Tata Communications Limited (NSE: TATACOMM) Q3 2025 Earnings Call dated Jan. 22, 2025
Corporate Participants:
Sudeshna Patnaik — Deputy General Manager
A.S. Lakshminarayanan — Managing Director and Chief Executive Officer
Kabir Ahmed Shakir — Chief Financial Officer
Analysts:
Balaji Subramanian — Analyst
Sanjesh Jain — Analyst
Vibhor Singhal — Analyst
Hitesh Mahida — Analyst
Dayanand Mittal — Analyst
Unidentified Participant
Presentation:
Sudeshna Patnaik — Deputy General Manager
Good evening everyone and a warm welcome to you all. Thank you for participating in the Q3 FY25 earnings call for Tata Communications. My name is Sudeshna Patnaik and I’ll be your host for the call.
We are joined by our MD and CEO Mr. Amol Lakshmi Narayanan, our CFO Mr. Kabir Ahmed Shakir and our Head of Investor Relations Mr. Rajiv Sharma. The results for the quarter ended 31st December 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 the business 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 uncertainties. The company does not undertake to update these forward looking statements publicly.
With that I would like to invite LAKSHMIT to share his views. Thank you. And over to you Lakshmi.
A.S. Lakshminarayanan — Managing Director and Chief Executive Officer
Thank you Sudeshna. We’re very pleased with our results for the third quarter. With continued growth in digital revenues coupled with improvement in EBITDA margins and free cash flows, our strategic measures pertaining to the review of non core assets and subsidiaries are yielding positive outcomes. We are on track with repositioning our assets to drive long term value creation.
In Q3 we entered into a share purchase agreement with TSI India for sale of our entire stake in tcpsl. Similarly, Net Foundry, our fully owned subsidiary requires additional investments to support its growth ambition and achieve its long term potential. We are considering avenues to infuse external capital which may result in us no longer being a controlling entity while we continue to retain a stake in that business.
Coming to our financial performance, consolidated revenues came in at Rupees 5,798 crores and grew by 2.9% year on year and 0.5% Q on Q. Our EBITDA margins came in at 20.4%, improved Q on Q by 100 basis points and our PAT came in at 256.6 crores up 12.9% Q on Q. FCF came in at Rupees 841 crores versus a negative FCF of Rs. 194 crores in Q2. Please note that Q3 numbers do not include TCP, SL and Net Foundry. They.
Data revenues came in at 4,903 crores and were up 6.2% year on year and 1.4% Q on Q. Core connectivity revenues came in at 200590 crores, a growth of 2.8% year on year and lower by 0.9% Q on Q. Internationally cable cuts were an issue in the previous quarters that we called out. The repairs were completed in October. The later part of the quarter was about winning back the customers in India. We continue to be market leaders in data center to data center connectivity and are investing further to sharpen our services with dedicated Metro builds.
On the order book and funnel side. Our funnel continues to be robust. A large deal funnel addition has increased by 50% year on year giving us the confidence that we are delivering on our strategy and being relevant to our customers. Our order book in H1 had benefited from marquee large deals. The YTD order book growth is healthy. Double digit and earliest signs suggest that 4Q is likely to be robust in revenue growth.
To throw some light on the deals in Q3 in India we are seeing increased traction in hosted SASE. Internationally we continue to add new logos in the form of national champions. In UK and Ireland we bagged orders from a top retail bank and a global retail chain to transform the digital landscape in the Americas we started working with the world’s largest manufacturer of construction equipment to support their operations overseas. Additionally, we are seeing more wins from existing customers in line with our strategy of going deeper with fewer.
Coming to our digital portfolio performance. This quarter revenues came in at rupees 2313 crores at 10.2% year on year growth and 4.1% quarter on quarter. This growth is broad based. Our collaboration and managed CPAAS portfolio which is our interaction fabric reported a robust growth of 11.7% year on year and 5.7% Q on Q. In Q3 we launched Calera AI to help enterprises uncomplicate their communication with their customers through workflows and templates powered by AI. We expect the adoption start kicking in in a few quarters.
NextGen connectivity, which is our network fabric, grew 9.2% year on year and 14.4% quarter on quarter. Customers shifting to cloud, shifting to Internet and adoption of AI are the key growth drivers for our network fabric and we are capturing this opportunity through our ISO Hybrid WAN service, the ISO Multi Cloud Connect service, both of which witnessed robust growth.
Cloud and security fabric grew by 20. 12.5% year on year and 4.1% Q on Q driven primarily by our security portfolio. GPU as a service is already available in the market. Our AI Studio launch will come later this quarter. Our incubation services which is our IoT fabric witnessed a growth of 23.1% year on year and a decline of 20.9% Q on Q in the top line there is an impact on account of discontinued operations.
In the previous quarter our move platform had seen an uptick driven by the SOTA campaigns by oem. These campaigns are periodic in nature. Having said that, we have extended our partnership with JLR. JLR’s upcoming medium sized SUV built on the new electric vehicle modular architecture will be leveraging Tata Communications moot platform. Our media portfolio witnessed 2% year on year decline and an increase of 6.7% Q on Q.
We signed a multimillion dollar deal with a Latam based media tech company as a media cloud and edge technology partner. We will help them transform from a linear traditional channel format to a digital platform. To sum up, in a not so conducive environment, we have delivered a strong execution as reflected in our digital data growth combined with expanded margins and increased cash flow. We will continue to invest in our products as we see our customer relevance is growing.
With that, I now request Kabir to share the key financial highlights.
Kabir Ahmed Shakir — Chief Financial Officer
Thank you lakshmi. The Q3FY25 revenue growth driven by data came in at 5,798 crores. Consolidated revenue growth of 2.9% year on year and 0.5% Q on Q. The top line had certain forex benefits accruing from a centering dollar normalizing for the same. The revenue growth is at 1.8% y and y and 0.2% q on q.
Data revenue for the quarter came in at 4,903 crores, growth of 6.2% year on year and 1.4% Q on Q. The digital revenues for the quarter came in at 2003313 crores, a growth of 10.2% year on year and 4.1% quarter on quarter last year. We emphasize last quarter. We emphasized the multiple strategic measures which will start benefiting us in the quarters to come and I’m pleased to share that we are making good progress. We announced the monetization of land parcel in the previous quarter and necessary shareholder approvals are in place.
Similarly, TSI purchase of entire stake in TCP SL will help us lower leverage, boost margin profile and PAT in the coming days as Lakshmi highlighted earlier during the call. We’re considering potential avenues of scaling net foundry by infusing external capital. This is another positive outcome of our strategic review of subsidiaries and help strengthen and sharpen our focus on. On core and aid margins.
Let me add that our strategic review of subsidiaries has not merely restricted to monetization of assets. We’ve been working towards making TCTS more profitable and the impact on our profitability is already visible. TCTS EBITDA margins have Improved by about 800 basis points year on year. Pat for TCTS has Significantly improved from negative 42 crores in FY24 to INR40 crores till Q3 FY25. This has been outcome of our move to come out of a large loss making contract.
Our measures towards simplifications continue as we undertake restructuring of the current layered corporate structure. PC Netherlands and TCUK have been identified as the preferred holding companies for potential acquisition overseas and steps are being taken to realign them as direct subsidiaries of PC India. This simplification will help the company to be more efficient and opportunistic in pursuing any potential opportunities when they come by.
All the aforesaid measures are sharply improving the organization’s ability to focus on the core and making us future ready and at the same time freeing up resources to fuel our next phase of growth. With our land and non core monetization state above stated above, we see our leverage ratios improving meaningfully over the next couple of quarters. Executing all the aforesaid measures was never easy as implemented. Implementation required upfront costs and may have created a perception of inefficiency. These decisions position the company for long term success and operational excellence.
Our EBITDA came in at 1181 crores up 4.1% year on year and 5.7% quarter on quarter. Our EBITDA margins for the quarter were at 20.4% albeit negative. The EBITDA margin of our digital portfolio continues to witness an improving trend. PAT for the quarter came in at 256.6 crores up 12.9% quarter on quarter. FCF for the quarter was at 841 crores after being negative in the previous two quarters. This is the highest FCF we have recorded in the last 10 quarters. We are able to address working capital concerns this quarter even though collection in some pockets of SAK region has been challenging in the recent past driven by geopolitical factors.
Cash capex for the quarter stood at 486 crores to see came in at 16% a decline of 40 basis points quarter on quarter. Net debt for the quarter stood at 10,468 crores and net debt to EBITDA is 2.34x. Both net debt and ROCE are impacted by forex net debt is higher by 200 odd crores and ROCE higher by 20 basis points. Because of the forex impact, TCPSL and Netfoundry are part of discontinued operations and therefore they are not part of the reported financials.
As such, the top line for Q3 is lower by 36 crores. EBITDA margins have been positively impacted by 40 basis points and pat margin is seen. The improvement in pat margin is seen at 20.7 crores. Net debt is higher by 267 crores due to non inclusion of cash from TCPSL. To sum up, our actions around repurposing our balance sheet, combined with continuous investments in new capabilities positions us well to participate in future growth opportunities.
I will now ask Sarishna to open the forum for Q and A.
Questions and Answers:
Sudeshna Patnaik
Thank you Kabir. We will wait for a minute for the question queue to assemble. Interested participants may click on the raise hand icon at the center bottom of the pane on WebEx application to join the question and answer que. The first question is from the line of Balaji Subramanian from IIFL Balaji. You have been requested to unmute yourself. Please unmute and proceed with your question.
Balaji Subramanian
Hi, good afternoon. Am I audible?
A.S. Lakshminarayanan
Yes you are.
Balaji Subramanian
Hi Lakshmi. Thanks for taking my question. My first question would be on the demand environment we have seen. You know, especially with now the Trump administration coming in. You know, some of the IT services companies at least are talking about an improvement in discretionary spending from the next quarter or so. So you know, how does you know? Are you also seeing some sort of a similar tailwind on the demand front? That would be my first question.
My second question would be on your Fi27 revenue target, the data and the digital portfolio revenue target. So now that we are just about. A little over two years away from that timeline. How do you see yourself achieving those targets? As in what is the visibility and how should one think about it?
A.S. Lakshminarayanan
Thanks Balaji. I think the first question on demand you referred to both the Trump administration coming in as well as the commentaries from their size. First of all, no, I think I had made the point before. The demand cycles of what you hear and see from the SIS are not directly related to us as we are in a digital infrastructure business. And to make that point, even in both our quarter one and quarter two we highlighted that our order booking had gone up both in Q1 and Q2. So even before that I was saying that our our funnel was robust, it was a matter of closing them and we were very pleased to have closed in Those deals in Q1 and Q2.
In Q3 our funnel additions have been robust but closures is normal I would say like the previous years and not the increase that we had seen in Q1 and Q2. So our demand cycles are somewhat different to this. That’s the first point I would make because in the biggest portfolio, both on the core connectivity as well as the next gen connectivity portfolios, largely these are driven by the customers adoption of cloud. They don’t want to touch that infrastructure until something is broken. So the movements and the drivers of why customers go towards transforming are slightly different to what their size would be. And I’m elaborating the point to just make sure that we can’t directly correlate the two environments.
Having said that, we are very pleased in this year particularly about our ACV performance. Q3 has come back to the normal funnel is still pretty good in terms of additions. New deals into the funnel were good in in Q3 and as we are looking at more larger and larger deals, our closure time is taking time. I think that’s more a function of us getting into a larger deal as opposed to necessarily the macro condition is what I would say. So those are the main elements from what we see and how we see the demand environment to be.
To your question on FY27, I mean as we said when we put out our ambition that we wanted to double our revenues, it is an ambition. That ambition was really underpinned by what we believed the enterprises. Were needing. And we still believe that those customers are, you know, will have the need to transform the network, will need a fabric that seamlessly integrates across network, cloud, security and all of these. And therefore we are continuing to invest in that direction and we are seeing good traction now.
Whether we hit that number is two years is, you know, to call out is difficult. It is again subject to many conditions in the macro. Even this year, for example, nobody anticipated a soft macro to the demand environment to be the way it played out. But I have confidence that we are moving in the right direction. We are investing in the right product set and we are participating in opportunities to move us forward.
Balaji Subramanian
Thanks Lakshmi. That was useful. And what about, you know, what is the timeline by which, you know, you should be close to achieving your medium term EBITDA margin target? You know, if I do some rough math, it does appear that the annual loss that you are making in the digital portfolio piece, I do know that you have mentioned in the past that one can’t kind of, you know, look at digital portfolio and core connectivity in separation. But if I look at it, it does appear that the annual EBITDA loss there is to the tune of 4 or 500 crores at least. So, you know, when can one expect these investments to normalize and you know, make decent, you know, maybe high single digits or you know, early teens kind of EBITDA margins? I’m just talking about the digital portfolio piece.
Kabir Ahmed Shakir
Yeah, Balaji, let me take that question I mentioned before, so I’ll reiterate it. Every business within the digital portfolio has their destination margin. They are in the lines that you have already mentioned. So they may vary from one business to another. And the second bit is that they have a glide path of getting there. And there are drivers identified how we’ll get. Some of them will be volume and operating, you know, leverage kicking in. Some of them, you know, will be when they actually scale up. And then we are able to get into multiple geographies. Some of them, you know, because of the cost saving measures that we need to actually put in. Some of them will be mixed elements. So there are multiple drivers for each of the businesses that we are actually tracking. So that’s what we have that in the medium term they should get to their destination portfolio.
But having said that, in the digital portfolio, let’s be open minded that we may have to. To pivot and re pivot ourselves depending on how the environment and how the customer demands are unfolding in front of us. And we need to be agile enough to be relevant to our customers, especially in the digital portfolio. So therefore I would like to yes, have my eye on what the destination margin is and what the glide path should be but at the same time be flexible enough that I stay relevant, you know, to the customers depending on the changing, you know, demand scenarios.
So with that, you know, I would say we are continuing, you know, in our overall margin, you know, ambition of getting back to the 23 to 25 range. As we said, we said we will get to the net debt to EBITDA this year, Roce next year and, and you know, EBITDA the year after. That’s what we had mentioned. We continue to remain there except for net debt to EBITDA may slip by a bit, especially because of the high forex volatility that we’ve actually seen in the last four, six weeks. And we are all aware of what’s happening to the dollar as a result of that. The ratios do have changed.
Fundamentals of the business haven’t changed anything. So it may slip by a quarter or so both on the, on the debt and on the ROI line. Plus the corporate action that we have taken, for example payment solutions on its own, that’s the right thing to do for the business. But that means 267 crores of cash is gone and therefore net debt is, has gone up. Those are mathematics, biology. They don’t change the fundamentals of the business or the value creating action that we are doing with each of them, you know, to get this business robust. So we are still committed to that and I’m really not worried if it changes by a quarter here or there because of macro conditions or external variables.
Balaji Subramanian
Thanks Kabir for the elaborate answer and all the best.
Kabir Ahmed Shakir
Thank you. Thank you. Balaji.
Sudeshna Patnaik
The next question is from Sanjay Chen. Sanjesh, you have been requested to unmute. Please ask your question. Sanjish, you may proceed with your question.
Sanjesh Jain
Yeah, can you hear me?
A.S. Lakshminarayanan
Yes.
Sanjesh Jain
Yeah. Thank you. Thank you. Good afternoon everyone. Thanks. Thanks for taking the question first on the digital services. Now that the calera is in the base, the growth of 10% appears to be significantly slower. What is really stopping us because underlying driver really has. Changed much. Whether cloud adoption, network transformation, I can understand slowdown in the CPAs, but rest of the businesses the fundamental really hasn’t changed. So what is dragging us behind in the growth for the digital services and what really will it take us for it to accelerate over 20, 25% which was the goal set for the organization?
A.S. Lakshminarayanan
Yeah. So Sanjesh, firstly you write the interaction business is a fairly substantial part of the digital portfolio now and the interaction fabric on a year on year basis has grown 11.7% which we believe for that category of business is quite good because there has been a gentle slowdown on SMS and others. The drivers for that business to further grow will come when the adoption of other channels compared to SMS starts to acquire scale. So that is one driver, the second driver is essentially move it to more platform in terms of more AI based orchestration and so on. And that is what we are investing. So that will happen in that sequence. As the adoption of that happens, interaction business growth and margins will begin to improve in the remainder of the digital portfolio.
The entire the next gen connectivity has grown well, but you know, for that the order conversion it takes much longer because you win a large international network transformation. It does take time either because it’s like, like customers say it’s live wire and you’re touching the live wire for them. You have to be careful and they are ultra careful. And second is also they want to do that region by region and it takes time to deliver and therefore recognize the revenue. So that is the kind of sequence that we have to go through. So we see traction. But the conversion to the revenue does take time.
And I called out in the next gen connectivity we have grown well and we are further investing in the new drivers which are the cloud connectivity portfolio which is very early stage in the market. The overall market is still only a billion dollars globally in that market and that is seeing a very healthy growth. But that number growth, even if it is 30, 40% growth, is not going to shift the needle on the overall digital portfolio. So you’re not able really appreciate the growth in that portfolio.
If you look at our cloud and security cloud portfolio, cloud is largely in India. Yes, we have had. Somewhat of a lower growth there. I would put that growth to market as well as the customer specific churn that we had in that business. But the security business has grown quite well and we had called out winning some large deals in the first half of the year and you will see some of it panning out as soon as next quarter. So I think the drivers are exactly the same. I think we are investing in the right areas and we expect that we would gain more traction as we go.
Sanjesh Jain
Thanks Lakshmi. That’s fairly elaborate. But considering where we are today, sitting on the order book and sales funnel, how does FY26 look for us? Do you see these challenges continue and difficulty as an organization to accelerate the growth?
A.S. Lakshminarayanan
As you know we don’t give guidance but the only indicators I would see there are certain, there are certain tailwinds which is the acceptance in the market of our products and platform. The growth in the funnel that I called out and the increased order booking that we did in the, in the first half of the year and we hope that it’ll pick up in Q4 again. Q3 came back to more normative levels. So these are the tailwinds we see as.
And similarly on the headwind side we do have headwinds, particularly when it comes to the connectivity business. There is price erosion, there are churns that happens and this year we suffered from cable cuts which was a substantial pull down in terms of the numbers that you would have had. So there are some headwinds and tailwinds. So it’s difficult to call out what FY26 beyond these indicators. We don’t want to give any guidance as such.
Sanjesh Jain
No, that’s fair. That’s fair. Just one follow up question. We have done a lot of investment whether it’s product portfolio, foot on the street, putting up a huge investment on the employee cost and all be satisfied with the progress that we thought when we started these investment in terms of how we are moving today.
A.S. Lakshminarayanan
Yes, I think the clear reflection is increased order book that we reported in first half would not have happened if you had not invested in expanding both our product portfolio as well as investing in the right type of sales resource in the markets. Now the question is. In order for us to grow and further accelerate, we believe despite our international business has grown quite well even this quarter and this year has grown.
But in order for us to grow in the international markets, our footprint and coverage needs to substantially even more increase and that we are taking very measured steps rather than incurring all costs upfront because we are having to balance the cost incurred how long will a person take to become productive and the results that they deliver. So these are more measured steps we would take, but clearly our presence would have to increase even more in order to grow faster.
Sanjesh Jain
Fair enough. Lakshmi. Just one on the cloud we were very bullish on the cloud cloud part of the business. We have announced certain new products as well and that we are taking international unlike the existing cloud business which is more India specific. When should we see acceleration in the order win on that part of the business on the cloud?
A.S. Lakshminarayanan
We did not say we are doing international. Sanjish cloud has always been India. We do have some cloud presence internationally but we have not really scaled that or invested further in the international side. We do have some customers that we support. What you perhaps are referring to is the Cloud Light portfolio and the Edge portfolio is our first biggest proof point of the edge that it works is our media cloud business. So the media cloud, even the largest the Latam deal that we announced, we will use our Edge portfolio specifically tuned for media for that transformation of that business. So it is seeing traction. We have to we have currently the only major use cases media that we have. So we will look at other use cases for manufacturing and retail and then we could scale that in those markets and AI cloud there also.
Sanjesh Jain
We were started investing, right?
A.S. Lakshminarayanan
Yeah, AI cloud we have been investing. I think we’re very pleased. We said that we will have it ready this quarter. Earlier last week we announced GPU as a service for general availability for customers. The AI Studio which is the platform capability on top of the GPU is something that we will launch later this quarter.
Sanjesh Jain
But traction in those will take some time before we see more order book coming in from. On these services. Right?
A.S. Lakshminarayanan
Yeah. I think it’s particularly on the enterprise side. People are still going to be in the experimental and learning mode and then they have to graduate to adoption and scaling. So that will take time. There is a class of customers who would want to invest in model building and so on. Those would be the first set of customers that we would expect more scale usage.
Sanjesh Jain
Got it, got it. How does does this rupee depreciation, a star rupee depreciation help us become more competitive in the international market?
Kabir Ahmed Shakir
I’ll let me take that. Not, not really because our price is always dollar denominated, you know, our costs or O and M are also dominated. So they, they do have a bit of, sorry, time, you know, lag, you know and therefore you see the reporting, you know, stuff. So on the top line we this time had a, you know, bit of a benefit on, on Forex but on the cost line on the EBITDA line it was very marginal. It had a, you know, a little bit of a severe impact on the net debt line. Right. But, but then the, after a point in time they, they normalize. Sanjish.
Sanjesh Jain
Got it. Kabir, last question. On the land sale which we were trying to do with 800,000 crore, when is that expected to close and cash flow to come in.
Kabir Ahmed Shakir
Sorry, did you say 2,000 crores?
Sanjesh Jain
No, no. 800 to 1,000 crores.
Kabir Ahmed Shakir
Yeah. It’s 850 crores to be precise is the gross amount. It’s expected to. The shareholder approval is in place. All other condition precedents, you know, that are required are already, everything is completed. So we hope to do that deal in, in this quarter and the monies will come in this quarter. I mean we have already recognized the DTF for that in the current Q3 already. So you’ll see the money is coming in Q4.
Sanjesh Jain
So just one follow up, squeezing in for that. Now that there is a huge demand for data center in India, should we see more land sale coming up say in FY26?
Kabir Ahmed Shakir
What is data center got to do with, with land sale? I, I didn’t see the connection Sanjesh. I have. But anyway I, I would say we have a asset monetization plan and I said in small, small here and there, which we had been selling for the last two years. This was the one big one which had, you know, title issues associated with. It took us almost, you know, literally 18 to 24 months to sort it out and we were in a position to then, then sell it. There are a couple of other parcels which are you know, on our radar now and as and when, you know, the. The title, you know.
And other regulatory issues and classification and all those things are cleared then we will get into the discovery mode. Some of them may be amenable for data centers but some of them are probably very prime properties in the middle of cities which may have better monetization end use case. So that is left to the buyer that you want to buy. We will, we will do a discovery and try and get the best price for our shareholders.
Sanjesh Jain
Got it? Got it. My only reason to connect it with the data center was that there was a classification issue on a significant part of the surplus land and hence data center demand meets the classification issue. And that was the reason why I was.
Kabir Ahmed Shakir
We’ll look at the see we going to put that up and if there is a data center provider who is able to give us, you know, the value better than somebody who wants to build, build residences or malls, I’m, I’m completely, you know, independent of what it is. We will go for the highest value.
Sanjesh Jain
That’s fair. That’s fair. Thanks Lakshmi. Thanks Kabir for all those answers and best of luck for the coming quarters.
Kabir Ahmed Shakir
Thank you Sanjesh.
Sudeshna Patnaik
The next question is from Vibor Singhal from Theama Equities. You have been requested to unmute yourself. Please proceed with your question.
Vibhor Singhal
Hi, can I, can you hear me? Am I audible?
A.S. Lakshminarayanan
Yeah, yeah.
Vibhor Singhal
Hello sir. Hi. Thanks for taking my questions and congrats on a decent performance. So my question was mainly on. My question was mainly on the commentary by the ID services companies that have happened in this quarter. I mean starting from the TCS at the beginning of the quarter, I think almost all companies are talking about kind of a renewed environment, demand environment in the US and the developer discretionary spends coming back and green shoots in various basically domains. Where are we in that entire scheme of things? I mean are we also seeing some of our clients or prospective clients talking positive about those things? Does any of that rub off effect have on any of our segment verticals which could help us take our growth to higher levels than what we are reporting today.
A.S. Lakshminarayanan
So Vibha, I think I sort of clarified that linking that commentary to our business may not be, it’s not likely relatable for various reasons because we are not in the application space. A large part of our portfolio is still network even if it is core connectivity and next gen connectivity put together is still. Still a very large part of our portfolio. And in this portfolio the demand drivers clearly are as there are more migrations to cloud as people want to move more to the Internet. And now with AI the data is going to become even more important as to how they manage and store and utilize all of these. The demand for network transformation is definitely going to be going to be there.
Having said that, how it translates is something that we have witnessed in the last two, three years. It’s really like a live wire. People take very conservative approach in catching that and transforming that and that will still continue. I think the only positivity I see is as people build more applications, there is going to be more data being transported and therefore the network would have to transform. So it would have a when it would happen is not a direct correlation.
Second data point is even before others started making positive commentaries, we said that our H1 order book we said was much, much better than the previous years what we had booked in H1. So I’m just making that point to say that it is not directly correlatable. The only area where we think the discretionary spend will benefit is one in our interaction business because some of the marketing campaigns and others are discretionary and that could go up and that could have a direct impact to our interaction business. And that is where we are further strengthening with our Colorado AI product that we that we launched.
And the second area of the discretionary is more on the IoT fabric. Right. Again, that also depends on more discretionary budgets is what I would say. The rest of the fabrics are more fundamental and is not directly related to the environment that the exercise would describe.
Vibhor Singhal
Got it, got it. That was really helpful. So if I take it, let’s say, I mean the cloud business is predominantly India cloud adoption India is probably going to take place whenever it does with a lag that’s different. Next gen you mentioned its network and will probably happen with a lag and sometime for the CPAAS business, I mean to be honest, a very decent growth in this quarter. How do you see this growth playing out? I mean what could be the triggers that could further up this number to let’s say a mid teen kind of a growth number on a YM Y basis. Are we seeing more adoption of new technologies in which we have offerings for clients? I mean some color of that would be any useful?
A.S. Lakshminarayanan
Yeah, no. You know we have diversified the channels to to voice RCS. In some markets we are launching the WhatsApp. In some markets we have launched so we would make more channel diversity available. In many markets during the course of the year. And that would be one of the triggers for growth. The second trigger is of course the platform that we are building on top of the channels in terms of more intelligent orchestration and all of that. And that would be the second trigger.
And we are at the moment in very early stages in terms of pushing that into the market. So we believe that that will gain traction and we will report on how that traction goes and how that growth you see, because those will be the key drivers for the future growth. Sms, we can take market share from other places, but it’s still the overall SMS market is not growing as much as it used to. And also from a margin perspective, that is not a, a great driver of margins if you stay in that, in that SMS alone.
Vibhor Singhal
Got it, got it. That’s really helpful. Lakshmi, my last question is for Kabir. Kabir. In terms of the margin profile, I mean we are gradually expanding our margins on at the console level. But if I do the back calculation, I think, as I think one of the participants also asked, our digital margins still appear to be in the red. I know you don’t give separate guidances for the separate divisions, but what will it take for our digital margins, let’s say to become profitable and get into that green territory?
I mean the growth, to be honest, this quarter we have grown almost 10% on a Y and Y basis in the digital portfolio. I mean, do you need that growth to go up to a much level or do you think there is some base effect that will come into play or are we very close to that and that irrespective of the growth numbers, at some point of time we should be able to reach that. Any color on that would be really helpful.
Kabir Ahmed Shakir
It’s growth, growth, growth. I can’t focus more on digital portfolio. Our biggest focus of the entire top management is driving growth. So we do not want to starve the business of the investments that it needs. So therefore, if we need to pivot and re pivot, sometimes we challenge our business models and say should we do it, you know, differently and we learn from it and adapt, we will, we will continue to do that. And therefore, and even in digital portfolio, just because you don’t have the scale doesn’t mean that you will not add feature sets. So you have to be relevant from your offering as well.
So it is not about saying, okay, I have invested already in the past, so let me pause and not invest further in product capability. So therefore, Lakshmi mentioned we’ve launched Calera IO this quarter. I mean, that is essential. Just because I’ve launched Colorado IO, will I be able to take my price up suddenly? I don’t know. Hopefully we can, but that helps me stay relevant in the pace. So see, our own ambitions is that. This part of the portfolio should go significantly higher than what we have grown this quarter.
I mean, obvious reasons, and I want to still feel happy about this growth given the context and given the relative market situation and overall demand that we have seen in the last two quarters. But having said that, our ambition, whether it’s from the FY27 that we talked about or even otherwise, that it knows, has to be growth. And when that growth operates at that particular level, you can do the math yourself because a large element of the costs are, you know, fixed in nature. So automatically the profile will improve. So therefore for that to take short term myopic decisions, you know, it’s very easy to cut investments, but I think we should purpose our energies as an organization in driving growth.
Vibhor Singhal
So just to dwell a bit on that more. Kabir, does that also mean that in terms of let’s say margin expansion for individual, let’s say CPAs or media or the cloud vertical, the main and probably the only lever that we have for margin expansion is growth and the other operating levers in terms of cost optimization and all, they have largely been exhausted?
Kabir Ahmed Shakir
No, I’m not saying that, but sorry,
A.S. Lakshminarayanan
No, I think, yeah, no, we still have the cost levers available in those businesses. I think we are and work on some of these levers, especially some of the digital businesses which operate more internationally. Some of the businesses where we had done acquisitions. So if you go to the EBITDA and after we did the acquisition, we used to say that if you look at our core business, including what we defined as a core as including the digital portfolio pre acquisition switch and Calera, we said our margins were at around 23%.
Today. That is still the case. We are our margins of our core minus the acquired entities are still at the 23% despite the investments we made in business, in cloud and security, in IOT and other areas. So we believe that. But even in those portfolios we have levers available. So for example, in the cloud business, you know, everybody knows that, you know, the, the whole market was hit by an increase of cost from VMware. There were cost increases.
So we are balancing so there are levers available in each of those businesses for us to further optimize and we are working on those on top of that. The revenue growth will truly bring the operating leverage on top of it. So we will be operating on both aspects of driving efficiencies in this business while securing and protecting the investments that we need to make at the same time. To drive the route.
Vibhor Singhal
Got it, Got it. Great. Thank you so much for taking my question right and wish you all the best.
Kabir Ahmed Shakir
Thank you.
Sudeshna Patnaik
Thank you. The next question is from Hitesh, from HDFC Life. Hitesh, you have been requested to unmute. Please proceed with your questions.
Hitesh Mahida
Not HDFC Live. Just so just to clarify, this cable cut thing, your other things being equal, should we see the impact. Revenue increase. Impact in Q4? I assume this has been sorted by October. So should we, other things being equal, should we see the revenue increase in Q4?
A.S. Lakshminarayanan
Just to look out on this. Yeah, no, I think I mentioned in my commentary that we are in the process of winning back some of the customers from the cable card. Then we have to get that traffic back and then the revenues would come. So we don’t want to directly correlate to that. But having said that, overall, the core connectivity revenues this year is muted compared to the previous years owing to the cuts that we suffered. And hopefully that will come back to the previous levels. Now, the only caveat that I would add in this, Hitesh, is overall, the core connectivity. Internationally, the core connectivity as a market is a declining market. And in that declining market we have been growing and taking more market share. So while compared to the previous years where we had grown the core connectivity by 6%, it’s come down to between 2 and 3%. We think it can go up, but it depends on how the markets will play out.
Hitesh Mahida
Just the other bit. Just sort of trying to understand better. If I’ve understood correctly, our success rate or conversion run rate has come off in Q3 versus what was seen in the last two quarters or what versus what was seen in H1. So is that correct? Is the understanding correct? And secondly, what.
A.S. Lakshminarayanan
Sorry, before you go to the second question, I just want to clarify. I didn’t get the first question. What did you mean by in Q3 something has come off?
Hitesh Mahida
Can you explain conversion run rate or a success run generate, you know, deal conversion from funnel to.
A.S. Lakshminarayanan
Actually the, the order book came in. Yeah,
Hitesh Mahida
Yes, yes. Okay.
A.S. Lakshminarayanan
Yeah, yeah, what I was mentioning,
Hitesh Mahida
Success ratio come off in Q3 versus H1?
A.S. Lakshminarayanan
No, no, the, the win rates are still, you know, win rates have not really come off. That doesn’t mean that in Q3 we lost something. And so there are some deals that are, that are sort of overflowing into, into Q4, but our funnel continues to be quite good. I mean, in terms of. Terms of order booking we cannot be that precise on a quarter on quarter basis. So I don’t see the quarter three order booking coming to the more to FY24 levels is what I said is not indicative of our ability to win. Our conversion ratios, our win rate has come down. In fact our win rates are still pretty good as has gone up. It’s just some of the delays and some of the deals rolling over to the next quarter is what.
Hitesh Mahida
So the cycle has elongated slightly?
A.S. Lakshminarayanan
Yeah, cycle. I mean it’s marginally gone up. It’s not very material compared to the last quarters from what we on an average when you look at the large deals, we used to be at 7 months, now it’s 7.4 months. So it is not as though it’s elongated. But in, in some of these things if, if a deal runs over rather than closing on December 15, they close it on January 15. I wouldn’t read too much to into it.
Hitesh Mahida
And you know when we’ve got this, when we say we’ve got a double digit order book growth versus last year, when does it show up in revenue?
A.S. Lakshminarayanan
Yeah, that’s a more complex question to answer because many of these have different, different conversion time to revenues. But I did say, you know, some of the deals which are more in the area of the cloud and security that we announced in Q1, Q2, we should start seeing that in Q4. Some of the network deals will take longer to fructify. You know, if it is in the core connectivity, for example, if you’re doing a dedicated build that might take, you know, almost 12 to 18 months to show up. So as revenues.
Hitesh Mahida
Okay, okay. And just for a better understanding of the order winds that we have, what proportion would be in India and what proportion would be outside India,
A.S. Lakshminarayanan
I don’t have that handily with me. And that is not a data point that we also have given on before. So I don’t want to start something new.
Hitesh Mahida
Okay, thanks. That’s all from it.
A.S. Lakshminarayanan
Thank you Hitesh.
Sudeshna Patnaik
The next question is from Dayanan Mittal Daya, you have been requested to unmute yourself. Please proceed with your questions.
Dayanand Mittal
Just one question. What are the key factors that’s driving margin expansion and where do you see margins over next few quarters?
Kabir Ahmed Shakir
Thanks. Yeah, I mean I don’t want to give any specific guidance on, you know, on margin per se. I mean we use, we. Our ambition is 2325. We were at 2325 and we came down as a result of acquisitions. So there are combination of multiple things that we are doing one each of those acquisition, you know, assets need to deliver. On their business cases which have built in synergies and margin expansion on their own. Our own core business needs to also grow and we need to have mixed benefits there and operating leverage to kick in. So that is another driver.
But there are also going to be BAU of inflation and headwinds that we will face and we need to mitigate that and then continue to grow. So I would say it’s a mixed bag of multiple things that we are, you know, we are looking at on an ongoing basis and, and in our ambition is in two years time we get back to the 23 to 25 using multitude of these levers that will play out.
Dayanand Mittal
Thank you there.
Sudeshna Patnaik
The next question is from Ritesh Gandhi Pradesh. You have been requested to unmute yourself. Please proceed with your question.
Unidentified Participant
In the US that Luma Technology benefit a lot from just the overall positioning as a sort of a provider backbone for AI. And I understand that we don’t have as strong a network in the States, but do we see potentially this being an opportunity in India and some of our other markets actually where we are strong?
A.S. Lakshminarayanan
Yeah, I think even today’s commentary I mentioned that we are a market leader in D.C. to D.C. connectivity in India. Internationally, the core connectivity has been on the decline and we have been growing. So we have been doing relatively well with focused investments and capabilities and delivering a network that is reliable for the DC to DC connectivity and for large enterprises who require large pipes, both nationally and internationally. So that is a business that has been growing for us 6, 7%.
While we had initially said that it would be in mid single digits or low single digits based on how the overall market growth or degrowth was happening in the international market. So that’s, you know, that just to give you a perspective. So definitely AI and Lumen has seen that on the back of large investments by hyperscalers for AI cloud in the us Lumen has benefited through the large order bookings there. And that is precisely what we have been doing in our core connectivity as well.
Unidentified Participant
Got. And then just to understand, you know, on your commentary on your FY27 aspirations which you spoke about, is it that now it’s sort of. Looking difficult or it’s. Or it is still on target, may slip by a quarter or two.
A.S. Lakshminarayanan
No, I think I’ve been saying that that is an aspiration that we set for ourselves based on the, based on which we were going to invest in products and increase our relevance. I think we are still continuing to do that. The traction and the feedback from the customers in the market is very positive on the digital fabric. So we’ll have to continue to stay the course that now when it will actually transpire. It depends on several factors that I’ve outlined and those need to play out.
Unidentified Participant
Good. And just to understand from the time in which we sort of set this aspiration and now actually, because I’m sure you guys would have done it a lot of the thinking into putting that aspiration out there as well, actually. I mean, what is sort of like not played out as you had sort of expected to. For us to actually achieve the aspiration.
A.S. Lakshminarayanan
One is clearly the macro condition. The overall the geopolitical uncertainties and the demand environment has gone down all over the place. And that is something that we cannot anticipate for.
Unidentified Participant
But which area of macro uncertainty is it? I mean, which area has been impacted by the macro uncertainty?
A.S. Lakshminarayanan
What do you mean by which area?
Unidentified Participant
No, as in your time, that the reason why the things which have changed is the macro uncertainty. But how is the macro uncertainty going to, you know, materially move the needle with regards to, you know, us potentially achieving what we were looking at?
A.S. Lakshminarayanan
That depends on the spend environment. Right. So the customer spends more on applications, there is going to be more need for data. As customers spend more on applications, there are going to be more data islands. So the networks have to transform. So it has a, it has a bearing on how our customers would see us and would buy from people like us.
Unidentified Participant
But even the IT spending angle of things stuff hasn’t reduced, then in turn the application would continue. In turn sort of. We would also continue to benefit. So. And we haven’t seen that happening in IT services. So just want to understand the reason we’re seeing this here.
A.S. Lakshminarayanan
But even in the it, there’s been a slowdown overall. It’s no longer in the big double digits that people are talking about.
Unidentified Participant
Yeah, yeah, no, no, but I’m saying that. Okay. And so in the event that, let’s say with regards to our aspiration, is it just ultimately a question of maybe a quarter or two or it could take an extra kind of year or two to reach the aspect. Aspirations or how will I reset this application, this aspiration, given what we know today.
A.S. Lakshminarayanan
Yeah, we’ll come back. I think we have an investors meeting coming up later on during the year and we will have a better sense by then. We have another quarter to go. All right, thank you. It’s too early to call it quits,
Unidentified Participant
So we are still aiming for it and hoping for it. That’s okay.
A.S. Lakshminarayanan
Absolutely. All right, thank you.
Sudeshna Patnaik
Thank you. The next question is from Nitish Rapi Nishit. Please unmute yourself and ask a question to understand
Unidentified Participant
How should we think about this quarter? Right. Because it’s after four quarters that we’ve seen very strong, broad based quarter on quarter growth in the digital portfolio. So I know almost 6% QoQ growth and across the portfolio on the digital side, barring the incubation piece. Right. So is that the right way to look at it or should we look at it more on a yoy basis? Because the last three quarters are in the base and you know, and, and this growth has come in a seasonally weak quarter and you’re saying the full benefit of the orders that you won in H1 have not yet kind of transpired. Right.
So I’m just trying to understand what is the right way to think about it and is it, is it unfair on my part to kind of think that, you know, what you’ve delivered in Q3 should kind of sustain or kind of improve going forward on a sequential basis?
A.S. Lakshminarayanan
You know, I think the way to look at this quarter is the overall digital growth as you mentioned in the current environment is quite good. The year on year growth as well as the quarter on quarter growth. I’ve also called out the individual portfolios. We’ve had good growth on the nextgen, connectivity on the cloud and security. I said I’ll be more on the security side rather than the cloud side. Our interaction fabric has grown double digit on a Y on Y basis.
So we’ve had A and even our IoT fabric. While there’s a Q on Q decrease year on year, there has been a good increase in that business as well. So I think on the digital side definitely it’s been a good quarter and some of the orders that we won in H1 and H2 would have got reflected in this quarter itself. But next quarter, some of the larger deals that we booked, the transition. Of that we would start seeing in the next quarter is what I mentioned.
Unidentified Participant
Yeah. So in that context, because the year on year numbers have a very big bearing of the last three quarters which were subdued. And if I annualize the growth that you’ve delivered in this quarter and is annualization wrong is the question I’m asking you, is there anything abnormal in this quarter which you believe may not continue going forward because the order books are there, our relevance is increasing the market is there. What should lead to that not happening going forward?
A.S. Lakshminarayanan
I think see the annualizing doesn’t really work. The reason being, I think I mentioned the tailwinds I’ve been talking about the order booking, the funnel being good and so on and so forth. The headwind really is especially on the network including the next gen connectivity is still a very large part of our business. Close to about 60% is on the core and the next gen connectivity put together. That business particularly is subject to price erosions and churn and customers might, especially if you take a, an IT customer or a BPO customer of ours in India. If they lose a customer then that network connectivity goes.
So there are network terminations that happen but a large factor is also the network price erosions that happen. Those are the headwinds that we have to worry about and that’s the headwind that we constantly battle. So the reason why I’m giving you that explanation, it’s in this business annualizing the quarterly revenue and extrapolating on that is not the right way to look at.
Unidentified Participant
No, no, I fully agree with you. It may not be the right way. I’m just saying in context that you know, we lost a month with, with cable cards, we have a better dollar, the currency is in our favor and the fact that we booked very strong orders in H1. So I’m just trying to understand the caution. Where is that caution coming from? But maybe it’s fair.
A.S. Lakshminarayanan
There is no caution. I mean I’m just giving you the both the plus and the minus side. The plus side is clearly the, you know, the orders booked. The plus side is clearly the, you know, the, you know, currently we see a lot of. Last year we saw a lot of BCDC growth in India. We are the market leaders. As and when more comes we will capitalize on those in all other portfolio. I think we are invested in the right places to be able to grow the caution. Along with that positive. I’m also saying what the headwinds normally are. That’s what I’m bringing both the pluses. And minuses to be clear.
Unidentified Participant
No, absolutely get it. Okay. And you know, can you just also help me understand how should we think about if data localization were to happen? You know, what are the parts of the businesses that could see could be positively impacted or what are the possible impacts that could be there on our business?
A.S. Lakshminarayanan
Clearly the cloud business will benefit if there is more of a mandate to localize.
Unidentified Participant
Okay. And the connectivity, wherein you said the data to data connectivity is also very.
A.S. Lakshminarayanan
I think if there are more, if there is a cloud growth and there is more data centers in India, then the connectivity also will benefit from it.
Unidentified Participant
Understood. And you know, last quarter you called out that, you know, your international order book was at an all time five year high, right. Order booking, I think if I’m not mistaken, has that trend continued? Because you called out some very interesting deals that you won. The international bank, the international retailer and some very interesting customers. So has that momentum continued? Are you seeing increased traction in that, that, that piece out there?
A.S. Lakshminarayanan
Yeah, I think the, the international funnel is, is quite healthy and yet to date the order booking also has been healthy. I think the, the, the thing is the international regions, those regions are still relatively small for us. So even if those regions grow at 25% or year to date, I’ve seen most of the regions have grown at a very healthy double digit. It’s still, you know, in terms of how it shifts the needle for us overall is still a question. So but in terms of the traction that we see, we surely see traction in all the markets.
Unidentified Participant
So are there some international regions? Because if you’re seeing 25% international is, if I’m not mistaken, around 40% of our business. Right. So if that is growing at a very healthy pace, are there some international markets which are seeing headwinds?
A.S. Lakshminarayanan
The international is also in two parts. One is the enterprise. And also we have international, we have the service providers and we have the OTT business, as we call it. So all of that is international. So the international enterprise is doing well. The ott, you know, after a lull has, has picked up. So that would be the broad commentary on the international side.
Unidentified Participant
And lastly, are there any plans to invest in cables again, you know, Because a lot of our cables are starting to near end of life. Are there any plans to kind of invest in cables?
A.S. Lakshminarayanan
Yeah, we have been investing quite regularly on the cable side. So we buy whether we may not invest directly as a consortium partner or build by ourselves, but we are investing through irus. We just had one of the cables systems go live recently. So we are continuously investing and monitoring the capacity requirements of our business. And in fact in the last few four, five years our capacity has gone up quite, quite high. So there is a constant investment that we are doing on the cable systems.
Unidentified Participant
Sorry, you said one of the largest IRUs went live. This happened in Q3 or in Q4 now cable systems? Yeah, the cable system that went live, that is in Q4.
A.S. Lakshminarayanan
Yeah. It’s just gone live now.
Unidentified Participant
Okay. No, that was it from my side. All the best to you and hopefully, you know, things will just continue better. Thank you.
A.S. Lakshminarayanan
Thank you Nishit.
Sudeshna Patnaik
Given the constraint on time, we will end the question and answer session now. With that I will request Lakshmi to please share his closing comments.
A.S. Lakshminarayanan
Yeah, no, thank you all. I think we are very, very pleased with the digital growth. The overall international growth has been a good all round performance. Performance on EBITDA has been quite good and also the EBITDA to cash flow conversion is also very good. So we’re very pleased overall with the product. 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.relationsatac1ommunications.com thank you for joining the call and you may now disconnect. Thank you. Have a good day.