Tata Communications said the 31.73 percent sequential decline in its consolidated net profit in the September quarter was primarily due to several cable cuts in the Red Sea region, which reduced the company's capacity to serve customers and impacted core connectivity revenue. Additionally, increased maintenance costs to repair the damaged cables further affected profitability, creating a double impact of reduced revenue and higher expenses. In an interview with Moneycontrol, MD and CEO, AS Lakshminarayanan, said the company has kicked off the asset monetisation process, including land monetisation, and reviewing its subsidiaries to achieve long-term profitability growth and bring down its debt to invest in growing businesses. Edited excerpts:
Sequentially, there is a fall in Q2 profit. What is the reason?
One reason is that in our core connectivity business, there have been several cable cuts recently. The Red Sea has been a hotspot for these disruptions. As a result, our capacity to serve customers has decreased, directly impacting our core connectivity revenue. We’ve seen revenue growth drop from around six to seven percent over the past couple of years to about three percent this quarter. While core connectivity is a capex-intensive business, it remains profitable. However, this slowdown, coupled with the additional cost of repairing broken cables, has affected us. Our maintenance costs increased, leading to a double impact on both revenue and expenses, which ultimately hurt our profitability. That is the primary reason for the drop. Of course, there are other factors—there’s always a long list of ups and downs from one quarter to the next.
What strategic measures is Tata Communications taking to reduce debt?
We are focusing on asset monetisation, including land monetisation, and reviewing our subsidiaries. Once we have board approval, we will make announcements. We are actively working on a few strategies to achieve profitable growth. Our debt has increased, with our net debt-to-EBITDA ratio creeping up from below 2 to 2.37. Some of the asset monetisation efforts will help us reduce this debt, as well as fund some of the activities that will allow us to continue growing the business.
To sustain growth, we need to keep investing. We have already discussed investing in platforms like Salesforce, which has led to an increase in order bookings. We need to continue investing in various areas, and these measures will give us the financial flexibility to do so.
Is there a set timeframe to execute these measures?
We are working on a schedule, but some factors are within our control, and others are not. We have a land bank in various regions and are addressing them one by one. There are several regulatory hurdles we need to clear, so while we are following a plan, we can't be specific about the exact timeline. We hope some of these measures will come through sooner rather than later.
Regarding the restructuring of the UK unit, what is the update?
Yes, we have discussed it before. There is a cost associated with it, and this contributes to some of the expenses you're seeing. One example is Kalyera, which grew through acquisitions and had a complex entity structure. We are systematically cleaning that up, which requires investment, but it will bring long-term benefits. A simpler structure will make future acquisitions smoother, offer tax benefits, and bring other efficiencies. While this is a costly process in the short term, it will deliver benefits in the long run.
Tata Communications secured wins across markets in Q2. Can you provide more details?
Compared to the last two quarters, we are seeing growth in data revenues. The overall PAT margins and EBITDA growth have also been strong. We've had good order bookings for the past two quarters, despite weak macroeconomic conditions and slow decision-making. This performance is commendable under the circumstances.
We've secured wins in all markets this quarter. Order bookings have risen in the first half of the year, including some large multi-year contracts, although the revenue from these deals will materialise later. For instance, we are currently implementing a major security deal for a bank, and we expect revenue from that to begin showing up in Q4. We’ve also had significant deals in cloud, security, and networks in both India and international markets. After a period of flat demand post-Covid, data demand has picked up again, driving another round of investment, which is benefiting us.
Which markets performed well this quarter?
All markets performed well, but the standout was our international markets, particularly the US. While our base in the US is small, we’re pleased with both revenue and order booking growth across most markets, both internationally and in India.
Do geopolitical issues delay decision-making?
Geopolitical tensions are escalating rather than easing. However, from an economic perspective, rate cuts by the Fed and others should help businesses view things more positively. Still, we'll have to wait until after elections and other events to see how things unfold. It’s difficult to predict with certainty.
How is progress on achieving synergies and profitability goals with Switch and Kalyera?
With Kalyera, we aim to reach EBITDA-neutrality by the end of this fiscal year and gradually move towards mid-to-high single-digit profitability. It’s a three-year journey, but we are on target with our goals.
We are not just focusing on cost reduction but are also investing in expanding the platform from SMS to other channels like RCS, WhatsApp, and email. We’re also enhancing the software stack to orchestrate across these channels. We’ve invested in AI-based orchestration and workflow tools. While profitability is a priority, we are balancing this with platform investment to ensure long-term value for our customers.
What’s the update on the AI Cloud launch?
We are working hard to launch the AI Cloud, and we expect to be ready for trials towards the end of the year. We’re excited about how it’s shaping up.
Have you started engaging customers regarding AI Cloud?
Yes, we have begun discussions, and there’s a lot of interest, not just in India but internationally as well. Most of the current AI spending is focused on training rather than inferencing, but that will shift over the next few years. While enterprises are still experimenting with AI, we expect gradual adoption as they move from proof of concept to full-scale deployment.
How soon do you expect deals after AI Cloud’s launch?
We hope to secure deals on day one. It’s hard to predict the size, but we expect a range of deals, from smaller contracts to larger ones over time. Enterprises are moving from experimentation to proving value, which will take time, but we expect gradual growth.
Which verticals are showing the most interest in AI Cloud?
We’re seeing interest in edge inferencing, particularly in manufacturing and retail. Banks are more cautious, especially in customer-facing processes, as they want to ensure trust in AI decisions. However, they are exploring AI in back-office functions, which are less risk-sensitive.
Any new announcements coming up?
Before the end of the year, we will be launching a multi-cloud network product, enabling seamless connectivity to multiple clouds for our customers, much like a SaaS product.
Any final comments?
India remains a growth market for us, and we see strong potential there. Internationally, we are a challenger, looking to replace incumbents and gain market share. While decision-making can slow down due to cautiousness, particularly with critical infrastructure like networks, we are optimistic about our growth prospects in both domestic and international markets, regardless of macroeconomic conditions.
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