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Tata Communications: Strong FCF; Positive surprise on margins
Whats Buzzing
Tata Communications (TCOM) performance was marked by positive surprise on margins front and strong cash flow generation
Context
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.
Our Perspective
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
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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