Tata Communications targets profitable growth as digital losses narrow despite weak margins

Investment View and Recommendation

Motilal Oswal Financial Services (MOFSL), in its July 22, 2026 results update, has retained a Neutral rating on Tata Communications and raised the target price to Rs 2,000 from Rs 1,950. The broker views the new management’s shift towards profitable growth, rather than revenue growth alone, positively. However, it remains cautious pending greater clarity on strategy and evidence of better execution.

Subdued 1QFY27 Performance

Tata Communications delivered a subdued 1QFY27. Reported EBITDA rose 8% year-on-year but declined 4% quarter-on-quarter to Rs 12.3 billion, which was 8% below MOFSL’s estimate. EBITDA margin fell 90 basis points sequentially and 40 basis points year-on-year to 18.7%, 145 basis points below the estimate.

Revenue Growth and Portfolio Trends

Reported gross revenue rose 10.5% year-on-year to Rs 65.8 billion, was broadly flat sequentially and was 1.3% below MOFSL’s estimate. Currency-adjusted consolidated revenue growth was only about 2.8% year-on-year.

Data revenue increased 11.3% year-on-year to Rs 57.1 billion, supported by 17.1% growth in the digital portfolio and 5.7% growth in core connectivity. Excluding foreign-exchange benefits, data revenue growth was about 4%.

• Collaboration and CPaaS grew 32% year-on-year.
• Next Gen Connectivity grew 31% year-on-year.
• Incubation services grew 21% year-on-year.
• Cloud and Security was flat year-on-year.
• Media revenue declined 16% year-on-year.

Profitability, Cash Flow and Balance Sheet

Profitability remained the key concern. Net revenue, a proxy for gross margin, increased about 9% year-on-year but fell 1% sequentially as digital margins weakened. Data EBITDA was Rs 9.6 billion, up 9% year-on-year but down 8% sequentially, while data EBITDA margin contracted to 16.8%.

MOFSL attributes part of the weakness to a Rs 0.5 billion prior-period provision relating to execution delays and complexity in a deal signed two years earlier. On a normalised basis, EBITDA was Rs 12.8 billion, up about 13% year-on-year and flat sequentially, but still 5% below the broker’s estimate. Management indicated that digital portfolio losses had narrowed to 6.9% from 9.6% in FY25.

Reported PAT fell 29% year-on-year to Rs 1.3 billion and was about 64% below MOFSL’s estimate. Adjusted for Rs 1.1 billion of exceptional items, PAT was Rs 2.4 billion, up 14% year-on-year but 35% below estimate, reflecting weaker EBITDA, lower other income and higher interest costs.

Net debt increased by Rs 8 billion sequentially to Rs 104 billion, taking net debt to EBITDA to about 2.1 times. Reported free cash flow was an outflow of Rs 4.4 billion, while annualised RoCE eased to 14.7%.

Management Strategy and Growth Initiatives

Management aspires to deliver double-digit reported EBITDA growth in FY27 by accelerating higher-margin network growth, optimising the digital portfolio mix to reduce losses, aligning sales incentives to contribution margin and reducing lead-to-cash timelines by about 50%.

Tata Communications has reorganised around four product towers—Network, Infra, Interaction and Services—supported by a Customer Success group. Management cited robust deal momentum across ThreadSpan, Commotion and enterprise solutions, including Voice AI, industrial connectivity and GCC-related opportunities.

The company sees AI-led data-centre build-out and cloud adoption as structural opportunities for programmable network platforms, although pricing pressure persists.

Estimates and Financial Outlook

MOFSL reduced its FY27E and FY28E EBITDA estimates by 3% and 1%, respectively, due to the weak first quarter and a more gradual margin recovery. The broker forecasts about a 10% revenue CAGR and a 13% EBITDA CAGR over FY26-FY29, with EBITDA margin expanding to about 21% in FY29 from 19.4% in FY26.

Valuation and Target Price

The Rs 2,000 target price values the data business at 9 times September 2028E EV/EBITDA and the voice and other businesses at 4 times EV/EBITDA. It also includes Rs 80 billion, or Rs 281 per share, for Tata Communications’ 26% stake in STT Datacenter.

Key Risks

• Continued muted currency-adjusted revenue growth.
• Further pressure on digital margins.
• Persistent pricing pressure.
• Slow cloud growth.
• Delayed improvement in execution and deal monetisation.