Tata Communications Limited (TATACOMM) Q4 FY23 Earnings Concall Transcript

Tata Communications Limited (NSE:TATACOMM) Q4 FY23 Earnings Concall dated Apr. 20, 2023.

Corporate Participants:

Chirag Jain — Deputy General Manager

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

Kabir Ahmed Shakir — Chief Financial Officer

Analysts:

Sanjesh Jain — ICICI Securities — Analyst

Aliasgar Shakir — Motilal Oswal Financial Services Ltd. — Analyst

Gautam Rathi — Chanakya Wealth — Analyst

Vinit Manek — Karma Capital — Analyst

Abhishek Singhal — Naredi Investments — Analyst

Presentation:

Chirag Jain — Deputy General Manager

Good afternoon, everyone, and welcome to Tata Communications Earnings Conference Call for Q4 FY ’23. We are joined today by our MD and CEO, Mr. Amur S. Lakshminarayanan; our CFO, Mr. Kabir Ahmed Shakir; and Mr. Rajiv Sharma, our Head for Investor Relations.

The results for the quarter ended 31 March 2023 have been announced yesterday and the quarterly fact sheet is available on our website. I trust you would have had the chance to look through the key highlights.

We will commence today’s call with comments from Lakshmi, who will share his thoughts on the business and long-term outlook, followed by Kabir, who will share his views on the financial progress achieved. At the end of the management’s remarks, you will have an opportunity to get your queries addressed.

Before we get started, I would like to remind everyone that some of the statements made or discussed in today’s call may be forward-looking in nature and must be viewed in conjunction with the risk and uncertainties we face. A detailed statement and explanation of these risks are included in our annual filings, which you can locate on our website, www.tatacommunications.com. The Company does not undertake to update these forward-looking statements publicly.

With that, I would like to invite Lakshmi to share his views. Over to you, Lakshmi.

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

Thanks, Chirag. I welcome all of you to the Q4 FY ’23 earnings call.

We witnessed another healthy quarter, reflecting strong growth momentum in our data revenues. For the full-year, data revenues are up by 10.3%. PAT is up 21.2% and ROCE is at 28.3% versus 25.4% in March 2022. Our results reflect the disciplined execution of our reimagined strategy, focused on deeper with fewer and our strategic push on products to platform. Our investments in overlay or as you may call the digital platform services, over the last couple of years, combined with our strengths with the underlay, positions us uniquely as a contact [Phonetic] player. Our unique strengths are very much noticed by our customers in our ability to impact both the cost side, as well as the revenue side of outcomes for them. Our products to platform shift, increased investments in front-end sales, particularly in international markets, and building new capabilities across the portfolio is reflecting the growth momentum. Our data revenues grew by 11.2% year-on-year again this quarter.

For FY ’23, digital platforms and services revenue grew by 15.5%, highest in the last four years. To add more color to our data growth, we’ve added INR1,317 crores of incremental data revenues in FY ’23, against an incremental revenue of INR903 crores in FY ’21 and FY ’22 combined. Our digital revenues including incubation are 32% of total data portfolio and our ambition is that, this number should be at 50% of the overall data revenue over the next three years. Funnel addition in FY ’23 was the highest and we recorded more than 50% of growth in large deal segment, and we are seeing good traction across India and international markets.

Before I get into the details of the performance for this quarter, I take pleasure in mentioning that Tata Communications was selected as a Turnaround Company of the Year by Forbes in March ’23, and that we have once again been recognized as a leader in 2023 by Gartner Magic Quadrant for network services global, plus completing a decade of excellence. We further strengthened our DPS portfolio with some new launches this quarter. We launched JAMVEE, a cloud-based application offering, integrated and simplified voice calling solution. This strengthens our offering, especially for knowledge and frontline workforce within enterprises and helping enterprises with a secure and compliant setups. Most importantly, it helps enterprises’ customers have greater control over deployment and management of the Unified Communication estate [Phonetic]. Let me add, with JAMVEE, we’ll be able to address 80% of the managed PBX market and the overall market is still growing in high-single digits.

The other product we have launched this CloudSIM, a software-only SIM, primarily addresses on-demand connectivity and enables new use cases, such as activating private network connectivity for short periods and provisioning connectivity only to devices in active use and allowing enterprises to decrease the total cost of ownerships. This is a significant innovation and the only one in the world who has the solution as of today.

Moving to our performance. For the fourth quarter of FY ’23, our data business remains instrumental to our overall revenue growth momentum. It remains sequentially — it improved sequentially by 2.2%, coming in at INR3,670 crores. Our digital platforms and services revenue stood at INR1,080 crores, registering a healthy growth of 15.9% year-on-year and 2.3% Q-on-Q. Our Q4 consolidated revenue was INR4,569 crores, improving by 7.2% year-on-year and 0.9% Q-on-Q. EBITDA for the quarter stood at INR1,034 crores, while EBITDA margins stood at 22.6%. The profit for the quarter was INR326 crores.

Let me talk about our margins and the aspect shaping our EBITDA trajectory. I want to reiterate that we are fundamentally taking the Company to a different growth trajectory. I’ve always said, the double-digit growth would take time and investment. And this year is a milestone with 10% plus data growth on a full-year basis and the digital portfolio grown 21% year-on-year, highest in the last four years. This is encouraging and an outcome of the significant investments in people, platforms, IP creation, content sales and capacity building. We called out to invest in growth, and this was planned. Our full-year EBITDA margins is at 24.2% and it reflects these investments and we are very well in the range of a margin guidance of 23% to 25%. There is the reason why we see ourselves as a commtech and not as the traditional telco, as we focus a lot on capital allocation and ROCEs. Unlike traditional telcos, which are at low-single-digit ROCEs, our full-year ROCE is at 28.3%, and this is despite investments in growth. We have delivered first time double-digit PAT margin and highest-ever absolute PAT this fiscal. We’re staying the course and FY ’24 will continue to be another year of investments, particularly in DPS and our ROCE guidance of 25% plus remains intact.

Coming to our core connectivity business revenues, it grew by 7.4% year-on-year and 1.7% Q-on-Q. We continue to invest in the core capabilities, plus transforming our networks to be intelligent and working on that programmability to cater to the new market needs, particularly on-demand needs.

Let me spend some time talking about our robustly growing incubation or the connected solutions portfolio. The incubation portfolio progressed a multifold, growing by 65.3% year-on-year and 9.4% Q-on-Q. We signed our first WAN-connected deal with a leading EV manufacturer. And are very pleased to support their WAN HA [Phonetic] scaler. I spoke about CloudSIM launch this quarter. It was launched in MWS earlier this year, and happy to share that we have signed our first deal as well with the large integrated IoT device and board manufacturer with remote controlling and monitoring capabilities for industrial equipments and plants. This will help them to simplify deployment and reduce costs. Our MOVE business continues to grow strongly and recorded a year-on-year growth exceeding 100%. Our IoT offering, seeing a growth of greater than 90% in the revenues on a full-year, and is gaining momentum in international markets, where we cater to both enterprises and smart cities. Being one of the few players with adtech certified safe pass badge ID solutions in India, our solution has gone live for one of India’s largest oil and gas players, which opens new avenues of growth.

Now, coming to digital platforms and services portfolio, it has grown at 15.9% year-on-year and 2.3% Q-on-Q. Our multitude of offerings in the digital platform solution portfolio are intended to consistently deliver more holistic solutions, stitching multiple products together for our customers’ ecosystems. And when you stitch all of these platforms together, it becomes a digital fabric and creates a robust moat around increasing customer stickiness and insulates us from structural pricing decline seen in the legacy business. The most exciting part of DPS is the strength of this portfolio and suite of applications, helping the enterprises to power their hyper-connected ecosystems. We have a good pipeline in our sales funnel and the pipeline of product feature releases and new products in the coming months.

The media business revenues were sequentially down by 2.3% and up by 19.5% year-on-year. Sequential decline in revenue is due to lesser number of events this quarter versus the previous quarter. This quarter, Tata Communications supported enhanced video workflows for Formula E, leveraging its media edge platform giving better-quality video feeds, leveraging Internet-based last miles. In FY ’23, the team had supported over 20,000 events. This represents a significant growth and the revenues were up by 28% year-on-year for this segment.

We would like to update that Switch Enterprises — the acquisition, which we announced in third quarter. We are expecting all necessary approvals to be in place soon and targeting integration — to begin integration in Q1 of FY ’24. Switch will help us gain a strong foothold into the Americas media and Internet [Phonetic] market.

Moving to cloud-hosting and security. This portfolio registered a growth of 38.5% year-on-year, and 10.1% Q-on-Q. In Q4 FY ’23, some of the key wins have been with our IZO private cloud and our managed service offerings. From product enhancement perspective, we created automation of orchestration of our IZO private cloud platform, Platform-as-a-Service offering, thus reducing time for provisions within minutes. Additionally, enhanced managed services reporting dashboard, our Information-as-a-Service offering are the solutions deployed on our IZO private cloud. Our MSS, our security business revenues were up by 26.6% year-on-year.

Enterprises continue to see merit in securing network transformation using zero trust architecture and we recently started working with one of Europe’s largest mobile — automobile manufacturers to help them enable a secure remote work for their 35,000 global workers more effectively than VPN, delivers secure and direct connection to applications and provide identical user experience from office or from home.

Our collaboration portfolio grew by 1.8% year-on-year and declined 3.6% Q-on-Q. There have been some customer-specific issues in layer 1 offerings, and hence, you see a dip in revenues this quarter. That said, we continue to benefit from an increased customer interest in our newer offerings, namely the Tata Communications GlobalRapide, as well as InstaCC and Tata Communications DIGO. DIGO continues to grow in capability as a customer interaction suite, where it focuses to unify all customer interactions. We are seeing customer wins in the layer 2, 3, 4 and our efforts are towards maximizing scheme.

Coming to our next-gen connectivity offerings, revenues increased by 5% Q-on-Q and 10.5% year-on-year. The key drivers of growth this quarter had been IZO WAN and IZO Private Connect. Our improved offerings on IZO WAN, both in terms of wide variety of Internet connectivity options and price competitiveness help us drive growth. Our vision for IZO WAN platform is to be the most comprehensive, dependable connectivity platform providing a wide range of variety of Internet connectivity options, some predictable enhanced Internet broadband to 4G, 5G from premises-to-premises, and premises-to-cloud and between cloud as well.

To sum up, as a digital ecosystem enabler, we remain committed to building innovative and scalable platforms to empower enterprises.

With that, I would like to invite Kabir to give an overview of our financial performance. Kabir?

Kabir Ahmed Shakir — Chief Financial Officer

Thank you, Lakshmi. Good afternoon, everyone. I’ll take the opportunity to take you all through the highlights of our financial performance for the quarter. But before I dive into the quarter four numbers, it’s important to see how we have fared for the full-year as a whole. We’ve delivered full-year double-digit data revenue growth, highest-ever PAT, highest-ever double-digit PAT margins, full-year EBITDA margins of 24.2% within our range of 23% to 25%. ROCE for the full-year at 28.3% and is up 290 basis points above last year. PAT is up 21.2% year-on-year and most importantly, the free cash flow generation is up 64% year-on-year. Even if I were to into tax refunds, these are up by 16%. Effective tax rate for the full-year was at 14.4% versus 26.1% in the previous fiscal. For full-year, our net debt is down by little over INR1,000 crores and net debt-to-EBITDA has improved to 1.3x from last year at 1.6x. EBITDA to cash conversion has improved from 52% in FY ’22 to 59% in FY ’23, not long ago this used to be in the 20s. I’m happy to share that we have demonstrated a meaningful financial turnaround and incrementally our focus will be on creating elbow room and capacity for multi-year growth.

Let me now talk about the quarter four numbers. Our consolidated revenue for the quarter stood at INR4,569 crores, improving by 7.2% year-on-year and 0.9% on a sequential basis. Data revenue for the quarter stood at INR3,670 crores, improving by 11.2% year-on-year and 2.2% on a quarterly basis. The reported revenue numbers this quarter like previous quarter continues to have certain forex benefits accruing from a strengthening dollar. Our EBITDA margins for the quarter were at 22.6%. Our PAT margins for the quarter stood at 7.1%. Net debt for the quarter and for the year remains the same at INR5,711 crores and net debt-to-EBITDA is now at 1.3x compared to 1.45x the previous quarter.

The notable part is that, on the back of our strong cash flow generation, that has been consistently coming down. Our cash flow generation continues to be healthy, reporting an FCF of INR631 crores this quarter and INR2,539 crores for FY ’23. Cash capex for the quarter stood at INR400 crores, though, our approved capex is close to INR600 crores and the gap is attributable to delayed deliveries and better payment terms.

Our consolidated EBITDA margins declined 120 basis points this quarter to 22.6%. Let me elaborate here a little more on what Lakshmi suggested above on the margin trajectory and the big picture. If you look at our ROCE improvement, our PAT improvement, revenue growth, they are suggesting that we are fundamentally transforming as a Company to operate in a higher-growth trajectory. And this needs a very different kind of an opex, capex structure to fund our growth ambitions. Double-digit revenue growth over the past three quarters is an outcome of the investments that we have made and this was very much planned. Our strategy around product to platform shift and deeper with fewer, demanded investment in sales, product — platform builds and capacity building. Full-year DPS revenue growth and digital platform revenue growth is the highest that we’ve seen in four years, giving us the confidence that we are on the right track. This fiscal, we continue to strengthen our foundations for achieving our growth ambitions to deepening customer engagement and investing in our — and expanding our global sales and product organizations to address market opportunities.

I continue to hold that if we have the right proposals from the business to fund customer success, we will stay the course and fund those opportunities, and even if that implies that margin temporarily go down below 23% for the short-term, we will not hesitate. Having said that, we will manage margins dynamically in instances where revenue growth is delayed, cost will be pulled. At the same time, we are focused on levers where we will sharpen our moats and help us improve our trajectory in the medium-term.

Moving to subsidiaries. We see a steady improvement in TCTS. TCTS revenue improved by 2.6% year-on-year and 2.7% sequentially, coming at INR342 crores. EBITDA for the TCTS stood at INR13 crores for Q4. We feel confident about TCTS going forward.

Our Payment business continues to make positive shifts as we expand our portfolio under the franchisee model. Revenue for the quarter came in at INR46 crores and an EBITDA of INR21 crores. As on date, we have added close to 3,300 franchisee ATMs to our portfolio and we are working steadily on increasing this further. The massive uptake of digital payments over the last few years has had an impact on transaction count for the ATMs and the long-term growth profile of this business. As is the company considered an impairment of INR323 crores in stand-alone books in TCL India, since TCPL financial losses have been consolidated, while preparing TCL financials, there is not impact on the TCL consolidated financials.

To sum up, our holistic delivery across financial KPIs, be it the strong cash flow generation this quarter and overall fiscal, the consistent reduction in net debt, continued improvement impact for the year, and our ability to fund both organic and inorganic growth opportunities is laying path to capture the tailwinds and the market opportunities which lie ahead.

Let me now ask Chirag to open the forum for Q&A.

Questions and Answers:

Chirag Jain — Deputy General Manager

Thanks, Kabir. We’ll wait for Amur to queue [Phonetic]. The first question is from the line of Sanjesh Jain of ICICI Securities. Sanjesh, your line has been unmuted. You may go ahead and now ask your question.

Sanjesh Jain — ICICI Securities — Analyst

Can you hear me?

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

Yes.

Sanjesh Jain — ICICI Securities — Analyst

Hello?

Chirag Jain — Deputy General Manager

Yeah, hi. Sanjesh, we can hear you. Please go ahead.

Sanjesh Jain — ICICI Securities — Analyst

Sorry, sorry. So sorry, I joined a little late in the call. I apologize if I’m asking something to be repeated. First on the order book front. We have added close to 2,000 employees. And if I can see most of this employee cost increase has come in the non-stand-alone, which means that the efforts are to drive the non-stand-alone business which is generally the international revenues. How is this translating into a result and say order book sales funnel? And overall, if you can give us color on how has been the order book attrition? And given that what we have heard from the IT companies still now, it looks like there are certain pullbacks from spend on the IT side. Are we concerned which — with this trend? How are we looking or what is our interaction with the customer are telling us? That’s number one.

A related one is, we were already sitting, I think, on a healthy order book and were facing the supply chain issues. Now, the supply chain has eased, will it be fair assumption for us to tell that the execution will pick up, so revenue recognition may not get impacted because of all these sentimental things, which is impacting the investment on the digital side of it? That’s my first question.

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

Yeah. I think there are two questions, Sanjesh, or probably multiple in that. Let me try to answer. The first one is, I think on the people front, it’s not 2,000, as you said. We have added 1,000 for the year. And in terms of — and those additions have been both in India and international. And we are seeing the additions coming to fruition in terms of the revenue acceleration because these Additions that we’ve made in the front-end of sales and marketing, have been able to reach more customers, build deeper relationships, and help us to drive growth and to delve the funnel.

In terms of the color of the order booking in the funnel, I think the funnel addition in last year has been one of the best that we have seen. Our order booking is also good. We are also seeing what do you call as large deals, which is more than $1 million ACV, which we classify as large deals. We have seen a significant jump in the number of these large deals both in India and international. So these are all — I see that as good positive signs of, a, our engagement with our customers, our relation [Phonetic] with our customers and how our platforms are making more an immediate impact in our customers’ businesses. So that’s the sort of color, I guess, that is the first part.

The second part you said is international trend. In terms of internationally, so far, all our discussions with our customers, we haven’t seen any pullback. Largely I would view in the current macro environment of international, where people are cautious, a lot of our portfolios lends itself to a cost-led transformation. And we believe that will make an impact. In fact, overall, for the last year, if you look at the overall order booking, over 40% of the order book is for our digital platforms and solutions. So the overall the color of the order booking and the traction we’ve been seeing so far is quite good. And that is what — which we have been saying and you’ve been seeing the result of that in the last three quarters in terms of increased revenue acceleration. And we believe despite the macro and the caution that you attributed to, we think it will continue, because the solutions that we are offering can help our customers genuinely to cut costs.

Sanjesh Jain — ICICI Securities — Analyst

And order backlog and execution with easing supply chain?

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

The — as I had called out as — that is a business as usual. The supply chain in terms of the equipment delivery from many providers [Phonetic] are still not what we experienced pre-COVID. But I had called out some time ago that we are treating that as business as usual. So that is neither affecting our revenue, not accelerating anything. And the reason I say is, many customers have also come to accept that this is the time taken and we have found already if alternate options available for the customers to go ahead, rather than being dependent on one provider. So I would say that’s as a — more as a businesses that we have [Technical Issues].

Sanjesh Jain — ICICI Securities — Analyst

Fair enough. Second question is on the revenue growth. We have earlier guiding of a double-digit revenue growth. We have gained [Phonetic] now, probably took couple of years for reaching, but we have gained now. And we also anticipate mix within data to change 50-50 between the core connectivity and the digital services, which implies that our digital services need to grow 25% CAGR. Do you think you are confident about this mix change to happen and this growth to come in considering the order book and on the ground discussion you’re seeing with your customers?

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

Yeah. Sanjesh, I think, when we launched our strategy we called out, amongst all parameters that we want to hit a double-digit growth. And I’ve always said that while people were not very patient, I said double-digit takes time to get there, right? You need investments in products and building capability and it takes time to do all of that. Now that we are here, with our continued investments, I feel quite confident that we can stay the course to execute on that.

Kabir Ahmed Shakir — Chief Financial Officer

I’ll just add, Sanjesh, the way in which we should look at it, not from a CAGR kind of a perspective. These are all businesses where — I don’t know whether it is going to be next year or year after next where if you get one transformative deal, then the growth trajectory for that particular year for that part of the business will look in three digits as opposed to a steady-state year-on-year 25% kind of a number. So that is how you should look at this, especially when these are our really new age technologies and things that we wanted to try to unlock.

And the second bit that I would also leave it is that, we said we want to get to double-digit growth, three consecutive quarters and full-year we reached double-digit growth. We want to maintain that momentum. And our next marker, [Technical Issues] as to become a commtech player, therefore, having a balance of 50-50 between our digital services portfolio and core connectivity. And that is how I would like you to read the ambition and not about whether it is going to rectify in exact proportions every quarter and every year.

Sanjesh Jain — ICICI Securities — Analyst

Clear, clear, clear. Got the message. On the margin side, is it fair to now believe that the bulk of the employee cost is now behind us in terms of what we needed to add and realign and attrition has also now normalized? Is it fair assumption that the cost pressures, whatever we were supposed to see is largely in Q4 and next year, when assuming that we deliver a double-digit revenue growth, that operating leverage will play out, is that the right way to think on the data side of the business?

Kabir Ahmed Shakir — Chief Financial Officer

Sanjesh, two questions, the attrition part is, I can safely say it’s behind us. So, I mean, you probably hear that in the news as well, with multiple IT companies also narrating the same thing. So that I can definitely say it is behind us.

In terms of our hiring, we added 900. I don’t know where you got the [Technical Issues] number from.

Sanjesh Jain — ICICI Securities — Analyst

No, no. I was talking about two years, 2,000, not one year’s or…

Kabir Ahmed Shakir — Chief Financial Officer

Yeah. So in the last year we added about 900 headcount and there are a lot of them are backfilling that we have done, plus, I would say, the net additions, of course, have gone in three areas, product and engineering side, go-to-market and also our service, delivery organization. See, as far as I am concerned, this is a continuous cycle that we will get into, that’s a whole fit to grow model, right? We have compelling business proposals that we need to fund. We will continue to fund. So I won’t say, this is behind us and that we will not do anymore hiring, then we will not grow. We will continue to grow and we need to calibrate as to when I am getting the operating leverage of the headcount and the investments that I have made, when I’m actually seeing that come through, then we take the next call of doing the next level of investment, so that it gets into that continuous momentum. So that is how I would encourage you to actually look at it.

Sanjesh Jain — ICICI Securities — Analyst

I meant it for the near-term we have hired, we first want to stabilize this workforce and drive some utilization and then go for the next level or so. So for next year, at least we are not going to hire another 900, 1,000 people, right?

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

No. I think, Sanjesh, I don’t want to give any of — I think we would — what you say is right, we’ve added significant amount of people in our products and platforms and in the markets. There are two things to look at, last year, the hiring was done over a period of one year. So, not all of the cost have seen a full-year impact. So there is a full-year impact. And that would come about this year. And where it is necessary we would add people. And like Kabir said, we need to calibrate that on an ongoing basis and we would calibrate that because we are carefully managing the business in terms of where we are investing and what returns we need to deliver. So that would be calibrated for sure.

Sanjesh Jain — ICICI Securities — Analyst

Got it. Got it. My last question is on the capex side of it. We guided for $250 million to $300 million of capex. I think we are significantly lower than that this year. How should we think capex for next two years?

Kabir Ahmed Shakir — Chief Financial Officer

Well, my guidance remains the same, Sanjesh, that is our intention to spend and if you see our approved capex, we are in that zone. But…

Sanjesh Jain — ICICI Securities — Analyst

And Kabir, when we say this $300 million just includes the additional fiber replacement capex as well?

Kabir Ahmed Shakir — Chief Financial Officer

No, it excludes that. Like — the moment you see — I want to get to 50-50 on DPS, right? Let’s set-aside the efficiency that we should get in our capex and operating leverage for a minute. If you do the working backwards, you would find that we would need a significant level of investment to support that kind of a growth ambition that we have. So I am targeting that $250 million to $300 million as the number and the reason why we did not spend, we mentioned before [Technical Issues] deliveries delays, plus we had some better payment terms. So there will be a catch-up of that, that will actually come up in the following year, plus we would like to get into the zone of spending $250 million to $300 million and additionally, on top of that for replacement capex for the next three to four years.

Sanjesh Jain — ICICI Securities — Analyst

No. Just from the free cash flow perspective, we are investing more than the operating expenses, we are investing more in the capex. If we need to even maintain the cash flow as a percentage of revenue, that means our revenue needs to grow significantly higher than, say, just 11%, 12%. Else the ROCEs will start diluting. I hope that’s a fair assumption that when we say that we maintain that 25% to 30% guidance. All this ambition is well backed by the fact that we will be growing the revenue significantly faster than this 11%, 12%. Will that be a fair assessment?

Kabir Ahmed Shakir — Chief Financial Officer

Yeah, that’s absolutely fair. We have given — these are all markers, and contours that have actually given — and which sets our own internal working and governance in the Company as well, Sanjesh. So, yes, our guidance is greater than 25% of ROCE. We will — we have been operating in that range. In fact, well above — we will continue to operate in that range. 25% is our EBITDA guidance, but if I have to kickstart growth and if I have to invest in a few areas and temporarily for a quarter or two it takes me below 23%, I’m really not fussed about it because that is being spent on right areas of investment, it is not a waste that we are incurring. And that I want to be clear. So if you mix all of these things, yes, we need a different level of growth trajectory in order to have these ambitions. But at the same time, if these are not fructifying, and then, these are not, I would say, a free-for-all, one-time approval given led to go ahead and then spend. These are going to be calibrated. These are going to be milestone-based. And if we are growing well, if we’re getting in the right direction, where will be continued momentum and investment behind it, where we are going off course, then we will pause and pull back so that we are not diluting any of the ambition on the financial metrics that we have given to you.

Sanjesh Jain — ICICI Securities — Analyst

Great, great. That’s good to hear. And thanks for taking all my question and best of luck for the future quarters.

Kabir Ahmed Shakir — Chief Financial Officer

Thanks, Sanjesh.

Chirag Jain — Deputy General Manager

Thanks, Sanjesh. The next question is from the line of Aliasgar Shakir from Motilal Oswal. Ali, you have been unmuted, please go ahead and ask your question.

Aliasgar Shakir — Motilal Oswal Financial Services Ltd. — Analyst

Yeah, thanks for the opportunity, and quite a detail explanation. I just have a question from your growth products point of view. So you did give a lot of explanation in terms of your order funnel and how the overall trajectory is. But from a growth product point of view, whether it’s MOVE, NetFoundry, CPaaS or even CloudSIM that you mentioned. What is the traction specifically? I’m asking this more from the point of view that when I see a segment in DPS. I mean, there have been few of them firing. But like CPaaS which we’ve been quite positive about for the full-year, as well as in this quarter, it’s not really done very great. So from your overall growth engine point of view, what are the products where we have most positive outlook and where we think we can drive growth in ’24, if we have to do double-digit growth in our data business?

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

Yeah. Ali, I think if you look at the segments, I had called out each one of them. Barring collaboration where we have had somewhat of a muted growth. All other segments, product portfolio segments have grown quite well. And within collaboration, the GSIP, which was sort of drag [Technical Issues] years to go, that has fairly stabilized. And the new products that we’ve introduced, like the GlobalRapide is gaining traction. DIGO is gaining traction. So we are quite confident that across all product portfolios, we should be seeing good traction.

Aliasgar Shakir — Motilal Oswal Financial Services Ltd. — Analyst

Okay. Got it. And just one question for Kabir. So you did mention, Kabir, that a lot of these opex investments are very milestone and timeline-driven and therefore, whatever investment you’re doing either opex or capex, we will see the — I mean, benefits of that or else we will [Indecipherable] them. So on that context, if you could just — I mean, explain how the operating leverage will behave when probably 24, 25 investment that we have done? What is the trajectory of growth and operating leverage we should see? Should we see this margin to recover at some point? And what will be the timeline milestone we will look at?

Kabir Ahmed Shakir — Chief Financial Officer

Thanks, Ali, for that question. Look, in the immediate term, this is going to be in the investment phase that we are in, and what do you have actually seen our opex on staffing costs, we haven’t seen the full-year impact of that yet, because our hiring had only more back-ended in Q3 and Q4 of this year. So you will see the full-year effect of that coming through. As Lakshmi also outlined, and I mentioned to Sanjesh, we are doing the investment on staffing in or on headcount on three aspects. There is product and engineering. And these are folks who are working on my next set of innovations that will actually come through, then I have my feet on street, and then I have my delivery organization. These are the three large buckets in which our investments have gone. The product follow a cycle of 1-3-30 [Phonetic]. One — stage 1, zero to one stage that we are in, we will see those products coming to fruition, maybe 18 months, 24 months from now. Three is where we are currently taking from one and going to three to five customers to see whether it has legs in multiple other industries and multiple other use case and 30 is when it gets into the product stage. Now, 30 is where you will see operating leverage kicking in, because the revenues will come through in FY ’24, but for one and three, those will only come through in FY ’25 and beyond.

Likewise for the sales organization also, it will take three months for any sales person to come on-board and go through the readiness program and be ready and takes another three months for them to then start building customer relationships and working on building the funnel and then converting that funnel into on order book. And then we have our own gestation period of when the order book converts to revenue. So that will flow through during the course of FY ’24. So here, all we need is, sometimes there are some aspects where you look at output metrics and measure the outcome of the business. In some, we need to look at input metrics and measure the right call for the business. I would say, this is the input metrics that we need to do that are we doing the right investments in the right places and then do we have governance mechanism internally to see that the progress of each of them. And that is how I would want to navigate and therefore, in FY ’24, we are expecting our margins to be at the lower-end of the range.

Well, that’s what I said — I would — exactly the same time last year for FY ’23, we were helped by the market shift that we actually had in voice, which I called out in a couple of quarters ago, we had some benefit there on the profitability line, which actually took us to 24.2%, otherwise, we would have probably been in the 23% range. So we will continue to be in the 23% range is what I see for the next year. But these are, in my view, the right investments because we want to now maintain the momentum of a double-digit growth and we want to launch this to a different trajectory. And I’m not going to spell it out for you, you guys can do the numbers yourselves. Our ambition of 50-50 on digital platform is tells you as to where we need to head and therefore, what investments that need to happen. And I won’t be myopic about one quarter, one year to take away what opportunities this Company has ahead for itself.

Aliasgar Shakir — Motilal Oswal Financial Services Ltd. — Analyst

Got it. So should we be expecting FY ’25 to then start seeing some benefit out of this?

Kabir Ahmed Shakir — Chief Financial Officer

I hope so, Ali. And in FY ’25, if we have more places where we need to invest, then we will come and tell you guys where we are actually making those investments and why we are making those investments. We talked about MOVE. I mean, our portfolio has grown over 100%. IoT over 90%. I mean, these are all markers that tells us that we are in the right direction and we are getting the right design wins for us. So if tomorrow our SASE and security portfolio gives us promise, media is another exciting place that we are so confident of and that’s why we made the Switch acquisition as well. So these are all green shoots that are available and these need support. These need the tender love and care. And we cannot not offer to them because they have the ability to scale up to $500 million, $700 million, a $1 billion businesses on their own in five to seven years’ time.

Aliasgar Shakir — Motilal Oswal Financial Services Ltd. — Analyst

Got it. This is very useful. Thank you so much, Kabir.

Chirag Jain — Deputy General Manager

Thanks, Ali. The next question is from the line of Mr. Gautam Rathi from Chanakya Wealth. Gautam, you have been unmuted. You may go ahead and ask the question.

Gautam Rathi — Chanakya Wealth — Analyst

Just I know people have been asking you regularly about some quantitative color on the order book, and that is where, again I — my first question is a request towards that. Lakshmi, whenever you’ve — if at all there is any kind of quantitative color that you could give towards the order book, like, even in the fact that what is the order book that we started with in FY ’23 and where are we today, even on an annual basis that will be very, very helpful for us to see — to actually see the progress going forward? So [Speech Overlap]

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

Gautam, sorry to cut you short. But I think the ask is well understood, Gautam. I think the — you are asking for lead indicators. Last time around we did give some indicators of lag in terms of how we are faring [Phonetic] in $1 million customers. I tried to give you some color on the $1 million dollar, the large deals within our order book, it’s significantly improved. And the order booking itself has significantly improved. The reason why I haven’t given out the exact numbers is, there are a few things that happened in our business, right? In our traditional connectivity, as well as in the — even sometimes in the next-gen connectivity, there is a churn that happens. That the customers shift offices or there is a price churn that unfortunately happens and that’s something is not very predictable yet, right? So, I think we are having to balance that. And then the new order booking that adds on top of it to make up for those churn.

So if I give you one number, I have to then give you another number, which is not that very well predictable, because that’s based on planned discussions and negotiations that we have. So — and that would — and the second aspect of it is the color of the usage business, right? So the usage order booking is purely usage-based. If there is a uptick in usage, the revenue goes up. So even in the order booking, it’s very difficult to give a proxy order book on what that usage needs to be. We have experimented with different models internally of attributing a smaller value of order book, attributing almost zero value to the order book for usage. So these are all things that we are doing so that we get better predictability internally for us to govern. So I hope I’m giving you a color of — the reason why — it’s not that we don’t want to give you that color. The reason is, by giving one parameter, we don’t want to misdirect you and confuse.

Gautam Rathi — Chanakya Wealth — Analyst

That’s very fair, Lakshmi, and I understand you are taking your time to be absolutely sure that what you share with us is the most relevant information. The only thing is, given — something seems to have given you the confidence that it is the time to push the pedal, right, and you are doing that, right? Just whatever — if that — something if there is anything quantifiable is what I was trying to understand, but…

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

No. I think qualitatively if I said that, Gautam, I think I mentioned that. If you look at our overall funnel and order booking in FY ’23, digital portfolio is 40%, right, so — which was not the case before. So that would give you a feel for the acceleration of digital portfolio in the order booking in the funnel. The second is, what we classify as large deals, which is $1 million deal in the enterprise segment. That has seen a significant growth in the deals. And both in India market, as well as in the international market. And the third is, as we speak to our customers, we get a sense that our relevance to them is evermore increasing because we are not talking to them anymore just about our connectivity and connecting branches. We are truly discussing with them how the digital fabric and help them end-to-end in their own journey to build their digital experiences for their customers, right? So, these are the factors that I can tell you as to why our confidence is there.

Gautam Rathi — Chanakya Wealth — Analyst

Okay. And if I were to just — Lakshmi, if I were to just take this discussion same on the qualitative line, how has the experience with the PPC and the churn being with respect to that? Because those are, again, two very important parameters that you could associate with relevance, right? If I were to just take that, how — if you could give some sense out there? And another framework that you’ve used is, 1-3-30, right? Again, if you were to just overlay that framework and just a few examples out there would be very, very helpful, like, where you kind of tested the 1-3 and you are now in the phase where you are saying that, it’s more like a 3-30 [Phonetic] that we are going to push for in the coming quarters?

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

Yeah. So when you mean PPC, I think the product penetration…

Gautam Rathi — Chanakya Wealth — Analyst

Yes, yes, yes.

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

So, no, I think the — that is number of products per customer is definitely seeing an upward trend. Even though I am not tracking that metric by itself, because even when we had a product penetration of offshore before, I sometimes used to see while the — that ratio is four. But the revenue with the customer was small, right, because there is no fun [Phonetic] in doing very small things with four products and that was not very meaningfully. We do measure that, but I don’t assign too much of weightage to that. So I look at more how many customers are at the threshold of $1 million. And how many $1 million customers do we have and how is that growing? We put out that number last year and we will put out that number come the Investor Day that we would have in June. You would see the growth in that. So that’s one parameter for how we see our relevance to the customer is increasing.

In terms of order book — sorry, in terms of churn that you asked for, I think I alluded. The churn last year, we were able to reduce it through strong actions from the team in the front. Supported by all the delivery and assurance functions. And we are trying to move that to a more programmatic activity to see how we can engage early with the customers to reduce the churn. But this is something seems to be more of an industry factor that we are caught up in. Until the transform ourselves to fully realize our vision of these two fabric, which is in progress. This churn is going to be there. So, I hope that answers the question that you had.

Gautam Rathi — Chanakya Wealth — Analyst

Just the last part, which was the 1-3-30, what I have meant out there was just a few examples where basically what I’m trying to understand is, you ceded a number of initiatives and you — what I understood was, you wanted some of them to kind of reach that three levels before you really scale it up. So, are there visible examples out there?

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

So there are visible examples. See, the 1-3-30 is a very continuing thing, it’s not a product at any point in time will have several ones, because if you look at GlobalRapide, we started with a Stage 1. We have now launched the GlobalRapide 2.0. And 2.0 has enhanced features. So while the GlobalRapide itself is in Stage 30, the 2.0 is still in Stage 1, for example, right? So — and GlobalRapide has seen a significant growth in terms of number of seats that we won last year and the number of seats that we are deploying.

Similarly, within even the next-gen connectivity, we had — that is a WAN and we launched a Stage 1 of the — with multiple variants and that has now reached Stage 30. So — and we said that our next-gen connectivity has seen a good amount of growth. And we are further continuing to expand. So I think the — if I were to give a color to you in the past, we used to say that, if our sweet spot of our customers in the international market is any customer having presence in five regions, and their network requirement is no more than 30% in the domestic market and 70% of the requirement is in international market, that would be our sweet spot, because our true strength was then the international connectivity that we offered. And we were not able to fight against the strong local incumbents. But today, that ratio has shifted rather than 30-70, we just won a deal which is 70% regional and 30% international and that was possible because of this 1-3-30 approach of introducing new products. And taking these two customers in a staged manner, right?

So — and I think also I have a figure and we’ll probably share during the Investor Day. Last year, we do track how much revenues that we’re getting from Stage 3 moving to Stage 30. And last year, of the incremental revenues that we showed, a significant part of it came from the products that moved from 1-3 to 30.

Gautam Rathi — Chanakya Wealth — Analyst

That would be very helpful. So we look forward to that in the Analyst Day. Thanks a lot. This is very helpful.

Chirag Jain — Deputy General Manager

Thanks, Gautam. The next question is from the line of Mr. Vinit Manek from Karma Capital. Vinit, your line has been now unmuted. You may go ahead and ask your question.

Vinit Manek — Karma Capital — Analyst

One question for you, Kabir. Just coming to the depreciation part, so there was INR64 crores, INR65 crores of absolute increase in the depreciation during the quarter. So just wanted a clarification that, was there any one-off during the quarter in terms of depreciation. Or this is a sustainable run rate that we will be seeing going forward?

Kabir Ahmed Shakir — Chief Financial Officer

No, there was a one-time correction that we actually did in our — in the way in which we used to recognize cable life and the residual value of cable life, that was about INR40-odd crores, where we took that correction. So aside that I think it’s business as usual.

Vinit Manek — Karma Capital — Analyst

Okay. So it was just a INR40 crore one-off during the quarter in terms of your depreciation?

Kabir Ahmed Shakir — Chief Financial Officer

Yeah. So we used to have — as per the Companies Act, we used to recognize 5% of the terminal value and then depreciate the balance over the life of the cable and then we took a call, since we are not getting in that 5% anyway when we decommissioned the cable. We made that change for all the past ones which have finished life, we’ve taken the hit and all the ones which have useful life left over, we have a portion that over the rest of the life of the cable. And therefore, you will see that small change in the future, until its end of life. But this INR41 crores represents the past.

Vinit Manek — Karma Capital — Analyst

So near-term, maybe two or three quarters you might still see something like this coming or it’s already done?

Kabir Ahmed Shakir — Chief Financial Officer

It’s already done. There’s nothing more that will actually come — whatever will come is going to be marginal — very, very marginal increase insignificant and immaterial come — your point of business [Phonetic].

Vinit Manek — Karma Capital — Analyst

Okay, okay. Got it, got it. Thank you. Thank you.

Chirag Jain — Deputy General Manager

Thanks, Vinit. The last question is from the line of Mr. Pratap Maliwal from Mount Intra Finance. Pratap, you have been requested to kindly unmute yourself. Please go ahead and ask your question.

Kabir Ahmed Shakir — Chief Financial Officer

Pratap, are you there?

Chirag Jain — Deputy General Manager

Pratap, please go ahead and ask your question.

The next question is from the line of Mr. Abhishek Singhal from Naredi Investments. Abhishek, you have been requested to unmute. Please go ahead and ask your question. Please go ahead.

Abhishek Singhal — Naredi Investments — Analyst

Yeah, yeah. Sir, my first question, effective tax rate in FY ’23 was 14%. So what will be the effective tax rate in FY ’24?

And second question, what will be the EBITDA margin in FY ’24? And what kind of growth expectation in top line for FY ’24?

Kabir Ahmed Shakir — Chief Financial Officer

Yeah. Abhishek, we don’t give specific numbers as guidance for every quarter or future years. As we’ve said, our stated ambition is double-digit growth. We have delivered that for the last three consecutive quarters and for the full-year. And our endeavor is to maintain that same momentum going forward.

Our EBITDA ambition is to stay in the 23% to 25% range. And as Ali and Sanjesh asked, I clarified for FY ’24, we expect to operate at the low-end of the range for various investments that we are actually making. And I have nothing further to add other than restating and reiterating the same ambition that we have given.

Abhishek Singhal — Naredi Investments — Analyst

Okay. And the effective tax rate for FY ’24?

Kabir Ahmed Shakir — Chief Financial Officer

The effective tax rate for FY ’24 will be better than what it has been in the past of 25%, 26% that is because we have net operating losses in international geographies. And as international geographies are becoming more and more profitable, we are utilizing those losses, plus also recognizing that as a deferred tax asset in our books. So it is not just that we are — it’s also an asset that we are creating in our balance sheet. So you should be able to see that in conjunction. And we hope to operate at a good levels of ETR. What exact number? I’m sorry, I’ll not be able to give you that now, Abhishek.

Abhishek Singhal — Naredi Investments — Analyst

Okay. And sir, last question is, sir, what is the one-time acquisition cost of Switch Enterprises which was acquired for INR486 crores in December? And when it is reflecting in profit and loss account statement?

Kabir Ahmed Shakir — Chief Financial Officer

So this will — this has not yet come in our books, Abhishek. As Lakshmi mentioned in his call, we expect all approvals to come through and integration to start only in the first quarter of FY ’24. So we have not paid any of these things yet until the close has happened. There are some costs on account of due diligence and other M&A-related ancillary costs that we’ve actually absorbed in our current year financials.

Abhishek Singhal — Naredi Investments — Analyst

Okay. Thank you so much, sir.

Chirag Jain — Deputy General Manager

Thanks, Abhishek. This brings us to the end of our call. I would now request Lakshmi to share his closing comments.

Amur S. Lakshminarayanan — Managing Director and Chief Executive Officer

Thanks. Thank you, everyone. I just wanted to say how pleased we are in terms of where we are today in having got to a double-digit growth, in having achieved all the financial parameters that we set out to achieve in our strategy. We are very well poised for the next phase of our journey in our strategy, which remains the same and we will continue to execute on that. Thank you very much for all the support.

Chirag Jain — Deputy General Manager

Thank you, Lakshmi. This brings us to the end of the call. In case of any queries, please write to investor.relations@tatacommunications.com, and we’ll respond accordingly. The recording will be available on our website in the next 24 hours. You may please disconnect now. Thank you so much.