Tata Communications Limited (NSE: TATACOMM) Q2 2025 Earnings Call dated Oct. 17, 2024
Corporate Participants:
Sudeshna Patnaik — Deputy General Manager, Investor Relations
A. S. Lakshminarayanan — Managing Director and Chief Executive Officer
Kabir Ahmed Shakir — Chief Financial Officer
Analysts:
Sanjesh Jain — Analyst
Balaji Subramanian — Analyst
Vibhor Singhal — Analyst
Vinit Manek — Analyst
Priyank Parekh — Analyst
Nishit Rathi — Analyst
Presentation:
Sudeshna Patnaik — Deputy General Manager, Investor Relations
Good evening, everyone, and a warm welcome to you all. Thank you for participating in the Q2 FY ’25 Earnings Call for Tata Communications. My name is Sudeshna Patnaik, and I’ll be your host for the call.
We are joined today by our MD and CEO, Mr. Amur Lakshminarayanan; our CFO, Mr. Kabir Ahmed Shakir; and our Head of Investor Relations, Mr. Rajiv Sharma. The results for the quarter ended 30th September 2024 have been announced today and the quarterly data pack is available on our website.
We will begin today’s call with opening remarks from Lakshmi on the business performance and outlook, followed by Kabir on the company’s financial performance. All participant lines will be muted for the duration of the call. There will be an opportunity for you to ask questions after the management remarks.
Some of the statements made in today’s call may be forward looking in nature and are subject to risks and uncertainties. The company does not undertake to update these forward-looking statements publicly.
With that, I would like to invite Lakshmi to share his views. Thank you and over to you, Lakshmi.
A. S. Lakshminarayanan — Managing Director and Chief Executive Officer
Thank you, Sudeshna. Welcome to the Q2 FY ’25 earnings call. I’m very pleased to share that this quarter we have delivered a good revenue growth driven by our digital portfolio.
Our consolidated revenues grew 18.4% year-on-year and 2.4% Q-on-Q. Data revenues were up 21% year-on-year and 3% Q-on-Q. Digital revenues grew 52.4% year-on-year and 3.6% Q-on-Q. Core connectivity growth is muted at 3% year-on-year and accounts for 54% of our data revenues this quarter. Digital services account for the rest, 46%. Our EBITDA margins came in at 19.4% and our PAT grew by 3% year-on-year and came in at INR227 crores. Muted growth in core connectivity, combined with the expenses due to Red Sea and other cable cut related costs, dragged our margins this quarter. That said, Red Sea cable is largely repaired and starting Q3, the revenue drag due to these cuts will be behind us. Consolidated EBITDA improved 10% year-on-year, however, it was down marginally by 0.6% Q-on-Q. Our net debt to EBITDA ratio stands at 2.37.
I would like to apprise you of the progress we are making on the asset monetization side. We have submitted for shareholder approval the sale of the land parcel in Ambattur, Chennai. This is in line with our strategy to enhance shareholder value by unlocking non-core assets. On the order book and funnel side, our funnel continues to be robust. Although the funnel addition has remained subdued in H1, we have witnessed an improvement in our win rate across all the regions. The improvement in win rate in H1 can be attributed to the large deals that have come in this year. On the back of this improving win rates, our order book in Q2 has increased by upwards of 25% year-on-year. The growth in order book is driven across all segments in India and international, except the service provider segment.
Our international region has registered the highest quarterly order booking in the last five years. Our core connectivity order book is driven by hyperscalers and OTTs. Our core connectivity revenues came in at INR2,613 crores and grew by 2.5% Q-on-Q and 3% year-on-year. India’s data center industry is rapidly expanding, and we continue to be the market leaders in data center to data center connectivity space. We have signed major deals with hyperscalers for multiyear network build and capacity upgrade. For instance, for one particular hyperscaler, we are building the longest, the long-haul dedicated network connecting the data centers across different states. The deal is large and complex and its scale of operation, in terms of the size, with a multimillion-dollar TCV. Spread over a period of 10 years, the revenue for this deal will start coming from FY ’26.
We continue to expand our fiber network infrastructure in the country. We have a strong network presence in tier 1 and tier 2 towns and serve large enterprises’ needs. The rising prominence of tier 3 and tier 4 towns is creating new pockets of growth. We have been deepening our capillarity of our network in these areas to further augment our leadership in the enterprise data network market.
Coming to the digital portfolio performance, this quarter our revenues came in at INR2,221 crores and 3.6% Q-on-Q and 52.4% year-on-year. This growth is broad-based. We are pleased to report that our incubation business, which is our IoT fabric, and it has grown in revenues by 33.8% Q-on-Q and 58% year-on-year. The key highlight has been MOVE platform, which benefited from robust usage growth coming from the addition of new vehicles. Further, there was an increase in our platform revenues as there was a rise in SOTA campaigns. We deepened our relationship with our existing customers by signing them on for enhanced platform proposition, particularly our intelligent connectivity solutions.
Our collaboration and managed CPaaS portfolio, which is our interaction fabric, grew by 6.6% Q-on-Q and 174.2% year-on-year. The media business has seen a Q-on-Q decline of 14.2% on the back of the sports calendar and large one-offs in Q1, like the T20 World Cup and Olympics, which we had in Q1. Cloud and security revenues are flat this quarter. The segment continues to see improving traction within the BFSI space, particularly. The pipeline of deals in this segment is healthy. We are encouraged by the opportunities in this segment and the deals that we have signed in Q1 and Q2.
The next-gen connectivity, which is our network fabric, grew by 4.5% Q-on-Q and [Technical Issues]. Our digital fabric continues to resonate well with our customers. We now have an industry analyst recognition across all the four fabrics, reflecting our strong value proposition. You may refer to our Q2 press release for more details on the same. Our solid value proposition, coupled with our longstanding relationships with large enterprises, gives us the conviction to profit from the market opportunity.
With that, I’ll now request Kabir to share the financial highlights.
Kabir Ahmed Shakir — Chief Financial Officer
Lakshmi, thank you. Hello, everyone. Let me walk you through our financial performance for the quarter. The Q2 FY ’25 revenue growth, driven by data and digital portfolio, came in at INR5,767 crores, consolidated growth of 18.4% year-on-year and 2.4% quarter-on-quarter. Data revenue for the quarter came in at INR4,834 crores, a growth of 21% year-on-year and a 3% quarter-on-quarter. Digital services revenue for the quarter came in at INR2,221 crores, a growth of 52.4% year-on-year and 3.6% quarter-on-quarter, emphasizing that business fundamentals continue to be strong. The most heartening part of our digital business is that we are incubating new businesses to drive long-term, sustainable growth.
As Lakshmi mentioned, we have put forth for shareholder approval the proposal for land parcel sale in Ambattur. The estimated range for final sale consideration is expected to be between INR750 crores to INR850 crores. This action is in line with our strategy to monetize non-core assets.
Let me add that we are taking multiple strategic measures which will start benefiting us in the quarters to come. These include strategic review of non-core assets and assessment of their monetization opportunities, strategic evaluation of pockets which may not offer longer-term leverage, and strategic review of subsidiaries, which we had suggested earlier, and we are making good progress there. These measures will allow us to reposition our assets to drive longer-term value creation and maximize resources to invest behind our growth.
Additionally, another set of measures are being pursued towards simplification, be it on the process side or cost structure, to ensure that our company is competitive for future opportunities. To drive all these measures, some of the costs will be upfront and are being incurred now and over the next couple of quarters. We believe that with these strategic measures, combined with the right capital allocation and a robust governance framework, we are well-placed to accelerate growth and maximize shareholder value. Our EBITDA margins for the quarter were at 19.4%. We’ll continue to make efforts to stay in the range of 20 for the consolidated full year FY ’25. Our interest costs were higher this quarter, driven by an increase in short-term borrowings and the change in mix as there was an increase in INR borrowings.
On the tax component, there are two highlights. First, there was a one-off tax payout of INR113 crores as we accelerate our process of streamlining and aligning various entities in various geographies to enable longer-term beneficial outcomes. The second being, we assessed the certainty of utilizing the past capital losses and recognized a deferred tax asset of INR84 crores for the quarter and the period ended September 30, 2024. Our PAT was up by 3% year-on-year.
FCF for the quarter was negative INR194 crores, significantly better than the previous quarter and the drag was primarily driven by increase in working capital. Working capital was higher on account of dividends payout in July. Ne debt for the quarter stood at INR10,483 crores and net debt to EBITDA is at 2.37 times. With our land monetization stated above, we see our leverage ratios improving meaningfully over the next couple of quarters. Cash capex for the quarter stood at INR447 crores. ROCE came in at 16.4%, a decline of 110 basis points quarter-on-quarter. As of this quarter, the full impact of Kalerya has been baked in.
Moving to subsidiaries. TCTS revenues declined by 26.4% year-on-year, EBITDA margins came in at 12%, and EBITDA improved by 36.3% quarter-on-quarter. Our payment business reported a healthy double-digit EBITDA margin of 11.2% this quarter. As you already know, the business is completely on the franchisee model.
Let me now ask Sudeshna to open the forum for Q&A.
Questions and Answers:
Sudeshna Patnaik
Thanks, Kabir. We’ll wait for a minute for the question queue to assemble. Interested participants may click on Raise Hand icon at the bottom of the pane on Webex application to join the Q&A. The first question is from the line of Sanjesh Jain from ICICI Securities. Sanjesh, you have been requested to unmute yourself. Please proceed with your question.
Sanjesh Jain
Yeah, good evening. Can you hear me?
A. S. Lakshminarayanan
Yes, Sanjesh.
Sanjesh Jain
Hey, hi. Thanks for this opportunity. A couple of questions. First, Lakshmi, you said in your opening remark that we have signed multiple hyperscaler and OTT contract, and you particularly mentioned about one multimillion, 10-year contract, which you are connecting the various data center of an hyperscaler, I hope so. So, what is the — because it’s a 10-year scale, so what growth can this particular deal bring to us from an opportunity standpoint? That is number one.
And number two, because we need to now also lay out the network in tier 3 and tier 4. So, what is the incremental investment does this deal require us to do, additionally, probably?
A. S. Lakshminarayanan
Yeah. Sanjesh, first of all, the hyperscaler deal, this kind of build we have been doing for some time for many hyperscalers. As I said, some of these were past [Phonetic] because they had built capacity post-COVID. They all spent money on the back of increasing traffic after the COVID. And then there was a period of utilization of that capacity. And now we believe there is more demand, and these opportunities have come up. So, one example of the deal is what we highlighted in this call today. But we have been doing this data center based interconnectivity for multiple customers, whether it’s enterprise or other hyperscalers. I don’t want to break out the revenue, what it means, because we don’t give that breakout.
The second question that you asked was on the tier 2, 3 expansion of capillarity and what it means by capex. We have been actually steadily increasing our capillarity in those spaces, and we are doing it very scientifically. We have analyzed all the pincodes where there are demands, and we have identified those clusters, and we are expanding our network in those spaces. So, this is not a big one time exercise. We have been steadily doing it over the past four years, and we will continue to do so in order to make sure that we can address the opportunities of enterprises moving to the tier 3, 4 cities in India.
Sanjesh Jain
That’s clear. That means the $300 million, $350 million of capex what we speak also includes the capex for laying out fiber in the tier 3 and tier 4 cities. That’s right?
A. S. Lakshminarayanan
That’s right. That’s what we have been doing, yeah.
Sanjesh Jain
Got it. Lakshmi, second question on the co-connectivity. Even last quarter, we said that the Red Sea and the cable connect has hurt us. Is this completely behind us with the cable getting completely repaired and the 5%, 6% growth what we have been speaking that we should be back from the Q3 onwards?
A. S. Lakshminarayanan
No, I don’t want to comment immediately on the Q3, but your first question whether it is behind us, yes, it is behind us. I think the last of the cable cuts was repaired, and we will now look for how to start utilizing that capacity more meaningfully.
Sanjesh Jain
Got it. But we are not seeing any issue from the demand side of the part or the higher pricing erosion. None of those issues which can otherwise hurt the revenue is visible, right?
A. S. Lakshminarayanan
No, the demand side has been steady. So, just to remind you, we have been saying that the core connectivity as a business globally is a declining trend as a market, right?
Sanjesh Jain
Correct.
A. S. Lakshminarayanan
In that market, we had called out in our strategy that we will be in the low-to-mid single-digit growth is what we said. But for various reasons, there was demand and also by the fact that the customers trust us to deliver because these are all very critical connections to data centers across the globe, they value the services that we provide, we have been able to garner more market share out of this and deliver a higher growth compared to the market. So, we don’t see any issue with the market as such. But the overall market is having the color which I just painted. I don’t think that would change in the short to medium term.
Sanjesh Jain
Got it. And this hyperscaler contract what we mentioned, that will be part of the core connectivity, right?
A. S. Lakshminarayanan
Yes.
Sanjesh Jain
The second question on the digital side of the business, if I look at the net revenue, the growth for this quarter is 1.4% quarter on quarter and on the gross side it is 3.6%. We are still hitting only 15% growth, and the ambition was to touch 25%. Is the demand side issue, or it’s just that the order book and the sales funnel conversion has been slow, but the discussion are encouraging. Where is that gap versus what we were targeting and what we are delivering today?
A. S. Lakshminarayanan
No, I think we have set ourselves fairly ambitious target. There’s no doubt about it, and we are going after it. But the macro conditions and the challenges that arise are something that we don’t factor in when we create ambitions. And I don’t want that. So, setting that apart, our ambition continues to be that. And you’re right in your observation that 6% translate to the number that we said. But our ambition remains the ambition, and we are gunning for it.
From the demand side, we are very, very happy to see that the order booking has improved, and we have been calling out that there is slowness in — and you can see not just from our commentary, I think that’s been true for everybody else, the markets and the slowness. But you know, we are calling out the increased order booking because I was always of the opinion that as you continue to improve your funnel and work your way through, something will come out of the funnel at some point in time. And this last two quarters has proven to be the case. But the market conditions are still the same.
I think the conversion or the decision-making time has not improved in any significant way. But as it may, we can’t change the conditions. What we are focused on is continuing to invest in our fabric, in our products, continue to engage with our customers. And that coupled with we said that we are going to increase our sales footprint, and we did that increase. And some of this I’ve also been saying that as you increase the sales footprint, it takes time for the new sales team to understand the propositions, build relationships, and make an impact in the market. So, I’m quite pleased with the outcome that we’ve had. And in order for us to continue to do this, we have to continue to invest in our products and invest in our sales.
Sanjesh Jain
That’s fair. That’s fair. Kabir, I got three questions on bookkeeping very quickly. One, last quarter, you said that you want to achieve 20% EBITDA margin for FY ’20. Do we hold that guidance still true? Second, is this the only land parcel which is put in asset held under sale, or there are more land parcel we can expect in, say, next 12 months timeframe? And what is that amount we are looking at? Number three is on the working capital. A sharp increase of INR13.5 billion in the first half. This is significantly different than what we have seen in last four years. So, what has changed suddenly in the working capital side of it? Yeah, that’s it. Thank you.
Kabir Ahmed Shakir
Thanks, Sanjesh. Look, our ambition is still in the range of 20%. I said range of 20%. We will maintain that ambition of range of 20%. Yes, cable cuts, that’s not the only reason, but if I were to filter out, there are multiple noises within that, as you would have in any company, in any quarter, did have a dent, and we are a little bit impacted by that. But our ambition is still in the range of 20% for the full year.
On your second question on land, this is a significant one and it’s a related party deal. So, it needs, as per the regulations, to go to shareholder approval. So, it’s in the public domain. I’ve given you the value of it, although it is there in the shareholder notice as well, I’ve called it out for easy reference for all of you. This quarter, we also had a small land parcel in Vikhroli that we sold that is already recognized. As I told you guys about almost 1 year, 18 months ago, there was a real estate strategy that was approved by the board. And the team is constantly working on cleaning all the title issues and all the hindrances that were actually coming in the way of monetization.
Now, to go into specifics, we just got after enough follow up with the local government, we got the patta issued in our name. And unless and until you have the patta issued in your name, you can’t really get on with the sale process, although we did the valuation, we did all of those work. So, that’s the reason why we are today in a stage we’re able to do the monetization for Ambattur. In fact, STT is a current tenant there already, and it makes logical and strategic sense for them to become owner. And then that’s where we are awaiting shareholder approval to consummate the transaction.
We have a plan. I can’t give you a number because all of those are mired with all of these complicated problems. And as and when we unwind each and every one of them and get it ready, we will go on. Quite a few — there is no large thing coming up in the next 12 months. A lot of them are in the INR50 crores to INR70 crores, INR80 crores bracket, three, four of those properties. Some of them we went and there were some technical issues we had to actually halt. We will restart them. So, those are operational in nature, Sanjesh.
Lastly, coming to working capital, yes, I do recognize that it has gone up. Let me reassure you that the operations are completely under control. Nature of it about, I would say, year to date, about INR500 crores of the receivables of the total INR600 crores that you see, INR500 crores are not due. Those are the conditions either in the large deal contracts that we have, where we have billed, and we have recognized revenue, but they are not yet due, so they are not collectible as such. So, that has contributed to a big portion.
Plus also flavor of our deals are also changing in a way where we had to accept some of them came with the guarantee [Phonetic] conditions of higher payment terms as well. So, that was a conscious business call that we always take between margin and working capital and then do a right tradeoff per se. So, that is, I would say, the anomaly of working capital, but nothing I would say is alarming that way.
Also, Lakshmi alluded to large contracts that we actually signed. So, when we see the holistic picture of it, a little bit of a cash timing is not something that I would be overly worried about in doing economically the right thing for TATACOMM.
Sanjesh Jain
Very clear. Just one follow up on the land, what you said. You said that they are already tenant on that land. That means other income will reduce? Will that be a fair assumption? And if yes, how much will it dip?
Kabir Ahmed Shakir
That is correct. That’s exactly the reason why I said it out, even though you didn’t ask for it. Look, you will have to look at other income that we actually have. And as I monetize, that will keep coming down.
Sanjesh Jain
Got it. And now that ST Telemedia has announced a very large expansion plan in India worth $3 billion, is it fair to assume that they will keep requiring this land, and we have land at the very prime locations, these deals can continue. And number two, what will be our contribution in $3 billion from the equity side of it? Will we maintain this 26% equity stake and all the equity infusion will be funded by the Tata Communications to the extent of our shares?
Kabir Ahmed Shakir
Yeah. No, firstly, they have an ambitious plan of $3.2 billion, which they have communicated. That is a total outlay over five years. There is a large component that will be funded by debt. So, then there is a balance equity portion. As of now, our stated position, which you have seen in the last few quarters as well, we will continue to maintain the 26% stake in STT. When what we want to do with that stake is a review that we will undertake along with multiple other things that we are doing within the business. That’s what I alluded to in the first part of my speech, that there is a lot of value is there in this company to be unlocked. So, a lot of costs are getting incurred upfront, which is, as per accounting, get booked in my current costs. But these are all the right actions that we are taking for setting up the company for success, relooking at capital allocation, how we have to invest behind growth. I think you should look at it from that larger perspective.
We are a company in the digital transformation space. We are servicing the long-term infrastructure and transmission needs for our enterprise customers. We are the digital fabric. And these have longer gestation periods. And if our thinking as a management is not going to be long-term, and if we do not take long-term actions, I don’t want to get myopic into short term. I’m not saying it as an excuse, Sanjesh, but that is rightly the thinking that Lakshmi drives in the organization, and it’s absolutely the right thing to do.
Sanjesh Jain
Fair enough. I have taken more than the fair time, but thanks for patiently answering all those questions and best of luck for the coming quarters.
Kabir Ahmed Shakir
Thank you, Sanjesh.
Sudeshna Patnaik
Thank you, Sanjesh. The next question is from the line of Amit Maskara. Amit, I’m requesting you to unmute yourself. Please proceed with your question. Amit, your line is unmuted. Please proceed with your question. Amit, we can’t hear you. Please come back in the queue. We’ll move to the next question. The next question is from the line of Balaji Subramanian, from IIFL. Balaji, we are requesting you to unmute your line. Please proceed with your question. Balaji, please unmute your line and ask your question.
Balaji Subramanian
Hello. Am I audible?
A. S. Lakshminarayanan
Yes, you are.
Balaji Subramanian
Thank you. So, I had three questions. So, the first one was on the revenue aspiration that you had laid out in the analyst meet earlier this year, which was 28,000 crores of top line by FY ’27, of which about 60% will be from digital portfolio. So, that is basically around INR17,000 crores. If I look at the annualized digital portfolio revenue for 2Q, we are somewhere around INR9,000 crores, give or take INR100 crores or INR200 crores. So, how should one expect the INR9,000 crores number to move to something like INR17,000 crores in a span of 2.5 years or so? So that is one.
And even though you have stated many times in the past that you would not like to do M&A just for the sake of hitting the revenue aspiration, what are the potential areas you are looking at as far as inorganic opportunities are concerned? And in that case, how do you look to fund it? I do get that you are also exploring multiple monetization opportunities, but how should one expect the funding to come through? So that would be my first couple of questions. After I get the response, I will move to the last question.
A. S. Lakshminarayanan
Yeah. Yes, Balaji, thank you. I think the aspiration remains intact, as I said in the previous question. And you are right in saying that for us to deliver this kind of growth, our digital portfolio has to grow at a stronger clip. So, that is what. And that is the reason why we chose to invest in all the digital for all the four fabrics.
So, if you look at our next-gen fabric, next-gen connectivity, in the network fabric, we’ve invested in a new platform called IZO Multi Cloud Connect. And in the coming quarters, we will be releasing a product which connects within the cloud. So, with the increasing trend of people adapting more multi-cloud, that’s an area which is today a small market, that is in single-digit billions, ready to grow in upwards of 20% CAGR in the networking space. So, we’ve identified such a pocket, and we have invested in a product. And it’s in early stage. This product is in early stage, and we expect this to grow.
So, in many of these areas, that is one example. So, if you look at the interaction fabric today, the bulk of the revenues are coming from SMS. The clear reading of the market and the expectation is that it will diversify from SMS to other channels. And also, more of AI capability and orchestration across multiple channels will become the norm. And those are the areas we are investing. So, these are all new areas, and we have placed our bets in a lot of these new areas, all of which are whitespaces with a good growth potential. So, I think that is one dimension of where we are focused on in order to capture the opportunities.
The second dimension is about the markets itself. The international market is a bigger whitespace, as we’ve been calling out. And that is a market where we are increasing our footprint. We do have a challenger proposition there. We have to go and replace the incumbents. And that is what we are working on. So, the way we have set out our ambition is based on what we see as the market opportunity, our reading of web technologies in each of the fabrics we’ll go. And we believe we have placed our bets and investment in all the right places.
To your question on funding, if we chose to do inorganic, I think Kabir talked about the several monetization opportunities and value unlocking opportunities that we have. And those are the things that we would use to do. Kabir, do you want to add anything?
Kabir Ahmed Shakir
Yeah. Balaji, I would say we have a lot of growth ambitions, both organically and inorganically. To your point on M&A, we have clarified many a times, there are core principles that drive our M&A decisions. It has to be responsible, it has to be strategic, and it has to create value for everyone. The places where we will look at, obviously, are going to be DPS [Phonetic]. Having said that, I am not averse to complementary capacities coming in the core connectivity space.
So, we will actively look at it. We have an active M&A funnel. And as and when that funnel progresses to a level, it will go to the board and go through the due diligence before it’s approved, and then it’s ready for us to communicate externally as well when we do such deals. Funding of it, both organic and inorganic, are something we constantly look at. And as Lakshmi alluded, there are multiple levers, monetization opportunities that we will examine.
But let me rewind the clock 18 months before. What did we do? We did have an aspiration of M&A. We spruced up, we delivered a very healthy profitability in our business. We brought our net debt down to 1.3 times, created the war chest and the capacity. We were operating at a very healthy 29% ROCE. And then we went and acquired these three assets. And our task is to, of course, integrate and deliver on the synergies and the business case of these assets. And we have given you an indication of when net debt leverage, ROCE, and EBITDA margins will come back to our ambition ranges. And when we get back there, I’ve said multiple times, our objective is not to stay there. Our objective is to use our financial muscle to invest behind growth.
Now, what happens between the time we get there and now if there are interesting opportunities? That’s why we will look at all these monetization opportunities. With the robustness of our financial performance, our own headroom on debt capacity has also gone up. So, if required, we will look at avenues. We’ve also done theoretical exercise on varying target sizes, what is the right funding instrument that we need to use. So, depending on the opportunity, depending on the target, I think, Tata Communications today has the right hygiene and the robust balance sheet to tap onto the right capital asset that is required to fund that opportunity. I’ll leave it at that, Balaji. I can’t go any further details than that.
Balaji Subramanian
Thanks, Lakshmi and Kabir, for the detailed response. My next question was on the interaction fabric that you had mentioned. So, you did allude to the diversification of enterprises towards non-SMS channels. But based on what I gather from market sources, it does look like even though WhatsApp volumes are on a tear, there have been some renegotiation of terms from WhatsApp side towards CPaaS players. And I do understand that they have taken up the incentive which you get — the threshold which needs to be crossed to be eligible for the incentive. And there is chatter that eventually the gross margins in the WhatsApp business will also settle down to something like 15%, 20%, which is what we see in the domestic SMS market.
So, how do you reconcile the fact that at the end of the day, a channel like an SMS is something which is owned by the telco, while WhatsApp as a channel is owned by Meta, so considering the typical lack of ownership of these channels by a CPaaS vendor, do you think that, that will come in the way of monetization of CPaaS in the long run? Thank you.
A. S. Lakshminarayanan
Yeah. So, we cannot really speculate on what will happen. There are not just these channels. There are voice channels, for example, which we own, and programmable voice is another big opportunity. There are video opportunities, there are RCS opportunities. So, the channels will continue to expand. And we cannot also predict on which channels are going to pick up the most in the customer. So, that is one area we do need to develop the products, which we are doing, and take it to customers.
The second is, I think the customers also will settle on looking at what are the optimal channels to use in terms of across these channels, which is where our ability to orchestrate across multiple channels, build out those orchestration layers, and bring AI to that will be crucial. So, after all, finally, it will be channels will be channels.
Balaji Subramanian
Got it. Thanks a lot and all the best.
A. S. Lakshminarayanan
Thank you.
Sudeshna Patnaik
Thank you, Balaji. The next question is from the line of Vibhor Singhal from Nuvama. Vibhor, we have requested you to unmute yourself. Please proceed and ask your question.
Vibhor Singhal
Hello.
A. S. Lakshminarayanan
Hi. Hello
Vibhor Singhal
Yeah. Hello. Hi. Thanks for taking my question. So, Lakshmi, a couple of questions from my side on the overall growth environment. So, as I think they’ve been asked by the earlier participants, I think the growth in this quarter was stable. But of course, there’s a big gap between what our aspirations are and what we are delivering at this point of time. How is the basically overall macro looking like, especially with respect to the second half of the year? We’ve seen a lot of IT services vendors talk about the interest rate cut having reinvigorated talks about the stationary spends. Is that also something that we are also hearing, and will that be applicable to us as well? But on a broader note, what is the kind of growth that we are –what is the kind of overall growth trajectory that we’re looking at for the second half of this year?
A. S. Lakshminarayanan
Yeah. I don’t want to comment on immediately the immediate quarters. I think we are very encouraged by the order bookings that we’ve had in the last two quarters. And the second data point that I have is that the time taken to convert these orders actually have been longer as well. As I’ve been saying, as we put more in the funnel, at some point in time, it will come out. So, our effort has been to see how do we put good quality of deals into the funnel, increase our engagement. And those are the things entirely under our control, and that is what we are focused on.
To the question on macro, there are different readings of it in terms of the geopolitical risks. That is even more heightened and in fact worsened. Yes, the interest rate cuts have been encouraging. So it’s hard to read into some of these. And the second aspect which I have been highlighting also, in the area of network, for example, the customers do not replace it just like that because it’s a fairly complex process that they have to go through. And there is an inertia for them to do. So, there is a lot of work that we are having to do with the customers to switch from incumbents. And having done that, the time to realize some of these revenues are also longer.
So, yes, macro plays a role, in which case, if they build more applications and if they put more into the cloud, their existing network architecture and infrastructure begins to crack. And that is when they look to see whether they can look to transforming the network. So, in a sense, that’s a relationship between macro. As macro improves, more applications, more things moving to cloud, more stress on their legacy network, and therefore the need to transform. So, it’s a longer cycle from our perspective. But the good thing is we stay focused on. And the encouraging thing is also we have multiple fabrics. So, if hopefully the discretionary spend goes up, our interaction fabric, I believe, will continue to stand to benefit from such a move.
Vibhor Singhal
Right. Thanks for that very detailed answer. But if I were to marry the answer you just gave with the answer to Sanjesh’s question in the beginning, you mentioned that, of course, there’s a macro factor, there’s a market dynamics. When we build aspirations, we, of course, don’t take market dynamics into account, and we go hope for the best. So, what exactly are the market triggers or let’s say drivers that you are waiting for? We’ve had an interest rate cut. There is a talk of discretionary spending picking up. What exactly are we waiting for? What are those events, or what is that something which you believe is going to drive over revenue growth to our aspiration levels?
A. S. Lakshminarayanan
As I said, we’re not waiting for anything for happening.
Vibhor Singhal
[Speech Overlap]
A. S. Lakshminarayanan
So, if you look at each of this, I think I gave an elaborate answer as far as a network. So, when do people undertake network transformation is particularly when they go to cloud, they see that their current network architecture is not able to cope. They come under cost pressure, and therefore they look to replace their traditional network with more Internet-based architecture. And as they move to more Internet-based architecture, there is more need for network security and SASE, which is where, again, we have invested. So, I think the trigger would be largely where the enterprises get to a point where, as they move their applications to cloud, as they have more distributed touchpoints, either from their users accessing in multiple places, the application performance begins to go down. And as they go to use more Internet, they get more worried about security, and therefore, the network transformation, implementing network security related thing accelerates. So, that’s a trigger point as far as that is concerned.
So, in the cloud and our security fabric, I’ve spoken to the security fabric. So, the network security is one. The second is we are seeing a lot of opportunities on implementing a very state-of-the-art SOC for customers. And that is what we announced a deal last quarter, for example. And there are multiple such opportunities where the threat landscape is increasing and people are wanting to implement. So, in a couple of these deals that we are implementing, it’s a complex implementation, integrating over 20 different OEM technologies to deliver. And we are enabling it through threat intel from our network and bringing AI capabilities to that. So, that is another trigger event for that portfolio. And, of course, the cloud, we are strengthening our infrastructure as a service as well as the platform.
Expect us to announce some relaunch of these products in this coming year. And we are investing in AI cloud, which is in a very, very early stage. So, these are some of the examples I can talk about for each of the fabric. There are clearly trigger points in each of the fabric which we believe will drive the growth.
Vibhor Singhal
Right. Sure. Got that, Lakshmi. So, okay, I’ll probably just have a couple of more very specific questions. The media revenue saw a very sharp decline in this quarter. Any specific reason for that? I’m sorry if you elaborated that already. I missed the initial parts of your opening comments.
A. S. Lakshminarayanan
Yeah. So no, I did mention that the media is a bit cyclical based on the sports calendar. A lot of our media revenues come from our coverage of live sporting events, right? So, we are the leaders in a lot of global sporting events like the Formula One and others. Last quarter, we had the IPL, the international cricket T20 match in the U.S. and the Caribbean, and we also had Olympics. So, all of that were in the last quarter. So, depending on the sports calendar, it has a bit of cyclicity, I would say.
Vibhor Singhal
Got it. Sure. That’s helpful. Just last question for Kabir. So, Kabir, I think, this quarter margins, I suppose, were impacted because of the maintenance expenditure in the core connectivity segment. Excluding, I don’t know if you quantified that, again, maybe I missed out on the initial parts. But excluding for that, are we looking at a trajectory in which we are looking to expand margins every quarter, especially in the digital space, as we should now be starting to reap the benefits of integration of both Kalerya and Switch? Is that understanding correct? And is that also what we can also build in, let’s say, for the next year as well?
Kabir Ahmed Shakir
Well, look, Vibhor, I’ve said we want to get back to our ambition of 23%, 25%. And that will come in two years’ time. This year, I’ve said we will be in the range of 20%. That’s what we would like to give. Half a percent here, there is not the point, but that is the range we will get back in. What your point you say, I will not say only for Kalerya, but for the entire digital products itself, we have a glidepath. We have mentioned that we have a glidepath, and there are multiple drivers, and the drivers differ from product category to product category. And those are tracked in terms of margin expansion. So, absolutely, yes, we want to be able to drive faster, better growth in DPS and also profitable growth. So, therefore, even that profitable trajectory also needs to go up.
Even from the current levels, when we drive faster growth, we have a headwind because of the mix effect on our margin profile. Despite that, our ambition is to stay in the 23%, 25%.
Vibhor Singhal
Got it. That was really helpful. Thank you, guys. Thanks a lot for taking my questions.
Kabir Ahmed Shakir
Thank you, Vibhor.
Sudeshna Patnaik
Thanks, Vibhor. The next question is from Vinit Manek from Karma Capital. Vinit, I request you to unmute yourself and ask your question.
Vinit Manek
Just one question for Lakshmi. So, Lakshmi, not specifically on the numbers, but we have seen a good growth Q-o-Q for this quarter and with a lot of revenue coming back on our core connectivity and few of the good order book that we have seen growth for the last two quarters. So, can we expect a better second half versus the first half revenues that we have seen, or any comments on that?
A. S. Lakshminarayanan
So, Vinit, I gave a color to some of these order books. While I cannot give specific guidance, I’ve also given a color on the order book that some of the orders, I think I mentioned about the large hyperscaler network build. And that will come almost towards the second half of FY ’26.
Some of our network deals we book the order, by the time we realize the revenues take longer. But there are certain portfolios where booking the order to conversion is faster. So, the various portfolios have different colors. So, it’s harder for me to — while we know how it’s going to translate, we don’t want to break that out and give a guidance for the H2 based on this.
Vinit Manek
Got it. And two bookkeeping questions for Kabir. So, Kabir, any sense on the usage of the cash that we’re going to do from the divestment that we had announced? So, will it be more towards the debt repayment, or it will be required for some accelerated investments on the AI cloud or the GPUs that we will be doing mostly in the second half?
Kabir Ahmed Shakir
Yeah, I would have liked if you did not call it bookkeeping questions. Finance in TATACOMM is quite strategic, and we add value to the business in a fundamental way. So, yeah, bookkeeping is what we do to earn our salary, but we are here to drive business forward.
Yes, we look at source of funds and use of funds. We have a strategic plan that drives our actions. We have our ambitions to be the digital fabric for our enterprise customers. And we have INR28,000 crores as our North Star in FY ’27. We have digital portfolio that we want to drive as an acceleration. So, those are all our guiding factors.
And yes, each and every opportunity will be evaluated based on the ROI that it needs to deliver. So, we are measuring from a very careful angle of driving growth, driving profitable growth, yet delivering the ROCE that we want to do and maintain a certain healthy debt-equity ratio and a leverage. So, there are multiple places from where this is optimized.
So, I would say we will look at every element, both in the P&L and in the balance sheet and sweat each and every piece of asset that we have towards driving profitable growth. If you had probably been exposed to the finance strategy, there is a big pillar called fit to grow. And the fit to grow is not just a conceptual model. It’s a strategic planning model backed with multiple scenarios that the team updates on a monthly basis, which guides us in terms of resource allocation for the business, both for organic and inorganic activities.
Vinit Manek
Got it. And can you just repeat the one-time expenses that were there in the interest cost of INR193 crores this quarter? And could this be the peak absolute interest cost for us? Because we have already hit that threshold of the debt to EBITDA thing that we had on the aspiration side. So can we say that this is the peak interest cost on the absolute side?
Kabir Ahmed Shakir
Firstly, it’s not a one-time cost. That’s my interest cost bill for the quarter, INR193 crores. Well, you tell me that the Central Bank of India and the U.S. will not increase rates, I will give you the guarantee that is the peak. Look, we have hedging that we do. We have an interest rate management policy that we actually run.
In this particular quarter, the costs have gone up because of increase in short-term borrowings and a mix of INR versus dollar debt. So, that is the reason. I’m sorry, I can’t give you guarantees whether we have reached the peak or not because I do not control interest rates.
Vinit Manek
Okay, but how much was that, can you quantify that for the quarter?
Kabir Ahmed Shakir
It’s very marginal. Our weighted average cost of debt is still lower than the previous quarter. It’s only the absolute that’s gone up because of the mix between the short-term borrowings that are taken in India. So, it’s a few crores here and there.
Vinit Manek
Got it. Thank you for answering all the questions.
Sudeshna Patnaik
Thanks, Vinit. The next question is from Priyank Parekh from Abakkus Asset Managers. Priyank, please go ahead and ask your question.
Priyank Parekh
Sir, am I audible?
Kabir Ahmed Shakir
Yes, you are.
Priyank Parekh
Yeah. Thank you. Just wanted to understand from the perspective of that we have multiple segments and within the digital portfolio, we have five segments. So, when we are projecting the growth for next few years, I want to understand how correlated these segments are. Are they quite heavily driven by certain levers, or they are completely diversified?
A. S. Lakshminarayanan
You mean if in each of the segments, yeah, I don’t think there is much of correlation. So, there might be some correlation between the network fabric and, for example, the cloud and security fabric, I think I answered in the last call. As people do network transformation and tend to use more of Internet, there is going to be more need for a different security architecture in the network through the SASE and other new technologies, which is linked to the network transformation that takes place. So, that is one linkage.
But otherwise, I don’t think there are huge amount of linkages between an interaction fabric and a network fabric or an IoT fabric. And also, we find that the buying personas within enterprise for many of these are somewhat different. Even within the network fabric, the person who looks at network and typically the people who have been looking at network security have been different. And as it begins to converge, we are also seeing that in enterprise there are changes in how they make the decisions. So, there are certain convergence, like the LAN and the WAN, the WAN and the security. But truly, there are different personas taking decisions and there are different drivers. There are not many more links I can think of.
Priyank Parekh
Okay. And when we are speaking that $280 billion [Phonetic] of the revenue in next few years, which segment you are really seeing driving that growth within the digital?
A. S. Lakshminarayanan
Yeah. No, all the fabrics. No, I think I have elaborated before. The network fabric, the cloud security, the interaction and IoT, the media, all of them have potential, and all of them can grow at a very healthy level double digits.
Priyank Parekh
Okay, got it. And just last one question for understanding. When we are saying that this land sale will affect our other income, that is the real estate income that we are reporting, right?
Kabir Ahmed Shakir
Sorry. Repeat that again, please. I missed you.
Priyank Parekh
So, when we are saying that this land sale will impact our other incomes, that is the real estate income that we are talking about.
Kabir Ahmed Shakir
Yes, that is correct.
Priyank Parekh
Okay, understood. Yeah, thank you.
Sudeshna Patnaik
Thanks, Priyank. The next question is from Gautam Rathi. Gautam, please unmute yourself and ask your question.
Nishit Rathi
Hello. Hi, this is Nishit. Can you hear me?
Kabir Ahmed Shakir
Hi, Nishit.
Nishit Rathi
Hi, great. So, just a couple of questions. You called out the best international order book in the last five years. Can you give some color as to what is driving this? And I know you gave a very detailed explanation with respect to some of the network transformation deals and how long it takes to get some of those. Are we seeing some of those also in that order book, or this best order book is without some of those network transformation deals?
A. S. Lakshminarayanan
No, I think the order book, again, as I mentioned, is across all the fabrics. But having said that, in some of the usage-based areas, like the interaction fabric, we don’t really include that in the order book because that is purely usage-based. Unless we have a firm commitment, we don’t include that in the order book. But the order book color that I gave is across all the four fabrics.
Nishit Rathi
Anything incrementally that has changed, Lakshmi? One thing you called out is increased sales productivity. You’re basically saying that your funnel had increased so much that something had to convert because you’d put more manpower behind it. But is there anything incrementally that you’re seeing are you starting to win deals differently? Any other color would be very, very helpful, or this is it?
A. S. Lakshminarayanan
I think it’s early to call. Obviously, the win rates have improved, which is simply a function of how much we are winning compared to how much get dropped because the customer is not simply taking it forward, or they choose to stay with the incumbent, those kind of scenarios. So, the win rates improvement is encouraging.
Yeah, other than that, no, it’s a factor of gaining the confidence with the customers because especially in all of these digital infrastructure areas, they are very, very core and fundamental to the enterprise. It is not that if something goes wrong in an area they could easily replace. It takes time. So, they are a lot more conservative. So, that’s the reason why it takes time. It takes time to develop the trust, and there is a long engagement cycle that goes behind that. But in terms of color, I don’t think I can add any more color to that. Yeah, there are instances where we have won against certain incumbents consistently. But other than that, I can’t give you any further color.
Nishit Rathi
See, I just wanted to call out what I understand, and just if you could help me understand that, right? The way I’m thinking about it is that it’s a long sales cycle, and you guys have been at it for the last, maybe, 18, 20 months, adding more and more sales people, which means that you’ve been adding to the funnel. But because it’s a long sales cycle, it takes time. And now you’re starting to see fruit of some of those deals come through, though the market is still not improves, which is showing up in your subdued funnel, right? So, it is more gradual, but there is a possibility that as incrementally, both your productivity of the sales improves as you keep adding more products and the market improves, this could accelerate, right? Is that the way you are seeing it, or is there anything different?
A. S. Lakshminarayanan
That is the plan.
Nishit Rathi
Perfect. So, that is one. And just the subdued funnel in the context of increased sales people, so have things got even worse on the macro side because your sales people are getting more productive, which means that even with the macro being soft, you should have actually been — the funnel should have been growing, right?
A. S. Lakshminarayanan
I think you should read that in context with the conversions as well, right? So, we have got deals, which means that we have fruitful conversion of the funnel. And when you convert, then it gets out of the funnel. So, we have to replenish the funnel, right?
Nishit Rathi
Understood.
A. S. Lakshminarayanan
So what I’m saying is the funnel is remaining constant, which is why we said the funnel is still robust. But in terms of the pace of new additions, that had somewhat slowed down because, rightfully so, the teams are also focused on closing some of them.
Nishit Rathi
Okay. So the staff, he’s occupied there. And just is there any update on the NVIDIA partnership? Because Q3 is when we were expecting that to go live. Any color you want to give on that? How do we see that starting? What revenue impact should we see from Q4, Q1 onwards?
A. S. Lakshminarayanan
No. It’s close to the period that you said Q3, so please wait for the launch.
Nishit Rathi
Fair enough. And just the media side, I understand the seasonality on a quarter-on-quarter basis. What I’m not able to fully understand on a year-on-year basis, given the commentary that we were hearing with Switch and the opportunities that were opening up there, are these again work in progress? What is happening out there, if any understanding there?
A. S. Lakshminarayanan
Yeah, I think we are closing deals. But some of the seasonality is not a yearly seasonality. Olympics doesn’t come every year. The ICC T20 doesn’t happen every year. So, some seasonalities are annual seasonalities, which reflect in the quarterly things, like the Formula One race begins and ends in certain seasons. But some of the other events are not a yearly calendar one. So, that’s what I referred. So, no, I think the integration with the Switch is proceeding at pace. We were impacted somewhat by the Hollywood strikes last year, and things are beginning to pick up again. So, we are quite pleased with the revenue opportunities through the Switch integration, particularly on the production side, because it does expand our capability beyond just the transmission side that we were in before.
Nishit Rathi
That’s fair. Kabir, you spoke about a lot of the cost getting booked upfront and a lot of investment being made. Can you just help us understand maybe a few examples for us to just get a better understanding of this?
Kabir Ahmed Shakir
There are a lot of them there already in the public domain. For example, preparing ourselves to play really well in the acquisition game, we are reorganizing our subsidiaries, now TC UK is a direct subsidiary of India. That’s there in the regulatory filings. It’s there in the public domain. So, that’s from an M&A perspective that we are competitive to be able to do that.
Then there are other projects in preparatory stage for any monetization opportunities that we may get which are not yet approved by the board. So, I’m not privy to share. These are all preparatory works. When it happens and when it reaches and when the board approves, then this will be the reason for public disclosure. Until then, I can only tell you that as we are poised for growth, and a lot of you have asked the question on use of funds and how will we do it. So, you’ve looked at all of them and say, how can we do that in a tax efficient and a least cost way, And our structure, if that was coming in the way, we are trying to simplify that structure. That’s the best level of information I can provide. I can’t go any more detail than that.
Nishit Rathi
That’s very fair, Kabir. Kabir, the employee cost also, is this normal increment or the INR50 crores increase quarter on quarter, just can you help us understand? Is there anything out there that we need to understand? Did you add more? What was that?
Kabir Ahmed Shakir
No, no, it happens every Q2 if you actually look at historically, so we accrue for a certain SIP cost and for the full year of the previous year that gets paid out in the first quarter and when there are excess provisions, that get reversed. So, therefore, you are comparing against the base effect, that’s why it looks increased, but it’s not any increased increment. This is not an increment cycle. Q2 is not an increment cycle. So, it’s not increment cycle, not any extra hires, so that is not contributing for it.
Nishit Rathi
Q1 had some reversals and Q2 is more normalized. And this is how you should be seeing this.
A. S. Lakshminarayanan
Yeah, correct.
Nishit Rathi
Okay. That’s very fair. And this INR86 crores, which has been included in revenue, what exactly is it? Is it like debtors or provision made which has been reversed? Is that understanding right?
Kabir Ahmed Shakir
No, no, it’s not. Look, it’s BAU for us. These are excess customer credits that we had which would have otherwise given to customers on renewals and stuff like that, and negotiations turn up better. It’s normally a very, very BAU activity that happens every quarter, every year, because sometimes renewal happens and we go and close the discussions two months, three months later on. And so you obviously take a view that you may end up giving so much as a discount, but you get better than that.
The reason why we’ve called out this time is because it’s an aged customer credit which is greater than five years. And therefore, just as part of good governance, we said since it’s an aged credit and not within the year, we’ve called that out. But otherwise, these are regular BAU stuff.
Nishit Rathi
Understood. And just one last thing. On the working capital side, the inventory number seems to be very high. And also, is there any impact of Kalerya in our working capital, because it’s a business where you have to give advances upfront. Can you just call out — help us understand the inventory and the Kalerya?
Kabir Ahmed Shakir
Inventories are deal specific, Nishit. So, there’s one large deal where we procured the inventory, but we are unable to bill the customer because of the RFP condition that we have to stitch a solution and then only we can do it. So, we have procured it for that particular purpose. Most of our inventories are for customer orders. We don’t have an inventory policy. We don’t stock inventory per se. So, this is directly linked to one large deal.
Nishit Rathi
And Kalerya, is there an impact of Kalerya on our increased working capital because you need to give advances to the telcos and stuff like that?
Kabir Ahmed Shakir
No, there is one specific deal in Kalerya where there was an advance payment that had to be given, which is factored in. As I responded earlier to Sanjesh also, I would say this is BAU, and we have taken an economic call in totality, per se.
Nishit Rathi
This very helpful. Just one last request, Kabir. Whenever you think it’s right, it’s very interesting what you spoke about the core and the non-core, and you guys have a very detailed plan towards that. Whenever you guys can share, maybe whatever you can share in that context for us to take a longer-term view on that business, because I believe it could have very material impacts, because you have a lot of capital coming out and cost getting saved, which will then be used to reinvest for further growth, right? And if you could share that plan with us at any point of time, it will be very, very helpful. It’s a request from our side. You can consider whatever best you can.
Kabir Ahmed Shakir
It’s not about request. Sorry, Nishit, let’s not be irresponsible with that comment. We are a public-listed company regulated by financial markets and SEBI. There are very clear laid out disclosure requirements. When proposals of this nature go to the board, board get approved, we are under obligation to report to the market. This is not a request. So, please don’t consider it. We as a management are obligated, and we will absolutely do everything in compliance with the law and to the strict levels of corporate governance. So, don’t even have an iota of doubt on that.
Nishit Rathi
No, no, I agree with that. I’m not saying what happens. I’m saying, what is the way forward? What is strategic? What is not strategic? What kind of amounts are you looking at saving?
Kabir Ahmed Shakir
That’s what I’m trying to say, Nishit. The moment I say this is an asset that I want to dispose, I’m obligated to call it as asset held for sale and put it in my account.
Nishit Rathi
Understood.
Kabir Ahmed Shakir
So, until that review has happened, until the board has approved it, we cannot do it. And I can’t be flippant with those remarks.
Nishit Rathi
Understood. Got it. Understood. Fair enough. Thanks a lot, Lakshmi and Kabir. Really helpful.
Sudeshna Patnaik
Thank you, Nishit. We will take the last question, and this is from the line of Amit Maskara from Sephira. Amit, please unmute yourself and ask your question. Amit, please proceed with your question. Amit, we still can’t hear you. We’ll request you to please reach out to the IR team, and we’ll help address your question.
With that, we come to the end of the Q&A session. Thank you, ladies and gentlemen. I will now request Lakshmi to please share his closing comments.
A. S. Lakshminarayanan
Thank you, all. It’s been a good interaction. I think we covered a lot of ground. Very pleased with the quarter in terms of the growth both in the top line and in the EBITDA and PAT. Also pleased with the order booking in the first two quarters that we have had. We commit to stay focused on executing on our strategy. Thank you.
Sudeshna Patnaik
Thank you, Lakshmi. This brings us to the end of the call. In case of any queries, please write to investor.relations@tatacommunications.com. Thank you for joining the call, and you may now disconnect your lines. Have a good evening.