Tata Communications LtdQ1 FY23Telecom - Services

Tata Communications Ltd

Q1 FY23 Earnings Call Analysis

Management growth scorecard

Revenue

Category 3

Margin

Category 4

Fundraise

N/A

Order

Yes

Capex

Yes

2 of 4 growth signals are positive.

Revenue guidance

Category 3

→The company aims for sustained double-digit revenue growth, having achieved this for the last three consecutive quarters and the full fiscal year FY23.
→Digital portfolio growth accelerated to 40% of order booking in FY23, reflecting confidence in expanding digital services.
→The mix within the data business is expected to shift to 50:50 between core connectivity and digital services, with digital services targeting a 25% CAGR.
→Growth drivers include next-gen connectivity, new products (e.g., MOVE TM, NetFoundry, CPaaS, Cloud SIM), and expanding global sales and product organizations.
→Large deals ($1 million plus) in both domestic and international markets have seen significant growth.
→Management anticipates milestone-based investments to sustain growth with potential transformative deals leading to rapid growth spurts.
→Execution is expected to improve as supply chain constraints ease, supporting revenue acceleration.
→The company remains cautious but confident of maintaining the growth momentum despite macroeconomic challenges.

Category 4

→The company aims to maintain double-digit revenue growth, having delivered this for the last three consecutive quarters and full fiscal year (FY23).
→EBITA margin is expected to stay within the 23%-25% range, targeting the low end (around 23%) in FY24 due to ongoing investments.
→Effective tax rate (ETR) for FY24 is expected to improve from FY23's 14%, likely better than 25-26%, supported by utilization of net operating losses in international geographies.
→ROCE guidance remains above 25%, signaling efficient capital use despite increased investments in growth areas.
→Margins may temporarily dip below 23% due to milestone-driven investments but are managed dynamically.
→Growth in digital platforms and services, particularly in DPS revenue (up 21% YoY), supports optimism on sustained profit expansion.
→Long-term ambition is to balance 50:50 between digital services and core connectivity, aiming for significant scale-up within 5-7 years.

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→There is no specific mention of any current or planned new fundraising through debt or equity in the transcript.
→The company has been focusing on reducing net debt, which has consistently come down due to strong cash flow generation.
→Net debt to EBITDA has improved to 1.3x from 1.6x previously, indicating better leverage.
→Capex guidance stands at $250-$300 million for the next 3-4 years, funded within approved budgets.
→Investments in opex and capex are milestone-based, with spending calibrated to growth and returns.
→The company prefers to fund growth from internal cash flow and maintain ROCE above 25%, rather than relying on new external fundraising.

Yes

→Order booking has significantly improved with a strong funnel and accelerated digital portfolio growth (40% of order book in FY23).
→Large deals (>$1 million) have seen a significant jump in both India and international markets.
→There is some churn due to customer office shifts and price churn, but new order bookings add on top to compensate.
→Order book growth is supported by continued investments in product, sales, and delivery staff.
→Predictability of order book from usage-based revenue is low; usage contributes marginally to order book valuation.
→The company refrains from giving specific order book numbers to avoid confusion due to churn and variable usage.
→Investments in new products expect benefits mainly from FY25 onward; operating leverage from stage 30 products expected to kick in FY24.
→The business remains confident of maintaining double-digit growth driven by improved order bookings and large enterprise deals.

Yes

→Tata Communications plans to maintain capital expenditure (capex) in the range of $250 to $300 million annually for the next 3 to 4 years.
→Current capex spent is lower than guidance due to supply chain delivery delays and better payment terms.
→Replacement capex on fiber is excluded from the $250-$300 million guidance.
→Investments are targeted to support the ambition of reaching a 50:50 mix between Digital and Core businesses.
→The company is focusing on strategic investments in new age technologies and products (e.g., MOVE TM, CPaaS, IoT, SASE & Security, Media) poised for significant growth in 5 to 7 years.
→Operating expenses and capex investments are milestone-driven, with investments calibrated to balance financial metrics and growth aspirations.
→Front-end hiring and investment in product engineering are ongoing to fuel innovation and future growth.

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