Tata Communications to continue making organic investments this fiscal, AI Cloud launch with Nvidia in Q3: AS Lakshminarayanan, MD

AS Lakshminarayanan- MD - CEO- Tata Communications

Tata Communications will continue making organic investments in product development in the ongoing fiscal year to drive growth, having spent $600 million last year.

Lakshminarayanan, MD and CEO of Tata Communications, told Moneycontrol that the company will spend $250-$300 million this year on capacity expansion and organic product development. Further investments will depend on inorganic opportunities that may come up.

Tata Communications, on July 11, reported a 12.8 percent fall in consolidated net profit, at Rs 333 crore, for the June 30, 2024 quarter. The company had reported Rs 382 crore in the year-ago period. Revenue rose 18.1 percent year on year (YoY) to Rs 5,633 crore.

There is still caution in the market, given the US elections and government changes in Europe amid the ongoing conflicts, he said, adding the company is on track to make its portfolio companies profitable. Edited excerpts

Overall, we are in a very healthy state. Our revenue has not just gone up; it has increased by 18 percent, overall, and data growth has been at 20 percent. Secondly, we have improved our EBITDA (earnings before interest, taxes, depreciation and amortisation) margins by 140 basis points.

We are driving several tracks within the company. One is about our last year's acquisitions, mainly Switch and Kaleyra. Our goal and effort have been to drive synergies. Wherever there are overlapping things on technology, engineering, and platforms, we are driving those synergies home, and in the go-to-market process and how we take that to the market also, we are driving synergies.

That's partly why you see the improvement in EBITDA margins. So, we must assimilate, integrate, and maximise all the synergy potentials within the M&A  set we've already created.

Secondly, we are also doing a lot of organic investments. We called out on our investor day last year and have done close to $600 million in organic and inorganic investments. We have made several organic investments. For instance, we developed our products for multi-Cloud Connect and Cloud Lite, both of which we launched. These products are developed in-house, making them organic investments. Additionally, we launched our SaaS product in partnership with Versa. These initiatives represent significant organic investments for the company.

The third track is that we have a team that is looking at inorganic opportunities. If there are the right opportunities, that will justify the strategic rationale they have laid out. We will be happy to consider and pursue those as well. So, that is how we are looking at our investments.

Our regular capex and other investments are in the $250-$300 million range. It is so in all our capacity expansion plans and investments in organic product development. It might go plus or minus something. Now, when an inorganic opportunity comes up, we will bring that up. We are not saying that we plan to invest $600-700 million this year. Regular business unit investment is what we will call out.
Everything else is opportunistic.

Kalyera was an EBITDA-negative company when we acquired it in June 2023. We said we would make it EBITDA-neutral within the first year.

We said we would get mid- to high-single-digit EBITDA in the second year. So, we are well on track. We focus on driving all the synergy activities in these acquisitions, bringing people together, driving towards the same destination, and, where appropriate, making new investments. In Kaleyra, we are making new investments to build orchestration AI into the product.

Switch will become EBITDA-positive. It's hard to call out because that business transaction was done in May last year—it's already been over a year. I've been saying even last year that we are managing it as one business. This year, it will be all one single business. So our Media business and the Switch combined are what they would measure, showing upticks in margin improvement.

Also, we are seeing synergies in the market of combined capabilities being positioned and a great reception for that. We just announced the ICC T20 capabilities. We're the partner for bringing all the US and Caribbean matches to the world, including India. In India, we delivered that on a 4k quality for the first time.

We leveraged the combined capability of the Mediaand the Switch teams to deliver this. Already, we are seeing the synergy playing out in some of these, and we are winning new deals due to the combined capability.

So, we are pressing ahead on both the cost synergies and combined capabilities, which are helping us win new deals.

Absolutely. We are seeing reasonably good growth in international markets. Our global revenues, as a proportion of the total, have gone up to 58 percent in the last few quarters. We expect a lot of traction. These things will take time because we are coming to a challenger position. There is evidence to show that we are winning in the market.

The full launch will be ready by Q3. We are well on track to execute and are excited about the launch and what it can do for enterprises and India.

All the areas we discuss are relevant to the industry as a whole. I don't want to discuss specifics, but I was very impressed by the way the minister ran the meeting. He was very agenda-focused. I am happy that it's an inclusive meeting, bringing the industry and the department together. We are hoping it will produce great results for the country.

There is nothing spectacular about it. These are regular refinancing opportunities. So, raising it is just blanket approval for us.

We have seen good growth in all international regions YoY. I don't think one region this time, which I can call out, has not grown.

The confidence organisations such as World Athletics place in us for marquee events, watched by millions worldwide, showcases our ability to modernise technology and deliver a superior experience. We also landed a significant deal in the banking and financial sector, involving extensive security and other digital capabilities. It's a substantial achievement for us.

Even Kaleyra has announced a significant deal.

The macro conditions remain very cautious and haven't changed.

You may also notice comments from other IT and CPaaS players, pointing out a relatively subdued performance from the CPaaS industry, while the IT industry is mostly experiencing single-digit growth. Despite this challenging environment, we are extremely pleased with our performance. We must stay focused, work hard, and continue building our platforms to capitalise on more opportunities.

Our first challenge in international markets is to be able to participate in more opportunities because our presence is relatively small relative to the market size.

Growth has largely come from acquisitions. That was always our strategy. So, I will not be defensive about it because making these acquisitions at the right price, integrating all the people together, and rationalising the platforms are all tasks that we cannot brush under the carpet, saying that this growth has happened as a result of the acquisition. The acquisition is a means to grow. We are executing everything we said we would execute, and therefore, we are seeing growth and margin improvement as well.

That is the whole strategy. The digital portfolio has been the first to hit 50 percent of the overall data milestone. In fact, we need to hit more than 60 percent in the next 2-3 years to reach our ambition. It is well on track. We are now positioning ourselves as a digital fabric. That is how we will improve our relevance to large enterprise customers. And on the back of that, we previously said our digital revenues would grow even faster, and we want to double our revenues. It was a fairly bold call that we took, and that is what we are executing on.

There is still caution in the market, given the US elections and rate cuts happening or not happening in many parts. Europe is still distressed, and elections and change of governments will slow things down. So, macro conditions are still what they are. We are very focused on ensuring that our portfolio investments make them good, and we are well on track to make them profitable. We are further investing in those portfolios organically to build out even more capabilities to capture the market.