Tata Comm let down on growth in FY21, but has set high targets
PremiumWhile many firms riding on the work-from-home theme saw an improvement in sales, in the case of Tata Communications, it turned out that its revenues were absolutely flat in FY21
When the stock markets recovered after the crash in March 2020, one of the first themes that caught investors’ fancy were the beneficiaries of the work-from-home phenomenon.
It was pointed out that telecom company Tata Communications Ltd was a leading candidate, making the firm’s shares among the most sought after post-covid. The stock is now 178% higher compared to its pre-covid highs. But while many firms riding on the work-from-home theme saw an improvement in sales, in the case of Tata Communications, it turned out that its revenues were absolutely flat in FY21.
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While its voice revenues have been on a decline for some time, even the data business grew by less than 5%. “Covid-led disruption has increased deal conversion cycle to 258 days from 203, which in turn restricted revenue delivery in the growth services segment. Deal conversion delays are expected to impact Q1FY22 performance as well," analysts at Emkay Global Financial Services said in a note to clients.
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But where the firm missed on revenue expectations, it made up with better margins. Its operating profit rose nearly 30% last year on the back of better margins. Now, the firm has fuelled some hope among believers by setting ambitious growth and profitability targets. At a recent analyst meet, its management reiterated focus on becoming a holistic solutions provider through deeper client engagement, revamping operating structure and new solution launches. Despite the near-term challenges, the management stuck to its medium-term target of achieving double-digit data revenue growth. It has increased its RoCE (return on capital employed) target to 25-30% in the medium term from 20% earlier. Operating margins are seen in the 23-25% range from 22-25% guided earlier.
Analysts caution that the slowdown across sectors and delayed deal closures could pose a threat to the firm’s targets. In the current scenario, the near-term data revenue growth trends remain challenging, said analysts at Motilal Oswal Financial Services Ltd. While the firm is relying on innovation solutions to drive growth, those may take time to yield desired results, they added. “Until new product categories in the innovation segment achieve scale of over 10 times from a current revenue base of a mere ₹130 crore, it may continue to lag along with a weak growth outlook in its subsidiaries," said Motilal Oswal analysts in a 10 June report.
Margins in FY21 were on the back of covid-related cost savings such as travelling costs. Its adjusted margins would have been lower by 100 basis points (bps). One basis point is one hundredth of a percentage point. Costs are expected to rise as normalcy returns. Analysts say that given the firm’s growth strategy, R&D spend could meaningfully rise, weighing on margins. While the stock hasn’t given up any of its post-covid gains, another year of underperformance may force investors to do a rethink.
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