Increasing data contribution drives Tata Communications’ margins

Data continued to shore up Tata Communications’ fortunes, with business in the segment witnessing healthy growth in the December quarter. While the company’s gross revenues declined 5.6 per cent year-on-year in the third quarter to Rs 4,115 crore, the data services segment reported a 6.8 per cent growth to Rs 2,884 crore in the same period.

Data’s contribution has been steadily rising over the last four quarters and now accounts for 70 per cent of overall revenues from 62 per cent earlier. The voice business, though, has been tepid, as revenues declined by 25.9 per cent in the segment during the quarter.

Data drives margins

Though overall revenues declined during the quarter, the company continues to deliver healthy EBITDA and margins. For four quarters in a row, margins have been expanding. For the December quarter, the EBITDA margin was 14.9 per cent. This pick-up in EBITDA was on account of a greater focus on cost control. So, manpower and network operating costs are being optimised to generate better operating profits and margins.

From a business standpoint, the increasing proportion of data services (which enjoys higher margins) in the overall revenue mix has meant that margins are likely to continue their upward trajectory. While its traditional data carrier services business is steady, newer offerings (growth services) in data such as managed hosting and managed security services have grown in excess of 38 per cent year-on-year.

Voice worries

The decline in voice revenues continues due to stiff competition in the industry. Voice minutes carried have come down steadily over the last one year. Only 9.2 billion minutes were carried by the company in the December 2017 quarter, compared to 10.5 billion minutes during the same period last year. The management has indicated that the revenue impact of the closure of Tata Teleservices (TTSL) on overall revenues would be around $50 million.

The bid for TTSL’s enterprise business is another factor to be considered by investors, as the valuations and contours of the bid are as yet unknown. The stock rallied by nearly 2 per cent on Monday, cheering and giving a thumbs-up to the results. But the uncertainties mentioned earlier seem to be holding back the share, with the Tata Communications stock correcting 12-13 per cent over the past one year

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