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Strong 2Q; lower digital losses drive strong EBITDA growth

* Tata Communications (TCOM) delivered a strong 2QFY27, with reported EBITDA rising 21% YoY (5% beat). EBITDA margin expanded ~200bp YoY to 21.3%, driven by lower digital losses (-3.6% in 2QFY27 vs. -6.9% QoQ).

* Data revenue grew 12.2% YoY (+1.8% QoQ), driven by healthy performance across the digital portfolio (+19% YoY, +2.6% QoQ), while core connectivity growth sustained at 6% YoY (+0.9% QoQ).

* Management indicated that order book grew in strong double-digit, supported by diversified deal wins across geographies and increasing traction in AI-led and higher-margin network solutions, which provides healthy revenue visibility.

* Further, the company remains focused on driving profitable growth with target of achieving double-digit EBITDA growth in FY27 (~15% YoY in 1H). Digital losses halved QoQ and management is targeting digital EBITDA break-even at the earliest through its focus on improving the quality of revenue, operating leverage and tighter cost controls.

* We raise our FY27-29 EBITDA estimates by 3-4% factoring in the reduction in digital segment losses. We build in a FY26-29E CAGR of ~10%/13.5% in revenue/EBITDA, with margin expanding to ~21.5% by FY29E.

* We believe the new CEO's focus on driving profitable growth is beginning to yield results, with encouraging progress on reducing digital losses. However, we await sustained improvement in financial performance and more clarity on the medium-term growth strategy before turning more constructive on TCOM.

* Reiterate our Neutral rating on TCOM with a revised TP of INR1,980.

~5% EBITDA margin beat driven by reduction in digital losses

* Gross revenue at INR66.9b grew 9.6% YoY (1.6% QoQ, our est. INR67.9b).

* Data revenue at INR58.1b rose 12.2% YoY (+1.8% QoQ), driven by 19% YoY (2.6% QoQ) growth in the digital portfolio and ~6% YoY (0.9% QoQ) growth in core-connectivity revenue. Adjusted for FX, growth was ~6% YoY.

* Collaboration & CPaaS (+28% YoY) and Next Gen Connectivity (+27% YoY) continued outperformance, while revenue growth in Cloud & cybersecurity (+6% YoY), and Media (-5% YoY) remained muted

* Net revenue (a proxy for gross margin) at INR36.8b grew 7.7% YoY (+2.7% QoQ), due to weaker digital growth (+8% YoY vs. 19% YoY on gross basis).

* Reported EBITDA at INR14.2b surged 21% YoY (+16% QoQ, 8% miss) as margin expanded ~200bp YoY (+255bp QoQ, one-off cost in 1Q) to 21.3% (130bp beat). Digital operating losses halved QoQ to -3.6% (vs. -6.9% QoQ).

* Reported PAT at INR3.4b rose 86% YoY (2.5x QoQ). Adjusted for exceptional items of INR0.37b, consol. PAT came in at INR3.8b (+85% YoY, +57% QoQ) and was broadly in line with our estimate as 5% higher EBITDA was offset by lower other income (59% miss) and higher interest cost (+6.5% QoQ, 13% higher vs. our est).

* Net debt rose ~INR8b QoQ to INR112b, with net debt-to-EBITDA inching up to ~2.2x (vs. 2.1x QoQ).

* Committed capex stood at ~INR6.6b (flat QoQ), while cash capex surged ~60% YoY to INR8.1b (+17% QoQ).

* Reported FCF of INR 2.1b (vs. outflow of INR4.4b QoQ, largely stable YoY).

* Reported RoCE (annualized) improved to 15.9% (vs. 14.7% QoQ).

* 1HFY27, revenue/EBITDA/adj. PAT grew 10%/15%/49%.

* 1HFY27 calculated pre-IND AS EBITDA rose ~13% YoY to INR23.6b, with margin expanding ~45bp YoY to 17.8%.

* For 2HFY27, the implied growth in revenue/EBITDA/PAT stood at 10%/18%/29%.

Valuation and view

* Management reiterated its commitment to achieving double digit EBITDA growth in FY27 (~15% in 1HFY27), with tangible progress towards achieving break-even in digital business in the near term, supported by improving revenue mix, operating leverage, and continued cost discipline.

* We believe the new CEO's focus on driving profitable growth is beginning to yield results, with encouraging progress on reducing digital losses. However, we await sustained improvement in financial performance and more clarity on the medium-term growth strategy before turning more constructive on TCOM.

* We raise our FY27-29 EBITDA estimates by 3-4% factoring in the reduction in digital segment losses. We build in a CAGR of ~10%/13.5% in revenue/EBITDA over FY26-29E, with margin expanding to ~21.5% by FY29E (vs. 19.4% in FY26).

* We value TCOM’s data business at 8.5x Dec’28E EV/EBITDA and the voice and other businesses at 3x EV/EBITDA. Further, we ascribe INR77b (INR272/share) value to TCOM’s 26% stake in STT data center (implies ~USD3.1b equity value) to arrive at our revised TP of INR1,980 (earlier INR1,865). We reiterate our Neutral rating.

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