Tata Communications

With its rich heritage in shaping India’s internet landscape, the company has, over 25 years, taken a lead position in enabling the adoption of digital services in the country.

Tata Communications is a global enabler of digital transformation for enterprises, including 300 Fortune 500 companies. Their solutions-oriented approach, proven managed service capabilities and cutting-edge infrastructure drive the next level of intelligence through cloud, mobility, Internet of Things (IoT), collaboration, security and network services. They handle around 30 per cent of the world’s internet routes, connecting businesses to 80 per cent of the world’s cloud giants and four out of five mobile subscribers.

The company generates revenue from five sources which include:

1. Voice solutions (11 per cent) that encompass international and national long-distance voice services.

2. Data and managed services (79 per cent) that involve core and next generation connectivity services, digital platforms and connected services.

3. Payment solutions (1 per cent) that include end-to-end ATM deployment, end-to-end POS enablement, hosting of core banking, financial inclusion, card issuance and related managed services along with switching services to the banking sector.

4. Transformation services (8 per cent) that offer telecommunication network management and support services.

5. Real estate (1 per cent) that generates revenue from lease rentals for premises given on lease, excluding premises held for capital appreciation.

Their capabilities are supported by a vast global network, the world’s largest wholly owned subsea fibre backbone and a Tier I IP network with connectivity to 190+ countries and territories. Tata Communications has a rich heritage in shaping India’s internet landscape. Over 25 years, they have been essential in enabling the adoption of digital services in the country. Connectivity is a crucial element for the economy and Tata Communications remains dedicated to empowering industry leaders with secure connected digital experiences in the evolving world of communications.

Sector Overview
The telecommunications industry plays a crucial role in driving global digital transformation, and the growing emphasis on digitalisation brings forth a multitude of unprecedented opportunities and challenges. Within the industry, operators are undergoing fundamental changes in their network and operational management with a significant shift towards software and data-driven approaches. Externally, they are confronted with rapidly evolving customer demands as businesses and lives adapt to a more software-centric world.

In India’s Union Budget FY 2023-24, several initiatives were proposed to embrace the potential of technology for national development. The budget outlines the establishment of 100 labs in engineering institutions dedicated to developing applications using 5G services. These labs aim to unlock new opportunities, business models and employment potential, covering areas like smart classrooms, precision farming, intelligent transport systems and healthcare applications. Additionally, the government plans to create three centres of excellence for Artificial Intelligence (AI).

A significant allocation of funds has been made for critical infrastructure projects. This includes `2,158 crore for optical fibre cable-based networks for defence services and `716 crore for telecom projects in India’s north-eastern states. Moreover, there is a strong focus on improving e-governance adoption using cloud technology through ‘Project Meghraj’. This initiative aims to establish a multi-level, national cloud-sharing foundation to offer affordable, secure and safe data storage for everyone.

Tata Communications is dedicated to meeting the evolving needs of enterprises in today’s fast-paced digital economy. They strive to be a catalyst for digital transformation as part of their ongoing journey of transformation. Their commitment extends to enabling enterprises across all the IT layers, where infrastructure becomes seamless, cloud computing dominates, data drives new business models and security remains paramount. Looking ahead to 2023 and beyond, the prevailing trends highlight the increasing complexity of our interconnected world, where hyper-connectivity extends to people, machines, things and processes.

Financial Overview
In Q1FY24, Tata Communications’ reported revenue was ₹4,771 crore, showing significant YoY and QoQ improvements. Data business revenues grew by 17.1 per cent YoY and 6.6 per cent sequentially. The digital portfolio revenues, including incubation, stood at ₹1,415 crore, healthily growing at 37.5 per cent YoY and 16.6 per cent QoQ. Underlying data revenues grew by 14.2 per cent YoY, the highest since FY20, and improved sequentially by 4 per cent. Underlying digital portfolio revenue also surged by 28 per cent YoY, the highest in the past 12 quarters, and improved by 8.6 per cent QoQ. On an annual consolidated basis, in FY23, Tata Communications reported a surge of 6.7 per cent in total sales which stood at ₹18,201.41 crore as against to ₹17,056.82 crore in FY22. The operating profit of the company grew by 2.15 per cent in FY23 which stood at ₹4,318 crore as against ₹4,227 crore in FY22. Similarly, the net profit of the company surged by 21.2per cent and stood at ₹1,801 crore in FY23 as compared to ₹1,485 crore in FY22. Moreover, Tata Communications have been able to grow their sales steadily over the past three years while net profit has grown by 72 per cent (CAGR) over the past three years. Tata Communications currently has a market capitalisation of ₹51,190 crore.

The company’s major shareholders include the promoters of the company, Panatone Finvest Ltd., holding approximately 44.8 per cent of the company and Tata Sons (P) Ltd. owning about 14.07 per cent. Additionally, domestic institutional investors (DIIs) hold around 14.07 per cent while foreign institutional investors (FIIs) own about 17.18 per cent of the shares. The remaining portion, approximately 9.88 per cent, constitutes the free float of the company. It is currently trading at a PE of 31.3 times with a price-to-book value of 32.3 times and a PEG ratio of 1.58. Additionally, the company has a ROCE of 26.3 per cent and a ROE of 142 per cent. Moreover, the company has a good dividend payout ratio of 34.6 per cent. Tata Communications’ net debt is ₹6,007 crore with an interest coverage ratio of 4.71 times.

Risks and concerns
In an evolving industry, Tata Communications prioritises building an inclusive and prudent risk management framework to evaluate threats and devise effective mitigation strategies. Their ability to assess and address key risks empowers them to sustain hyper-connected ecosystems, establish sound policies and ensure business continuity. Globally, enterprise transformation has emerged as a necessity and many companies are actively seeking cost-effective ways to empower their digital infrastructure. In the wholesale voice and data business segment, a substantial portion of Tata Communications’ revenues is derived from declining and low-margin carriers and service providers who are already facing challenges due to existing low prices and ongoing price erosion.

Consequently, capital allocation for the telecom segment is frequently compromised, potentially having an adverse impact on the company. Tata Communications’ continuous efforts to simplify and automate internal business processes result in higher productivity and efficiency. This rationalises the cost structure without compromising service quality or delivery. To mitigate risks in the voice and data business, the company’s focus remains on the enterprise segment. This strategy ensures overall business growth, revenue, profitability and secures their position in a competitive market.

Outlook
Tata Communications’ future outlook is positive as they continue to enhance their data revenue growth momentum through investments in capabilities. While short-term margins may remain soft, they aim to operate at ROCEs above 25 per cent. Their unique strengths are recognised by customers, enabling them to address cost and revenue side outcomes effectively. The company has completed the acquisition of Switch, expanding their reach to top-tier US sporting event venues and gaining a foothold in North America. They have also entered into an agreement to acquire Kaleyra Inc, a leading global CPaaS player, to strengthen their communication technology play

The company’s core connectivity business continues to grow with a focus on transforming networks to cater to new market needs, particularly on-demand requirements. Additionally, their collaboration and media businesses are experiencing strong growth. Tata Communications’ next generation connectivity offerings are driving deal wins and they are launching the IZO software-defined multi cloud connect to address the growing market opportunity in multi cloud interconnect. 

Their cloud, hosting and security portfolio are growing well with a continued focus on multi-cloud management and managed security services. While the incubation portfolio grew YoY, its performance was subdued sequentially. Tata Communications aims to expand their IoT offerings to international geographies. Overall, the company is wellpositioned to meet the evolving needs of enterprise customers with continuous investments and a focus on driving relevance in the digital landscape. However, the current stock price has already factored in the growth potential, evident from its higher PE and PB ratios, which indicates overvaluation when compared to its competitors. Hence, we recommend HOLD.