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Integration of Kaleyra drives EBITDA

* Tata Communications (TCOM) reported 16% QoQ growth in revenue (in line) and 12% QoQ growth in EBITDA (9% beat). Cost synergies after the integration of the Kaleyra acquisition led to a beat in EBITDA. Adjusting for the acquisitions, revenue/EBITDA were flat QoQ.

* The management's endeavor to drive growth has diluted margins, including the loss-making acquisitions. However, the company has reiterated its longterm focus on margin-accretive growth. We have raised our estimates to factor in a higher EBITDA run rate from the acquisition and now expect revenue/EBITDA CAGRs of 15%/16% over FY24-26. At P/E of 23x and EV/EBITDA of 8.5x on FY26E EPS, we see limited upside. We reiterate our Neutral rating on the stock.

EBITDA up 12% QoQ (9% beat)

* Consolidated revenue grew 16% QoQ to INR56.3b (in line), led by a 15% QoQ improvement in the data segment.

* Adjusted for INR9.1b in revenue from Switch, Kaleyra and Oasis, consolidated/data revenue remained flat QoQ.

* Consolidated EBITDA grew 12% QoQ to INR11.3b (9% beat), led by Kaleyra, which turned EBITDA positive in the first quarter itself.

* The big beat was driven by the integration of Kaleyra EBITDA, which was estimated to be INR1b vs. expectation of an operating loss of INR220m, a swing of INR1.2b. Adjusted for INR1.1b in EBITDA from three acquisitions, Consol. EBITDA at INR10.2b was flat QoQ and margins stood at 21.7%. ? Consol. EBITDA margin declined by 70bp QoQ to 20.1% (200bp beat).

* Adj. PAT after minority grew 4% QoQ to INR2.3b (27% miss).

* Adjusted for a loss of INR75m in Switch, Kaleyra and Oasis (vs. INR386m loss in 2Q), PAT declined 9% QoQ to INR2.4b.

Key takeaways from the management commentary

* Margin trajectory: The management has reiterated the long-term target of 23-25%, but in the short term, margin would decrease due to acquisitions.

* Kaleyra profitable: Cost synergies in 3QFY24 led to positive EBITDA in Kaleyra for the first quarter itself. In the medium term, TCOM expects double-digit EBITDA margin for Kaleyra.

* Weak macro condition: The funnel is improving, but customers are taking more time in decision-making, which is leading to a lower customer conversion rate.

* Capex: Cash capex would be higher than accrued capex for a couple of quarters and overall capex intensity may stay high to push growth

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