290bp miss).
* TCTSL revenue declined ~34% QoQ (exit of loss-making contract), while EBITDA was up ~35% QoQ at ~INR470m as margin expanded sharply by ~1,210bp QoQ.
Management commentary
* Management indicated that despite ongoing macroeconomic headwinds and continued pressures across the industry, the order book grew in double digits on the back of the addition of multiple million-dollar deals.
* Further, management noted that losses narrowed in the digital portfolio. However, we believe the improvement (if any) would be modest, given a 30bp QoQ decline in data EBITDA margins, despite lower growth in lower-margin Incubation segment.
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