Tata Communications: Strong FCF; Positive surprise on margins
Tata Communications (TCOM) performance was marked by positive surprise on margins front and strong cash flow generation
Topline came in at Rs 4311 crore, up 5.1% YoY & up 1.1% QoQ, with data revenues up ~7.6% YoY (up 1.2% QoQ) at Rs 3340 crore. EBITDA margin was at 25% (up 95 bps YoY and up 47 bps QoQ), possibly owing to some benefit of US$ appreciation. Data EBITDA margin was at 29%, down 30 bps QoQ. The company is currently facing challenges due to lower usage based revenues and supply chain issues (also impacted by Russia Ukraine conflicts) which has worsened OEM lead time delay by ~5x from normal 12-16 weeks. Thus, it expects step up growth only once supply chain issues get sorted. Growth funnel (pre stage of Order Book) have increased, deal win rate has improved along with order book growth of healthy double digits. The company intends to drive growth by enhanced product offerings in next gen connectivity, IZO WAN, cloud etc. It has also put feet on street with new hiring and expanded regional presence through sales and marketing spends.
The company's strategic growth plan, focused approach and structural improvement in data segment margins has driven multiple re-rating. While deal closures delays and supply chain issues has led to slower recovery in revenues, demand outlook is robust in the medium/long term. Furthermore, stable performance and improved cash flow generation, deleveraging possibilities and improved return ratios bode well for the company. With cash flow generation consistency and growth levers like cloud, edge & security, IOT etc., we remain constructive on the company
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