Margin gains, debt reduction boost Tata Communications' September qtr

Revenue growth momentum, profitability will be key triggers

The Tata Communications stock hit its upper circuit, gaining five per cent, after a strong performance in the September quarter. While revenues were up three per cent over the year-ago quarter, it was the sharp gains in operating profit that stood out.

Operating profit was up 39 per cent year-on-year (YoY) at Rs 1,158 crore, the third consecutive quarter of double-digit growth, and margins grew 680 basis points to 26.3 per cent. This was led by growth in the data business — which accounts for 80 per cent of revenue and 90 per cent of operating profit — and cost efficiencies. 

While some of the margin gain is sustainable, gains from Covid-related spending – including sales and market costs – are likely to reverse in the current quarter. The company has cut manpower costs by reducing onsite: Offshore mix and enhanced automation. It has guided for a margin range of 22-25 per cent. 

Though the firm highlighted opportunities in various data segments, it indicated that deals related to network transformation projects are getting delayed and some could come through in the December and March quarters of FY21. Revenue growth depends on how many of these deals get converted, especially in the seasonally weak December quarter. 

The Street will also keep an eye out for debt reduction. Net debt reduced by Rs 377 crore to Rs 8,631 crore, as did the cost of borrowing. Net debt to operating profit on a trailing twelve months basis was down to 2.3 times as compared to 2.8 times a year ago. Further reduction in debt with monetisation and improving cash flows would be a key trigger. 

While the outlook is strong, near-term upsides, given the 150 per cent stock gains over the last year, are limited. Investors should await a better entry point.