IGI Logo

Focusing on digital platform growth

We attended TCOM’s analyst meet, where management presented its GTM ‘product-to-platform’ strategy and discussed about the expanding growth in new products/portfolios and geographies.

Below are the key highlights:

* Management reiterated its ambition to double data revenue by FY27 to INR280b (at 18% revenue CAGR), driven by the DPS segment that is likely to contribute more than 60% of data revenue.

* This will require higher capex and opex, totaling ~USD300m in FY25E, and is projected to increase with a capex-to-sales range of 10-11%.

* Further, TCOM aspires to maintain its EBITDA margin at 23-25% by FY27E, but management expects that the near-term margins may be hit by harmonization and restructuring following the acquisition.

* Management believes that the balance sheet discipline will be maintained with >25% ROCE and <2x net debt to EBITDA by FY27E.

* We have factored in a revenue/EBITDA CAGR of 14%/20% over FY24-26E. Margin improvement and data revenue growth should be the key catalysts for further valuation re-rating. Reiterate Neutral.

Data Revenue- key forte

Management reiterated its aspiration to double data revenue by FY27, implying an 18% CAGR (vs. 10% CAGR in the last four years). This growth will be fueled by the digital portfolio services, which currently account for 40% of the data revenue and are projected to increase to 60% (implying 34% CAGR), while the core services offering (commoditized connectivity solutions) is likely to post a 3% CAGR. The growth could be due to a combination of organic and inorganic opportunities, as well as an increase in the number of million-dollar club customers. The company is well placed to reap benefits from its recent investments in international markets and even in India.

* Cloud and security services are expected to benefit from an increasing Total Addressable Market (TAM), which is likely to post 16% CAGR over FY25-28E,

* Interactive and IoT fabric are expected to clock 14% and 10% CAGR over FY25-28E, respectively,

* Media: The focus remains on cloud and leadership in transmission, but the capability of Switch (a new division of video production) will be keenly monitored.

Strengthening capabilities to propel growth

The medium-term structural drivers for TCOM include leadership in the Indian market, expansion in international markets, increased customer relevance through portfolio expansion (in media), and new product rollouts such as AI cloud, multi-cloud connectivity, and CloudLyte. As a B2B specialist, TCOM boasts a strong network by owning a subsea network with extensive coverage. The company provides connectivity in over 190 countries and directly connects 35% of the internet routes. TCOM plans to leverage its digital platform capabilities and believes it has the right to win.

Investing in growth

To drive accelerated growth, TCOM believes it will need to invest in growth. It has raised its capex guidance to USD300m from ~USD250m in FY24 (likely to maintain the capex-to-sales ratio at 10-11%). Further, TCOM will continue to intensify its opex. Therefore, management maintains its 23-25% EBITDA margin guidance despite aiming to increase scale. The core EBITDAM is operating at an optimum level, while the acquisitions have dragged down margins for some time. However, margins are expected to improve soon. Management expects that FY25 EBITDAM could be higher than FY24. The company expects gradual improvement, with the first improvement expected in leverage (the net debt-to-EBITDA ratio to fall below 2.0x by FY27), followed by improvements in ROCE (25%+ by FY27), and then EBITDA margins (23-25% by FY27). However, ROCE may experience further dilution for the next couple of quarters before gradually improving.

Valuation and view

* We estimate a 14%/20% CAGR in revenue/EBITDA over FY24-26. ? The company has set an ambitious revenue growth target of INR280b by FY27 in the digital portfolio, which will be supported by both organic and inorganic initiatives.

* Net debt jumped 60% YoY to INR90b due to inorganic acquisitions. However, TCOM’s strong FCF of ~INR20b annually would allow it to explore growth opportunities, while maintaining a healthy RoCE of over 25%.

* At a P/E of 23x and EV/EBITDA of 9.3x on FY26E, we see limited upside potential for the stock. Margin improvement and data revenue growth should be the key catalysts for further valuation re-rating. Reiterate Neutral with a TP of INR1,950. We assign 10x/3x EBITDA to its Data/Voice businesses.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412