Tata Communications Aims For Billion Dollar Verticals In Commtech Quest

That’s according to Kabir Ahmed Shakir, chief financial officer at the Tata Group firm, who said that a fundamental shift is underway at what was once Videsh Sanchar Nigam Ltd.

“I’m no longer selling products. It’s platforms, solutions,” Shakir told BQ Prime’s Niraj Shah, during a post-earnings interaction. “I’m no longer talking about cost, it’s about value. I’m a broad-based player offering a suite of services.”

Shakir is optimistic on at least five business verticals and their potential to become billion-dollar enterprises in the next 5-7 years. These include:

• Digital platforms and solutions.

• Internet of Things.

• Cloud-based computing.

• Media and communications.

• Cybersecurity.

“These are the S curves of the company. Each of them have the potential to become a billion-dollar enterprise in the next 5-7 years,” Shakir said. “At this stage, they need to be provided ‘tender loving care’, so that they get on their feet and start delivering value for us.”

Much of that TLC is financial at the moment because "all the legs of a business—product, people and go-to-market—need funding," he said.

Thankfully, Tata Communications is making some money now.

Revenue of the Tata Group firm rose 0.89% over the previous quarter to Rs 4,568.66 crore in the three months ended March 31, according to an exchange filing. That compares with the Rs 4,609.32 crore consensus estimate of analysts tracked by Bloomberg.

Tata Communications Q4 Results: Key Highlights (QoQ)

• Revenue up 0.89% at Rs 4,568.66 crore (Estimate: Rs 4,609.32 crore) 

• Ebitda down 4% at Rs 1,034.22 crore (Estimate: Rs 1,101.50 crore)

• Ebitda margin at 22.63% vs 23.79% (Estimate: 23.9%)

• Net profit down 17.22% at Rs 326.03 crore (Estimate: Rs 358.30 crore)

For the full fiscal, Tata Communications clocked a consolidated revenue of Rs 17,838 crore, even as net profit rose 21.2% year-on-year to Rs 1,482 crore. Ebitda—a measure of a company’s operational profitability—stood at Rs 4,318 crore, with Ebitda margin declining 110 basis points to 24.2%.

Free cash flow stood at Rs 2,539 crore, even as capex rose marginally to Rs 1,639 crore. The company’s debt-to-Ebitda ratio has improved to 1.3 from 2-2.5 earlier.

“We are very happy with what we have delivered. This is the third quarter of consecutive double-digit growth that we have delivered,” Shakir said. “In terms of profitability, we have always said that we are going to operate in the 23-25% range.”

But while revenue rose, expenses did too—3.7% sequentially and 10% over the year-ago period.

Shakir cited staffing costs as the reason for the inflated bills—the company hired a net 900 employees in FY23—“but this is an investment in people”, he said.

The company is also investing on creation of intellectual property as well as stepping up sales operations in international geographies, with a focus on the customer and service delivery. “Not doing investments will be irresponsible towards the growth potential that this company has,” he said.

The new financial year comes with its own set of challenges, some of which started unravelling in January-March itself. 

A banking crisis in the United States roiled an economy that is already in the throes of a slowdown, if not a full-blown recession, due to relentless interest hikes by its central bank. This cocktail of macro uncertainties, spiked with a war across the Atlantic, is making businesses reassess their budgets.

Shakir, however, is cautiously optimistic. 

“I’d like to have my head in the clouds, but feet on the ground,” he said.

According to him, while there may be a slowdown and cutbacks, there’s a sense of FOMO—fear of missing out—in boardrooms as far as digital spending is concerned. They don’t want to miss the bus that is the fast-evolving tech ecosystem. “That said, our products have to deliver on the cost front as well,” Shakir said. “Yes, the environment out there is volatile, but as long as I have something, which can add to the customer, we have a good chance of converting that to revenue.”

Moreover, Tata Communications has an interest rate management policy in place. 

The company, according to the chief financial officer, has tactically taken hedges against its debt that’s already reducing. Almost 50-60% of the leverage is already hedged, leaving just enough headroom for any potential growth, he said.

“When I walk into FY24, I have to deliver on top line/bottom line and EPS to the shareholder. I need to be aware of the elements, and interest cost is a big element,” he said.

A shrinking net debt-to-Ebitda, as well as all-time high free cash flow are a big plus.

“So, all of that has gone into funding organic-inorganic growth. My interest cost is fairly under control (due to hedging), and I’d like to keep that flexibility, going forward.”

At a post-earnings analyst call, Shakir said that he’ll look to grow the business at the cost of profitability. During the chat with BQ Prime, however, he explained what he meant.

What Shakir is looking at is a “fit-to-grow” model. Tata Communications, according to him, is inherently an infrastructure company that needs to invest continuously to grow.

“I’ll not be irresponsible, but I’ll invest. I’ll look at the unit economics—how a solution for one large client can be extrapolated to 100 others,” he said, reiterating that the company’s profitability stays intact at that 23-25% band. "We need to deliver top line growth, we need to grow the operating leverage, and invest it back into the business,” he said.

There’s a whole lot of promise in the CFO’s words and, as he said, there is a transformation under way at Tata Communications. But when will that translate to meaningful growth that’s visible on the street?

Shakir wants the investor to look at how far the company has come from the VSNL days to now, on a path to becoming a global communications technology firm.

“Let’s go back 3-5 years. We hadn’t invested in this business. Our growth was in the single digits. We had low profitability, single-digit ROCE (return on capital employed),” he said. “That is not the path to creation. The path to creation is by investment.”

“Since then, we have improved our profitability to 17-25%. ROCE has jumped from 8% to 28%. We have reduced our net debt, delivered highest ever profit, highest ever free cash flow. Heck, we are net worth positive for 9-10 quarters now.”

It’s been a long journey, true, but there’s more left.

“There’s a huge cultural transformation that is happening at Tata Communications,” Shakir said. “We have been used to a certain vocabulary, used to selling products for a certain tenure, to a certain customer or geography.” 

He emphasised that they are fundamentally shifting to platforms and solutions and . "I’m a broad-based player offering a suite of services.”

Tata Communications wants to take the inherent telecom strength from the days of VSNL and become a communications technology player. “I’m going to use my underlay as my asset base and then offer -added services on top of that.”

Shakir wants the business to be an equal mix of digital services and the core communications, in line with the vision of Chief Executive Officer AS Lakshminarayanan. Currently, it is 70:30 in favour of the core business. “That is reflected in our order book. That is reflected in the relevancy quotient we have with the customer,” Shakir said.

Where does, then, the inflection point lie for Tata Communications? When will the metamorphosis be complete?

“I don’t know, but I’m quite positive about all of them (business verticals),” Shakir said. “We are making progress internally. We are enhancing our product capabilities, and our ‘1-3-30’ policy is cutting across all of these capabilities as well.”

“It is only a matter of one or two deals,” he said. “You have to cook them.”