Detailed report |

18

January 2017

Sector:

Telecom

Tata Communications

Connecting the globe

Aliasgar Shakir

(Aliasgar.Shakir@MotilalOswal.com); +91 22 30102415

Jay Gandhi

(Jay.Gandhi@MotilalOswal.com); +91 22 6129 1546

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Tata Communications

Contents: Tata Communications | Connecting the globe

Summary ............................................................................................................. 3

Poised for steady growth in enterprise data business ............................................ 5

- Deep connectivity, wide array of offerings supporting growth

- Scaling up in Gartner’s Magic Quadrant

- Clientele – focus on premium enterprise segment

- Innovative product portfolio to drive growth

-Growth and Transformation segments the key growth drivers

-Traditional business: Stable bread-and-butter segment

-ATM business: On a steady growth path

Healthy margin accretion potential ..................................................................... 19

-Traditional segment – operating leverage driving margin expansion

-Transformation segment to drive overall margin improvement

-Scale benefits to help turn Growth segment profitable

-Perennially eroding prices having low bearing on profitability

-ATM business – focus on profitable growth

Fading Voice business – impact minimal.............................................................. 23

Steady FCF generation, improving RoCE .............................................................. 25

Better placed than the conventional telcos ......................................................... 31

Land valued at INR176/share .............................................................................. 32

Initiating coverage with a Buy rating ................................................................... 35

Financials and Valuations ................................................................................... 40

18 January 2017

2

Tata Communications

BSE Sensex

27,258

S&P CNX

8,417

Tata Sector: Telecom

Initiating Coverage |Communications

CMP: INR 667

TP: INR778 (+17%)

Buy

Connecting the globe

Phase 2.0: Improving margin, low leverage, Improving RoCE



Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val, INRm

Free float (%)

TCOM IN

285.0

687 /326

1/49/56

190.1

2.8

402

25.0



Financial Snapshot (INR b)

Y/E MARCH

FY16A FY17E

Net Sales (Rs b) 205.5 186.1

EBITDA (Rs b)

31.0 30.0

Net Profit Rs b)

0.4

4.0

EPS (Rs)

1.6 14.0

EPS Growth (%) 1,986.6 801.0

BV/Share (Rs)

-14.7

-2.9

P/E (x)

429.5 47.7

P/BV (x)

-45.5 -230.9

RoE (%)

-91.6 -159.4

RoCE (%)

0.9

5.9

RoIC

1.0

8.2



FY18E

191.7

33.7

10.1

35.5

153.5

32.6

18.8

20.5

238.9

10.7

19.0



Tata Communications (TCOM) has transformed from a long-distance voice services

provider to a full-service data connectivity and value-added services provider. Its

deep connectivity and array of customized solutions should drive a healthy 10%

CAGR in data revenue over FY16-19 in a largely commoditized market. Yet, its focus

on (a) the higher-margin Enterprise segment, and (b) value-added services should

support a 490bp expansion in core EBITDA margin over FY16-19.

The recently-announced sale of its African venture, Neotel, and data center should

help deleverage TCOM’s balance sheet by ~48% to INR60b. While this is factored in

street estimates, we believe (a) the impending 40% capex reduction, (b) higher FCF,

and (c) RoIC improvement to ~18% by FY19 are not.

Despite its presence in the B2B space, we believe TCOM is better placed than

traditional telecom companies like BHARTI and IDEA on the business front. TCOM’s

better competitive position, low regulatory risk, and lower capital intensity

provides healthy scope of RoCE improvement.

Factoring healthy 14% Core EBITDA CAGR over FY16-19 and subsequent

deleveraging potential, the stock trades at an EV of 6x FY19E EBITDA. This is despite

~40% stock price appreciation in the last six months. We recommend Buy; our

SOTP-based target price is INR778 (7x FY19E EV/EBITDA). Further, TCOM offers

INR176/share land value to minority shareholders subject to Government approval

for demerger of the land. Government’s recent tax bill supporting the land

demerger and our channel checks indicate potential monetization in current

Government’s regime.

Shareholding pattern (%)

As On

Dec-16 Sep-16 Dec-15

Promoter

75.0

75.0

75.0

DII

9.1

10.8

14.1

FII

11.1

8.9

6.5

Others

4.9

5.3

4.4

FII Includes depository receipts

Poised for steady growth in enterprise data business

TCOM’s growing focus on the data business (contributing 57% of core revenue),

leveraging its 710,000km deep submarine network and leadership position in

emerging markets, holds it in good stead. Cisco expects business IP traffic to

grow at a CAGR of 18% over the next five years. TCOM’s shift from a

commoditized network provider to a full-service customized enterprise solutions

provider has led to sticky clientele growth. Its value-added offerings like unified

communication, hosting, managed security, and a host of sector-specific data

offerings also provide strong growth potential. We expect TCOM’s data segment

to record healthy 10% revenue CAGR over FY16-19.

Expect strong data-led margin expansion to continue

Despite the perennial price decline, we expect margin expansion to continue in

TCOM’s Traditional network business on the back of operating leverage. After

300bp expansion over FY13-16, we expect 310bp expansion over FY16-19. The

base of the Growth and Transformation segments remains low, despite steady

45-50% CAGR. We believe scale benefits will allow these segments to turn highly

profitable over FY16-19, with EBITDA margin benefit of about 10-15 percentage

points. We expect TCOM’s core EBITDA margin to expand ~490bp to ~20%,

driven by the data segment. This should drive 14% EBITDA CAGR over FY16-19.

18 January 2017

3

Tata Communications

Stock Performance (1-year)

Tata Comm

Sensex - Rebased

2,150

1,800

1,450

1,100

750

Improving balance sheet – RoCE expanding, FCF healthy

The recently-announced sale of the African venture, Neotel, and data center is

expected to generate ~INR55b, which is likely to be used to reduce debt by ~48% to

INR60b. While this is factored in the valuations, we believe the incremental gains of

lower capex intensity (about 40% reduction), RoIC expansion from 6% in FY16 to

~18% in FY19E, and annual FCF generation of INR 10b in FY19E from negative FCF in

FY16 (cumulative FCF generation potential of INR17.5b over FY18-19E) are not.

Better placed than conventional telcos

TCOM is better placed than the conventional telcos. While a B2B business model is

generally perceived to suffer from high competition, weak FCF and low RoCE, in the

telecom space, this is not really so. In TCOM’s enterprise data business, competitive

pressures are lower than in the consumer telecom market. Further, capex intensity

is significantly low at about 10% of revenue, leading to healthy FCF generation; for

BHARTI/IDEA, capex is 15-18% of revenue. TCOM is subject to limited regulatory

risk; BHARTI and IDEA are exposed to high spectrum and quality of service related

regulatory intervention. While we expect TCOM’s RoIC to expand to ~18% by FY19,

BHARTI and IDEA’s RoCE is likely to remain below cost of capital. We believe TCOM

has high re-rating potential and should enjoy a valuation of 7x EV/EBITDA in a

market where BHARTI/IDEA trade at 6-7x one-year forward EV/EBITDA.

SOTP valuation

SOTP valuation of INR778/share implies 17% upside

Our implied EV/EBITDA multiple of 7.1x to core FY19E EBITDA of INR40b is on the

back of (1) EV of 3x FY19E EBITDA of INR4b for voice, given weak business visibility,

(2) EV of 7.5x FY19E EBITDA of INR36b for data, given healthy growth, improving

EBITDA margin and FCF generation potential over the next three years. We believe

the stock has strong re-rating potential despite the sharp run-up in the last three

months, as incremental FCF generation and RoCE improvement do not appear to

have been factored at current valuations of 6x FY19E EV/EBITDA.

Particulars

FY18E FY19E

EBITDA (INRmn)

33,731 39,996

multiple (x)

7.0

7.1

Voice EBITDA (INRmn)

4,082 3,938

multiple (x)

3.0

3.0

Data EBITDA (INRmn)

29,648 36,058

multiple (x)

7.5

7.5

Enterprise Value(INRmn) 234,610 282,251

Net Debt (INRmn)

71,243 60,556

Equity value (INRmn)

163,367 221,694

No of shares (mn)

285

285

Equity value/share(INR)

573

778

% Upside(Downside)

-14%

17%

Land Bank (INR)

176

176

Fair Value (INR)

749

954

CMP ((JNR)

667

667

% Upside(Downside)

12%

43%

Source: MOSL

Land bank valued at INR176/share

TCOM’s minority shareholders have a share in the land bank, valued at

INR176/share after factoring capital gains tax and dividend distribution tax. While

pending for over 15 years, there has been considerable progress towards the

eventual monetization of the land after the current NDA government assumed

power. In August 2016, the government passed the Taxation Bill, which takes care of

the issues relating to capital gains tax liabilities. Also, a 51% government-owned

entity, Hemisphere Properties has been created to transfer the demerged land. In

our recent interactions, DoT has indicated that there is strong likelihood of the land

transfer under the current government.

18 January 2017

4

Tata Communications

Poised for steady growth in enterprise data business

Shift of data growth towards emerging market bodes well







Deep connectivity, wide array of offerings supporting growth: TCOM derives 57% of its

core revenue from the data business. In this business, it has been witnessing strong

growth, driven by (a) deep network connectivity across the globe, (b) wide array of

offerings – traditional lease line connectivity and customised managed services – that

attract corporate clients, and (c) TCOM’s leadership position in Gartner’s Magic

Quadrant consistently since 2013.

Growth and Transformation segments the key growth drivers: Over FY16-19, we

expect the Growth and Transformation segments to witness a CAGR of 20% each, led

by innovative/customised solutions and higher client wins. The Traditional segment

should grow at 8% on shift of healthy volume growth towards the emerging markets,

partly offset by perennially declining prices.

Capacity not a constraint to continued double-digit growth in data volumes for the

industry; margins expanding despite falling prices: The global IP traffic is expected to

grow at 22% over 2015-20, while enterprise traffic would grow at 18% to reach

32,165PB/month, led by high growth in emerging markets and increasing adoption of

advanced video communications in the enterprise segment. Capacity is not a key

concern – increase in bandwidth from 40gbps to 100gbps/250gbps in high volume

routes has releasing (and is releasing) huge capacity. Prices have been perennially

falling, but without any impact on margins, due to fixed operating costs. Despite the

price decline, the traditional connectivity business has seen consistent margin

expansion.

Deep connectivity, wide array of offerings supporting growth

Tata Communications (TCOM) is a direct play on global data growth and shift in data

consumption to emerging markets. It has transformed from a pure-play long-

distance voice services provider into an integrated communication services provider,

with sharper focus on the high-growth data business. TCOM, the erstwhile VSNL,

now operates in two verticals: data and voice.

The data vertical, which is the key growth driver, contributed 57% of core revenue in

FY16. Under this vertical, TCOM provides [A] traditional network services like private

leased line connectivity, including virtual private networks, and [B] customized

managed services to global enterprises, including (a) data centres, (b) unified

communication services like video conference calls, and (c) ATM outsourcing, with

its captive tier-I network connectivity across the globe.

The voice vertical contributed 43% of core revenue, with ~6% EBITDA margin in

FY16. It remains a steady cash cow business, with marginal capex and a steady

annual FCF of INR4b. TCOM is the leader in the long-distance voice business, with

19% share in the international long-distance market.

18 January 2017

5

Tata Communications

Exhibit 1: TCOM’s transformation into a data business provider

Source: Company, MOSL

Exhibit 2: Revenue mix tilting towards data business

Voice Revenue (LHS)

Data Revenue (LHS)

51

89,914

87,761

FY15

57

Data rev (As % of core rev)

68

65

62

42

47,946

65,259

FY11

45

56,462

68,118

FY12

44

67,534

85,647

FY13

47

81,485

93,024

FY14

105,971

80,560

FY16

113,616

70,296

FY17E

124,250

67,494

FY18E

140,312

65,109

FY19E

Source: Company, MOSL

Ring around the globe

TCOM’s key strength in the data segment is that it owns and operates the worlds’

only wholly-owned fibre-optic subsea network ring around the globe. Tata

Communications’ Global Network (TGN) consists of 710,000km of optic fibre cabling,

of which ~200,000km is terrestrial and ~500,000km is subsea. Its global network

cable system interconnects Asia, the Middle East, the US, and Europe, allowing it to

provide higher bandwidth and lower latency. TCOM holds a large portion of the

cable independently; most other Indian and global telecom companies hold a small

share in a large 20-member consortium. In an otherwise commoditized market, TGN

gives TCOM strong pricing and cost benefits.

18 January 2017

6

Tata Communications

Exhibit 3: Global network and data centers

Source: Company, MOSL

Exhibit 4: Gartner places TCOM in Magic Quadrant

Source: Company, MOSL

Scaling up in Gartner’s Magic Quadrant

Since 2013, TCOM has scaled up from the

Visionaries

quadrant to the

Leaders

quadrant in Gartner’s Magic Quadrant for network service providers (NSPs) in the

Asia-Pacific. Magic Quadrant evaluates NSPs on their network completeness and

ability to execute. NSPs with (a) a full portfolio of voice and data products, (b)

above-average service & support, (c) deep global network coverage, and (d)

competitive pricing are classified as leaders. Our industry channel checks indicate

that TCOM’s classification as a leader in Gartner’s Magic Quadrant has allowed it to

participate in several enterprises’ RFPs (requests for proposals), in turn accelerating

the pace of contract wins from corporates.

18 January 2017

7

Tata Communications

Clientele – focus on premium enterprise segment

TCOM caters to two key segments of customers: 1.) Enterprises, 2.) Carriers (Service

Providers). The enterprises it serves include (a) over 5,000 global and domestic

banks, and (b) corporate clients seeking data connectivity and value-added services.

It also serves 2,000 carriers across the globe, including Bharti Airtel, Idea Cellular,

and over-the-top (OTT) firms like Skype and Vonage that seek global connectivity

from TCOM. TCOM caters to carriers offering an integrated set of services, including

wholesale voice, domestic and international data connectivity, and internet

backbone connectivity (IP transit).

Exhibit 5: Focus on enterprise clients to help expand margins

65%

58%

51%

44%

37%

Service Provider

Enterprises

Source: Company, MOSL

Higher contribution from enterprise clients driving up margins

TCOM offers diverse and customized services to over 5,000 enterprises. Among the

services it offers are (a) Internet Protocol (IP) connectivity services, (b) IT

infrastructure like data centres, (c) managed communication, and (d) collaboration

solutions for businesses seeking voice, data and video connectivity between their

distributed offices, within India or globally.

Margins in the enterprise segment are higher, given the customized offerings and

direct B2C nature of the business. TCOM has been focusing on increasing the

contribution of the enterprise segment – from 46% to 59% over the last five years.

We believe this will continue to grow and remain a key driver of EBITDA margin

expansion over the next five years.

Offering a gamut of services

TCOM’s key USP is that it provides an array of services within the data segment. A

chief information officer (CIO) looks at TCOM not just as a data network or a data

center provider, but as a complete connectivity provider, with multi-point lease

switching (MPLS), virtual private network (VPN), ethernet, tele-presence, audio-web

conferencing, specialized sector-specific (examples: Media and Banking) services,

and a bouquet of 20 services that improve connectivity and enhance data

experience. TCOM has over 15 terabits of international bandwidth capacity,

utilization of which is at just 20%. It has upgraded its global submarine cable

capacity by increasing speed from 40 GB/sec to 100 GB/sec across Tata Global

Network (TGN)-Pacific and Intra-Asia submarine fiber networks to meet increased

bandwidth demand.

18 January 2017

8

Tata Communications

Innovative product portfolio to drive growth

To strengthen its position, TCOM has leveraged its wide network, offering

customized, industry-specific services to Media & Entertainment and Banking &

Financial Services. It offers live broadcasting and video downloads to the Media &

Entertainment industry in multiple geographies with the lowest lag. Similarly, its

dedicated connectivity with financial exchanges allows Banking & Financial Services

companies to transact swiftly. The niches it has created enable it to command

premium pricing.

Under its unified communication and collaboration (UCC) services, TCOM provides

enterprise calling services (VOIP), conferencing services (voice, data, web, video),

and hosted contact center services. The recent strong demand for mobility makes

UCC critical to large businesses that operate across multiple geographies and time

zones. In July 2013, TCOM launched its

Jamvee

application, a device-and-access-

agnostic video service that customers pay for on a per minute basis. This drives

growth in video usage and IP traffic, increasing overall network usage.

Innovative offerings to the Media & Entertainment and Banking sectors and UCC

services are the key drivers of the traditional and growth segments. Low

competition and premium pricing in these segments allow TCOM to garner higher

margins. Further, corporate clients seeking these services also consume traditional

data network services, allowing the company to generate higher revenue.

Growth and Transformation segments the key growth drivers

Over FY16-19, we expect the Growth and Transformation segments to witness a

CAGR of 20% each, led by innovative/customised solutions and higher client wins.

The Traditional segment should grow at 8% on shift of healthy volume growth

towards the emerging markets, partly offset by perennially declining prices. We

examine below the segment-wise growth prospects.

Exhibit 6: Data business mix

8%

5%

-1%

Traditional Services

Growth Services

13%

Transformation Service

Tata Payment Solutions

75%

Intersegment elimination

Source: Company, MOSL

18 January 2017

9

Tata Communications

Exhibit 7: Revenue mix – traditional business (2QFY17)

24%

22%

VPN

IPL

ILL

10%

20%

12%

12%

Source: Company, MOSL

Ethernet

IP-T

Others

8%

12%

52%

5%

6%

Exhibit 8: Revenue mix – growth business (2QFY17)

17%

SIP-T

Hosting

GHCC

V Connect

VS & IPT

Others

Source: Company, MOSL

Exhibit 9: Contribution of high-margin growth/transformation services and payment

solutions rising

Traditional Services

Transformation Service

100%

80%

60%

40%

20%

0%

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

Source: Company, MOSL

Growth Services

Tata Payment Solutions

Exhibit 10: Growth and transformation verticals to drive data business

Revenue split (INR m)

Traditional Segment (a)

as a % of data

Growth Segment (b)

as a % of data

Transformation Business (c)

as a % of data

ATM(d)

as a % of data

Data growth (a + b + c + d) (e)

as a % of core revenues

Voice segment (f)

as a % of core revenues

Core Business (e + f)

FY16

78,338

75%

13,246

13%

8,348

8%

5,664

5%

103,771

56%

80,560

44%

184,331

FY19

CAGR (FY16-19)

99,986

8%

71%

-4%

22,647

20%

16%

3%

14,571

20%

10%

2%

5,202

-3%

4%

-2%

140,312

11%

68%

12%

65,109

-7%

32%

-12%

205,421

4%

Source: Company, MOSL

18 January 2017

10

Tata Communications

a) Traditional business: Stable bread-and-butter segment

The traditional connectivity business, which includes private and public cable

connectivity, is TCOM’s bread-and-butter business. It includes private and public

connectivity, with customized private connectivity offerings to enterprises including

virtual private network (VPN) and ethernet. The same cable connectivity is also

offered to service providers for IP transit and other offerings. TCOM’s wide footprint

– 710,000km of cable connectivity; holding a ring around the globe – gives it a

strong competitive edge. Its independently held cables across continents allow it to

provide low-cost efficient offerings to clients in a highly commoditized market,

where large quantity of holding is through consortiums. The traditional business has

grown at 13% CAGR over FY12-16, with 76% contribution of overall data business.

We expect the traditional network business to grow at about 8% over FY16-19.

Exhibit 11: Traditional services revenue and growth over FY12-16

Traditional services Revenue (INR m)

17.4%

17.6%

11.2%

4.0%

49679

FY12

58332

FY13

68581

FY14

75332

FY15

78338

FY16

7.4%

6.9%

YoY

9.8%

84172

FY17E

89939

FY18E

99986

FY19E

b) Growth business: Scaling up

To drive profitable growth, TCOM has leveraged its deep connectivity to expand its

offerings to the enterprise segment. It offers multiple value-added services over the

core connectivity layer – providing infrastructure and content hosting services,

managed security services, video content delivery systems to specific industries like

media and entertainment, data center through its partner network, IZO, IP calling

connectivity (SIP trunking) to service providers and OTT operators, and a host of

other value-added services. This allows the company to change its earnings model

from invoicing of MBs and GBs to service-led invoicing.

OTT companies like Skype and Vonage use TCOM’s IP transit services to provide

direct calling. While this impacts TCOM’s voice business growth, it contributes to

data network segment growth.

The Growth segment has grown at a CAGR of 44% over FY11-16 to INR13.2b and

contributes ~13% to the data business. Given its low base and huge opportunity, we

expect the Growth segment to grow at 20% over FY16-19, with its contribution to

data business rising to 16%.

18 January 2017

11

Tata Communications

Exhibit 12: Growth services continue to grow at a fast clip

Growth services rev (INR m)

41.4%

40.5%

YoY

20.8%

15.4%

8168

FY14

9425

FY15

13246

FY16

18.3%

21.8%

18.6%

4782

FY12

5777

FY13

15674

FY17E

19093

FY18E

22647

FY19E

c) Transformation business: To see healthy growth

The Transformation business includes managed network operations, outsourcing

and consultancy services to telecom operators around the world. TCOM delivers

operational efficiency, cost transformation and revenue acceleration solutions for all

stages of the carrier process lifecycle through network engineering and design,

implementation, and operations functions. With the traffic mix shifting in favor of

data from voice, telecom companies are focusing on reducing costs and supporting

high demand through efficient network management.

Over the last five years, the Transformation business has been a key growth driver.

It has grown at a CAGR of 55% over FY12-16, and its share in the overall data

revenue pie has increased from 3% to 8%. We expect the segment to lead growth,

with 20% CAGR over FY16-19; its contribution to data revenue should increase to

~10%. Strong funnel of new business wins and increased depth of service offerings

will continue to drive accelerated growth over the next 3-5 years.

Exhibit 13: Transformation services revenue (INR m) and growth trends

Transformation Services revenue (INR m)

94.3%

YoY

51.4%

35.6%

46.8%

22.1%

20.6%

12,284

FY18E

18.6%

14,571

FY19E

1,425

FY12

2,768

FY13

4,192

FY14

5,685

FY15

8,348

FY16

10,189

FY17E

Source: Company, MOSL

d) ATM business: Impacted by demonetization

TCOM’s subsidiary, Tata Communication Payment Solutions is a managed ATM

services provider, with a chain of 20,000-plus third-party brown label ATMs (BLA) as

well as independent white label ATMs (WTA). To expand their ATM networks, banks

outsource ATMs, which offsets capital as well as operational costs, including rent,

telecom, security, network and cash management costs. TCOM operates ~12,000

BLAs. It also has ~8,000 independently held ATMs under the

IndiCash

brand.

Additionally, it holds ~13,000 points of sale, which are known as card swipe

machines.

18 January 2017

12

Tata Communications

TCOM has received contracts from PSU banks like SBI in Tamil Nadu for

INR6.6/transaction. In comparison, banks charge other bank customers about

INR18/transaction for using another bank's ATM. At the upper end of the spectrum,

Electronics Payments and Systems (EPS) has acquired a contract at

INR11.9/transaction for offsite cash transactions in Maharashtra, and AGS Transact

Technology operates at INR12.1/transaction for the Chandigarh, Haryana

and Himachal Pradesh zone. This depends on the frequency of transactions and

attractiveness of the location, which reduces cost per transaction.

Exhibit 14: ATM revenues hurt by demonetization

Tata Payment Solutions (INR m)

5.1%

3.0%

0.8%

411

FY11

FY12

5.8%

5.7%

5.3%

As % of GDS revenue

4.6%

3.8%

3.7%

1,700

3,425

FY13

4,737

FY14

5,157

FY15

5,664

FY16

5,244

FY17E

4,737

FY18E

5,202

FY19E

Source: Company, MOSL

ATM penetration in India is one of the lowest in the world. In FY14, there were only

181 ATMs for every 1m persons in India against 550 in China and 1,300 in the UK. In

aggregate, there are just about 203,000 ATMs in India; we expect this number to

grow significantly.

Exhibit 15: ATMs per 100k adults: India lags other nations…

185

130

59

18

China

India

Singapore

United

Kingdom

Brazil

Russian

Federation

129

200

150

55

100

50

0

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, MOSL

Exhibit 16: …but catching up

China

Singapore

Brazil

India

United Kingdom

Russian Federation

Source: Company, MOSL

To increase the ATM per million persons and expand banking services in rural and

semi-urban areas, in June 2012, the RBI announced the introduction of white-label

ATMs (WLA). These ATMs are owned and operated by non-banking finance

companies and do not display any bank’s logo. TCOM launched a WLA network

under the brand,

Indicash,

and currently owns ~8,000 ATMs.

18 January 2017

13

Tata Communications

Exhibit 17: Managed ATM companies in India

TCom

Prizm Payments

Srei Infra

AGS Transact Technologies

NCR

Financial Software & Systems

FIS

Accura Infotech

MphasiS

Muthoot

Source: Company, MOSL

ATM business adding 2,000 WLAs annually:

TCOM has RBI approval for 20,000-

21,000 ATMs. Currently, it has 8,000 ATMs and plans to add ~2,000 ATMs annually.

To reduce capex and opex, TCOM plans new models like shop-in-shop and alliances

with large retail formats, among others. It also plans to leverage its ATM network for

opportunities such as third-party advertisements, sales, delivery points, bill

payments, data capture, and lead generation. With average capex of about

INR300k/ATM, TCOM may incur annual capex of USD8m-9m towards the addition of

2,000 ATMs per year.

Exhibit 18: TCOM: Payment solutions/ATM business has turned the corner

Revenue (INR m)

101.5%

4737

3425

1700

38.3%

8.9%

-572

FY12

-1226

FY13

-907

FY14

-406

FY15

84

9.8%

FY16

191

-7.4%

FY17E

297

-9.7%

FY18E

430

9.8%

FY19E

5157

EBITDA (INR m)

5664

5244

revenue YoY (%)

4737

5202

Source: Company, MOSL

We expect the segment to deliver revenue CAGR of 10% over FY16-19, maintaining

5% revenue contribution to the data segment. With maturity of the existing ATM

base coupled with strong cost focus and scale efficiency, the management expects

EBITDA margin to expand from the current 6% to ~10% by FY19. Subsequently,

EBITDA contribution should improve from 1% to 10%.

Given the segment’s limited synergy with the overall business, we expect TCOM to

exit this business over time. At the current weak 6% EBITDA margin and annual

capex of USD8m-9m, FY17E FCF of ATM business should be ~INR 20m.

Demonetization to result in near-term headwinds for ATM business:

The currency

demonetization announced by the Indian government has led to sharp liquidity

squeeze in the market, with ATMs running out of cash. TCOM’s brown label ATMs

have seen a sharp fall in cash transactions, whereas its white label ATMs have been

dry for the last two months until December 30, 2016. This is expected to impacted

3QFY17 ATM business revenue by about 29%, leading to negative EBITDA margin of

7.5% against positive EBITDA margin of 6.2% in 2QFY17. However, we expect

recovery in 4QFY17, with improving liquidity and ATM transactions. This should lead

to about 5% EBITDA margin in 4QFY17.

18 January 2017

14

Tata Communications

Capacity not a constraint to continued double-digit growth in data volumes

for the industry; margins expanding despite falling prices

The global IP traffic is expected to grow at 22% over 2015-20, while enterprise traffic

would grow at 18% to reach 32,165PB/month, led by high growth in emerging

markets and increasing adoption of advanced video communications in the

enterprise segment. Capacity is not a key concern – increase in bandwidth from

40gbps to 100gbps/250gbps in high volume routes has released (and is releasing)

huge capacity. Prices have been perennially falling, but without any impact on

margins, due to fixed operating costs. Despite the price decline, the traditional

connectivity business has seen consistent margin expansion.

Benefits from steady data growth in EMs

Growth in worldwide bandwidth usage has been staggering. International

bandwidth usage doubled in just two years, growing from 146tbps in 2013 to

295tbps in 2015. Demand growth has been strong across the globe, with each

region witnessing 40% CAGR over 2011-15. The growth has been fastest on links to

Africa, Asia, and Oceania, where demand as grown at over 50% CAGR over 2011-15.

Exhibit 19: Global data consumption growing sharply

Source: IDC, MOSL

Exhibit 20:

Used international bandwidth growth by region

Source: IDC, MOSL

18 January 2017

15

Tata Communications

Exhibit 21: FY15 business IP traffic by geography (PB/month)

678

1,453

998

4,958

Asia Pacific

North America

Western Europe

Central and Eastern

Europe

Middle East and Africa

Latin America

3,518

Source: Company, MOSL

9,080

Source: Company, MOSL

Exhibit 22: FY20 business IP traffic by geography (PB/month)

1,758

3,135

1,752

11,356

Asia Pacific

North America

Western Europe

Central and Eastern

Europe

Middle East and Africa

Latin America

2,377

5,084

As per Cisco, the global IP traffic will grow 22% over 2015-20, while Business

segment will grow 18% reaching 32,165 PB/month. Increased adoption of advanced

video communications in the enterprise segment will drive steady growth in

business IP traffic.

Exhibit 23: Business IP traffic (PB/month)

Business IP traffic

27,040

16,399

19,227

22,729

32,165

13,982

FY15

FY16

FY17

FY18

FY19

FY20

Source: Company, MOSL

Exhibit 24: Business IP traffic by network type; 2015-2020 (PB/month)

Business Internet traffic

Business managed IP traffic

Business mobile data

23,383

19,704

11,937

14,006

16,570

10,149

3,176

658

FY15

3,409

1,053

FY16

3,617

1,605

FY17

3,834

2,325

FY18

4,063

3,273

FY19

4,298 4,484

FY20

Source: IDC, MOSL

18 January 2017

16

Tata Communications

The exponential growth will be driven by the steep data absorption in EMs. The

market is highly fragmented, with top five firms contributing USD100b in revenue

and a majority of the data traffic in North and South American regions. (Companies

like AT&T and Verizon, with USD50b each in revenue, BT with ~USD15b, Orange at

USD10b, Singtel at USD5b, and Vodafone at USD5b). Among India’s firms, TCOM

(annual revenue: USD1.6b) and Bharti Airtel (annual revenue: USD1.4b) are the top

contenders. TCOM’s contribution to overall global data traffic is insignificant, in our

view. However, its deep network in the emerging markets, in favour of which

international data consumption is shifting, is allowing the company to record

consistently high traffic growth.

Ample capacity, no fresh capex in the market

Submarine cables are the primary channels of inter-continental communication and

supply a significant amount of the capacity that meets global bandwidth demand.

The steep data growth in the past five years has not reduced data capacity

utilization (defined as Lit capacity) on major subsea routes. This is due to technology

advancement, which has enabled transition from 10 Gbps wavelength speeds to 100

Gbps, ensuring that both existing and new cable systems have ample supply for

years to come. For instance, the introduction of higher-capacity transmission

technology has decreased the trans-Atlantic cable’s lit capacity utilization from 25%

to 16% over 2006-13. This is even though the lit capacity nearly tripled during this

period and no new cables entered service.

Exhibit 25: Potential capacity on major submarine cable routes (2005-2015)

Source: Company, MOSL

Content providers driving data volume growth

Unable to meet the high network bandwidth demand of content providers like

Google, Facebook and Microsoft, internet carriers have started shifting to direct

cable operators. As major capacity users, content providers are likely to play a

leading role in global network development. They will participate more as anchor

investors and consortium members in submarine cable systems, driving overall

network growth.

18 January 2017

17

Tata Communications

Exhibit 26: Tata Communications’ current portfolio: Market share v/s industry growth

Source: Company, MOSL

Exhibit 27: New platforms to drive market expansion from USD41b to ~USD57b by FY19E

Source: Company, MOSL

TCOM expanding target market by adding new, unconventional products

Over the last 2-3 years, TCOM has added a series of new product lines like video

support, managed hosting, and cloud-based products focused on specific industries.

This should allow TCOM to expand its addressable market by 50% over the next

three years. This is despite the weakening voice market, which remains its biggest

market. Since most of these segments are unconventional, with limited competition,

TCOM should be able to record healthy growth and garner superior margins.

18 January 2017

18

Tata Communications

Healthy margin accretion potential

Scale benefits offer margin levers across business segments

With inherent operating leverage in the telecom business and scale benefits, we expect

TCOM’s data margins to expand by 470bp over FY16-19 to reach ~26%. The management

has indicated ~30% EBITDA margin by the end of FY19.

1.) The Traditional segment should see 310bp expansion over FY16-19 led by operating

leverage on the back of 8% revenue growth.

2.) The Growth segment is likely to turn profitable, with EBITDA margin expanding from --

-15% in FY16 to 3% in FY19 on scale benefits from higher revenue base.

3.) We expect EBITDA margin for the Transformation segment to remain range bound

over FY16-19 at 16-17%. Though in 2QFY17, EBITDA margin has dropped to 8%, it

should recover to 20% due to front-loading of growth-related costs and visibility of

healthy growth.

Data EBITDA margin to improve 470bp over FY16-19

With inherent operating leverage in the telecom business and scale benefits, we

expect TCOM’s data margins to expand by 470bp over FY16-19 to reach ~26%. The

management has indicated ~30% EBITDA margin by the end of FY19.

Exhibit 28: Segmental EBITDA margin improvement potential

EBITDA Split

Traditional

EBITDA margin (%)

Growth

EBITDA margin (%)

as a % of data

Transformation Business

EBITDA margin (%)

as a % of data

ATM

EBITDA margin (%)

as a % of data

Data

EBITDA margin (%)

as a % of core business

Voice

EBITDA margin (%)

as a % of data

Core business

EBITDA margin (%)

FY16

22,720

29.0

-2,020

-15

-9

1,458

17

7

84

1

0

22,242

21

83

4,963

6

19

26,804

15

FY19

32,670

33

639

3

2

2,319

16

6

430

8

1

36,058

26

90

3,938

6

10

39,996

19

Growth (%)

(FY17-19)

13

4

-168

18

11

17

-2

0

72

7

1

17

4

7

-7

0

-9

14

5

Source: Company, MOSL

Traditional segment – operating leverage driving margin expansion

For the Traditional data segment, EBITDA margin has expanded 300bp over FY13-16

to 27.5%. This is despite the perennial data price deterioration and highly

commoditized nature of the business.

18 January 2017

19

Tata Communications

Despite price decline, EBITDA margin should improve





Being a commoditized business, the Traditional network business sees increased

competition and pricing pressures. However, lower prices may not translate into

lower margins. Given the (a) absence of variable costs, and (b) high operating

leverage in the network business, incremental volumes do not require

additional costs. Until volume growth outpaces price decline, the incremental

revenue should drive higher margins.

TCOM independently holds a large portion of its submarine and terrestrial

network, which gives it the advantage of lower access cost in a commoditized

market. Further, TCOM’s focus on improving enterprise mix by offering

innovative managed services would help it to garner better margins. The

company combines the traditional lease line connectivity services with added

services like VPN, ethernet, or communication services, while catering to

enterprises, thus creating bespoke offerings.

We expect the traditional segment to continue to drive margin improvement on the

back of operating leverage from 8-10% revenue growth. Post the reclassification

since last two quarter, the Traditional business margin stands at 30%. We expect

about 310bp incremental improvement over FY16-19.

Exhibit 29: Favorable leverage to aid Traditional services margins

EBITDA (INR m)

27.5%

25.7%

26.1%

EBITDA margin

30.0%

31.8%

32.4%

33.1%

24.5%

13,638

FY12

14,313

FY13

17,656

FY14

19,645

FY15

24,178

FY16

26,773

FY17E

29,105

FY18E

33,102

FY19E

Source: Company, MOSL

Transformation segment to drive overall margin improvement

Transformation business EBITDA margin hovers at single digit (7.8% in 2QFY17).

However, the segment has previously delivered high-teen EBITDA margin, with a

peak of 28-29%. According to the management, the weak EBITDA margin in 2QFY17

was due to (a) increase in headcount for scaling up the business, (b) front-ending

costs for new deals, and (c) portfolio rejigs to attract higher growth. We believe, the

segment has the potential to deliver about 25% EBITDA margin. Over FY16-19, we

expect EBITDA margin for the Transformation segment to reach 17% and the EBITDA

contribution for the segment to increase to 6% from 2.5% in 2QFY17.

18 January 2017

20

Tata Communications

Exhibit 30: Transformation services margin profile improving

EBITDA (INR m)

29.4%

28.6%

17.5%

9.1%

204

FY12

814

FY13

1,198

FY14

795

FY15

1,458

FY16

923

FY17E

11.2%

15.9%

EBITDA margin

14.3%

14.0%

1,370

FY18E

2,319

FY19E

Source: Company, MOSL

Scale benefits to help turn Growth segment profitable

The Growth segment is currently loss-making, with -15% EBITDA margin in FY16. The

size of the Growth segment – revenue of INR13.2b in FY16 – is one-sixth the size of

the Traditional connectivity business, which is delivering 27.5% EBITDA margin.

Given the fixed cost model, the Growth segment should see steep revival, as it

reaches healthy scale. Over the last five years – FY11-16 – Growth segment revenue

has improved 44%. We expect it to continue to grow at an accelerated pace of 20%

over FY16-19. This should allow it to reach ~3% EBITDA margin in FY19 compared to

-15% in FY16. We believe this segment has the potential to reach 20-25% EBITDA

margin on stable-state basis, which could be over the next five years, given its value-

added proposition, which allows better pricing power.

Exhibit 31: Growth services profitability still in the red; operating leverage on high cost

base to ensure steep revival

EBITDA (INR m)

EBITDA margin

-4.3%

-830

639

2.8%

-9.6%

-458

-1,744

-16.3%

-1,331

-30.2%

-14.3%

-1,346

-15.2%

-12.1%

-2,020

FY14

FY15

FY16

-1,892

FY17E

FY18E

FY19E

FY12

FY13

Source: Company, MOSL

Perennially eroding prices having low bearing on profitability

Data prices vary widely by region due to differences stemming from available

supply, competition, and cost of incremental upgrades. However, bandwidth price

erosion is perennial even as the mix of market participants evolves. Average 10 Gbps

wavelength prices on key global routes have declined at a compounded annual rate

of 25% since 2012; however, it varies considerably by route. The wholesale market is

limited to specialist sellers with the constitution for very high rates of both volume

growth and price decline, or with unique attributes that pose fundamental

differentiation, such as access to emerging markets.

18 January 2017

21

Tata Communications

The key point is that the price decline remains slower than demand growth, keeping

revenue growth in healthy positive territory. In the Enterprise data market, price

decline is a function of increased capacity coming from technology advancement,

which accommodates lower wholesale prices. Thus price declines are ultimately

enabled by excess supply with no impact on costs.

ATM business – focus on profitable growth

The ATM business has turned around, with about 6% EBITDA margin in 2QFY17,

after being loss-making for the last five years. We believe the company’s increased

focus on profitable white label ATM growth, and paring of about 5,400 loss-making

brown label ATMs should support margin improvement. Also, 2QFY17 saw 180bp

margin impact due to one-time operating costs and provisions. We expect the ATM

business to reach about 8% EBITDA margin by FY19. Over the long term, we believe

this business could be divested, given the limited synergies with the company’s

business profile and profit growth potential.

Exhibit 32: ATM business has turned around

EBITDA (INR m)

1.5%

84

EBITDA margin

3.6%

191

6.3%

297

8.3%

-7.9%

-572

-1226

-907

-406

-19.1%

-33.6%

FY12

-35.8%

FY13

430

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

Exhibit 33: Rising product segment mix for non-traditional segments

Traditional Services

Transformation Service

100%

80%

60%

40%

20%

0%

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

Source: Company, MOSL

Growth Services

Tata Payment Solutions

18 January 2017

22

Tata Communications

Fading Voice business – impact minimal

IP calling has shifted voice traffic towards data



The advent of IP calling has significantly shrunk the traditional circuit switch-based

long distance voice market.



TCOM’s voice revenues have declined at a compounded annual rate of 2% over FY14-

16, while EBITDA has declined at 13%. Over FY16-19, we expect revenue and EBITDA

to decline at 7%.



However, being a full service connectivity provider, TCOM has gained from IP-based

calling, led by the OTT and other operators.

VOIP calling services impacting voice traffic

The international long distance (ILD) industry has been plagued by the advent of low

price VOIP calling services, with increased contribution of the total voice traffic

consistently over the last 10 years, as per Telegeography. TCOM’s combined voice

traffic (ILD and NLD) peaked in FY13; over the last three years – FY13-16, TCOM’s

voice traffic has declined at a compounded annual rate of 11% to 43.1b minutes.

However, better pricing has slowed the pace of revenue decline to 2%. TCOM

remains a dominant player, with an estimated 19% global market share of ILD voice

traffic.

Exhibit 34: ILD voice minutes shifting to VOIP

Source: Telegeography, MOSL

The voice business generated revenue of INR80.1b in FY16, contributing 43% to the

core business. With 6% EBITDA margin compared to 21% data EBITDA margin, the

EBITDA contribution is merely 18%; this has further reduced to 15% in 2QFY17. The

impact of voice business has substantially reduced. The weak earnings visibility in

the voice segment is already indicated by the management and factored in the stock

price. We expect voice segment revenue and EBITDA to decline at a compounded

annual rate of 7% over FY16-19; EBITDA contribution would decline to 10%. Further,

with just USD5m-10m maintenance capex, it remains a cash cow business,

generating annual FCF of INR4b.

18 January 2017

23

Tata Communications

Exhibit 35: TCOM gains strongly in ILD over the past five years

Vodafone

Tata

Orange

Telecom Italia

BICS

KDDI

IDT (2)

KPN/Basis

Telefonica

Deutsche Telekom

Airtel

Verizon

SFR (1)

TeliaSonera

WIS

CITIC

0

10

20

30

40

International minutes (b)

50

60

Source: Telegeography, MOSL

Exhibit 36: Perennial price decline in Voice segment

Source: Telegeography, MOSL

However, Voice segment not passé

While the use of OTT services will grow and the number of international carriers will

decline, as per Telegeography, the traditional voice traffic will continue to operate.

Social networking services cannot match the global reach of traditional voice. The

traditional voice service connects more than 8b fixed and mobile subscribers.

No loss of revenue from VOIP

The management concurs that there is some softness in overall traffic volume in

recent years. Though international voice calling is shifting in favor of IP-based calling

by OTT companies, the management clarifies that the shift is gradual. Further,

TCOM offers SIP trunking services to OTT firms which are part of the data segment.

Loss of international voice traffic will be a gain for the data segment, driven by the

increase in data traffic of IP-based calling. Additionally, TCOM also caters to OTT and

VOIP providers like Vonage and Skype. Therefore, it will merely witness a shift of

revenue from one segment to another, rather than loss of revenue.

18 January 2017

24

Tata Communications

Steady FCF generation, improving RoCE

Neotel and Data center sale to support FCF generation







Steady FCF: With the sale of Neotel and data center business, TCOM’s capex should

reduce by nearly 40% to about USD250m. With this and core EBITDA CAGR of 14%

over FY16-19, annual FCF should grow to INR 10b by FY19E from negative FCF in FY16

(cumulative FCF generation should be about ~INR17b over FY18-19).

Healthy return ratios: Low capex and improving profitability should also improve core

RoIC from just 6% in FY16 to 18% in FY19.

Deleveraging at the forefront: TCOM’s FY16 net debt of INR115b should decline to

about INR60b following the sale of the capex-intensive Neotel and data center

businesses. Incremental healthy FCF will further reduce net EBITDA to 1.8x by FY18

from 3.7x in FY16.

Expect core business to grow annual FCF to ~INR 10b (INR17b cumulative

FCF over FY18-19)

We expect core revenue to grow at a CAGR of 3% over FY16-19 (factoring in the sale

of Data Center business), with EBITDA margin expanding 490bp, leading to 14% core

EBITDA CAGR to INR40b. Additionally, after heavy capex and nascent data business

contribution over the past five years, the data business has now reached a sizeable

scale. Data segment EBITDA of INR22.2b (FY16) contributes 82% of core EBITDA and is

expected to reach INR36b, with 90% overall contribution. Peak capex is behind, with

capex guidance of USD200m-250m per year over FY16-19, leading to a healthy INR17b

cumulative FCF by over FY18-19, up from the current core business FCF of INR200m.

Exhibit 37: Data business: Higher EBITDA, flat capex to turn FCF positive

60,000

30,000

0

-30,000

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

EBITDA (LHS)

Capex (LHS)

FCF (RHS)

30,000

15,000

0

-15,000

Exhibit 38: FCFF/EBITDA set to improve

60000

40000

20000

0

-20000

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

FCFF

EBITDA

FCFF/EBITDA

210%

140%

70%

0%

-70%

Source: Company, MOSL

18 January 2017

25

Tata Communications

Cash cow voice business with steady FCF

The Voice segment remains a free cash flow play, with steady EBITDA of INR4.7b in

FY17E and just INR5m-10m of annual capex. Being a commoditized business, the

Voice segment offers low EBITDA margin of 6% and risk of degrowth due to the

impact of OTT firms like Skype, Viber and Vonage. TCOM continues to lead the

market, with 20% share in international voice market. The management prioritizes

margin and cash flow protection over traffic growth. Voice EBITDA has declined at a

compounded annual rate of 12% over FY12-16, given the pressure from OTT firms.

We have factored in 7% voice EBITDA decline over FY16-19, led by declining revenue

and EBITDA margin. The key positive is that this is a cash cow business, requiring low

capex. We expect cumulative FCF of INR12b over FY16-19.

Exhibit 39: Voice business a consistent FCF business

9,000

6,000

3,000

0

-3,000

FY11

FY12

FY13

FY14

FY15

FY16

FY17E FY18E FY19E

Source: Company, MOSL

EBITDA (LHS)

Capex (LHS)

FCF (RHS)

10,000

7,500

5,000

2,500

0

Exhibit 40: Data margin improvement to drive core business margin

Voice EBITDA (LHS)

48,000

36,000

24,000

12,000

0

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

Data EBITDA (LHS)

EBITDA margin (RHS)

24

18

12

6

0

Exhibit 41: Core business FCF to improve, driven by operating leverage and flat capex

30,000

20,000

10,000

0

-10,000

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

Voice FCF (LHS)

Data FCF (LHS)

Overall FCF (RHS)

30,000

20,000

10,000

0

-10,000

18 January 2017

26

Tata Communications

Peak capex is behind

After a period of asset expansion and infrastructure build-out completion, TCOM is

now focusing on containing capex and sweating its existing assets. Reduced capex

intensity and improved operating performance should drive core business

deleveraging. With the sale of capex-intensive data center business and Neotel,

there should be ~USD100m capex reduction from earlier capex guidance of

USD300m-350m. TCOM has an annual capex outlay of USD200m-250m for the next

2-3 years, which is well below its previous 2-3 years’ annual average capex of about

USD300m. Of the USD250m capex, USD15m-20m would be for maintenance and the

remaining would be fresh capex towards growth avenues and the ATM business.

Exhibit 42: Annual capex estimates for FY18 and FY19

Particulars

Voice

Data Maintenance capex

Data growth capex

Strategic capex

Others

Total Capex

Capex (USD m)

4

11

150

35

30

229

Source: MOSL Estimate

Capex-to-sales ratio down from 16% to 7% in FY16E

TCOM’s capex-to-sales ratio has fallen from a peak of 16% in FY12 to ~10% in FY16.

This is well below the 18-20% capex-to-sales ratio for Bharti and Idea, as well as

other players in South East Asia. TCOM finished laying submarine cables across the

globe and passed its huge capex phase in FY12.

Exhibit 43: Capex-to-sales to moderate (INR m)

Data Capex (LHS)

636

16

684

10

485

397

241

244

244

10

18,703

FY16

10

8

17,856

FY15

18,988

FY17E

14,896

FY18E

7

14,896

FY19E

Voice Capex (LHS)

Capex as a % of sales (RHS)

9

14,667

FY14

10

19,552

FY12

15,155

FY13

Source: Company, MOSL

The data segment has a capex-to-sales ratio of ~18% (FY16). However, being a

mature business, TCOM’s voice segment has low annual maintenance capex

requirement of just USD5m against an EBITDA of INR5b (FY16). Therefore, its overall

capex-to-sales ratio is just ~10% (FY16).

18 January 2017

27

Tata Communications

Exhibit 44: Capex below annual depreciation

44504

141585

50310

58,527

89,585

FY16 Net Block

(INR m)

Net Sale

Capex

Dep

FY19E Net Block

Source: Company, MOSL

#Annual capex = INR50310/3 = INR16770m

Net sale of INR44,504m includes Tata Docomo’s buy back value of INR10,465m

To put TCOM’s capex outlay in perspective, existing capex is even lower than its

overall depreciation cost. This indicates that the company’s peak capex is behind.

Though depreciation on invested capital is high, there is little capex towards the

same assets, leading to lower net block over FY16-19. The lower gross block (down

INR45b-50b) is also on account of the sale of capital-intensive data center and

Neotel verticals, which has further improved capital efficiency of the business.

Capacity no constraint in the business

TCOM recently upgraded its network speed from 40GB/sec to 100GB/sec, expanding

capacity 5x. This can be done by changing the circuit switch at the point of presence

(PoP). Capacity is not a constraint in this business. TCOM’s current capacity

utilization is sub-30%, leaving significant capacity available for incremental growth.

High FCF generation to improve gearing

With healthy FCF, we expect TCOM to utilize cash to improve its leverage position.

We expect cumulative FCF of INR76.4b over FY16-19, including the sale of Neotel

and data center business, which should be completed in the current fiscal. The

overall amount generated through the sale of both businesses would be INR55b-.

The sale also enables INR6b reduction in annual capex, adding to FCF generation.

The sale of Neotel and data center business would lead to debt reduction of

~INR55b, allowing core net debt to fall from INR115b in FY16 to ~INR71b in FY17

and ~INR60b in FY18. With all the deleveraging funded by internal accruals, TCOM’s

ex-Neotel debt-to-EBITDA should fall to ~1.8x in FY18 from the peak of 6x in FY12.

Return ratios should witness healthy improvement

TCOM’s core business has seen a 240bp EBITDA margin expansion over FY13-16 to

14.6%, driven by data-led profit recovery. Over the next three years – FY16-19, we

expect a steady data EBITDA CAGR of 17%, leading to an overall EBITDA margin

improvement of 490bp over FY16-19. Further, the capex-to-sales ratio has reduced

from the peak of 16% in FY12 to 10% in FY16 and is expected to decline further to

7% in FY19, as the company has passed peak capex and looks to sweat assets. All

these factors should improve core RoIC from just 6% in FY16 to 18% in FY19.

18 January 2017

28

Tata Communications

Exhibit 45: Return ratios to improve following sale of Neotel, data center

(x)

24

16

8

0

5.9

5.2

FY14

5.3

4.6

FY15

5.7

4.9

FY16

7.9

9.1

6.2

FY17E

FY18E

FY19E

ROIC

ROC

17.6

12.8

12.0

Source: Company, MOSL

TCOM’s RoE improvement should be exponential, as its equity has not grown in the

past decade. Inability to raise equity, given government stake in the company, led it

to remain dependent on debt funding. Further, due to losses over the past five

years, the equity base did not grow. The negative equity base in FY16 should turn

positive in FY18. Low base should drive TCOM’s RoE to 86% in FY19.

Exhibit 46: ROE decomposition: Improving asset turns and pat margin drive ROE

RoE

300%

200%

100%

0%

-100%

-200%

FY12

FY13

FY14

FY15

FY16

-146.2%

FY17E

FY18E

FY19E

-24.9%

-30.7%

8.6%

0.2%

PAT margin

Asset Turnover (x)

235.4%

83.6%

-51.0%

200%

150%

100%

50%

0%

-50%

Source: Company, MOSL

Neotel sale yet to be factored in

Neotel, TCOM’s South African subsidiary, has been a loss-making venture, and has

remained a drag on overall profitability. In 2008, TCOM ventured into the South

African market as a wholesale international voice and enterprise data provider, and

continued to make losses until FY13 due to high interest cost. In FY14, it turned

profitable, but net-debt-to-EBITDA ratio remained high at 12.2x.

TCOM recently entered into an agreement with Liquid Telecom-led SPV to sell

Neotel at an EV of ZAR6.55b (USD465m; INR31.8b). This will generate equity value

of INR2.8b for TCOM’s 67% equity holding after paying off debt of INR25.6b, with a

value/share of INR 10.

After factoring in sale of Neotel and data centre, the core business net debt is likely

to fall from INR115b in FY16 to ~INR60b in FY18. Net-debt-to-EBITDA ratio would be

1.8x and RoIC would be 18% in FY18.

18 January 2017

29

Tata Communications

Exhibit 47: Neotel valuation (FY17)

Neotel

Share Capital

Reserves

Debt

Capital Employed

Assets

Neotel deal size

Debt

Equity Value (100%)

Additional liabilities

Tata Comm Stake 67.32%

No of Shares

Equity Value/share (INR)

ZAR

1,767

(2,548)

5,200

4,419

3,403

6,550

5,200

1,350

500

572

USD

125.7

(181.2)

369.8

314.3

242.0

465.9

369.8

96.0

40.7

INR

8,582

(12,374)

25,251

21,459

16,523

31,807

25,251

6,556

2,779

285

9.7

Source: Company, MOSL

Exhibit 48: Neotel sale to improve gearing (x)

Debt to EBITDA

4.0

3.0

2.0

1.0

0.0

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

3.6

3.6

3.5

3.3

3.7

Core Debt to EBITDA

3.4

2.4

2.3

1.8

1.8

1.1

1.1

Data center sale to aid further deleverage and reduce capital intensity

In May, TCOM announced the sale of 74% stake in the Indian and Singapore data

center business at an enterprise value of INR31.3b (INR23.2b for 74% stake). The

data center business has an estimated annual revenue of ~INR6b and EBITDA of

~INR1.6b, valuing the deal at about 19x EV/EBITDA. The deal is like to get executed

by 3QFY17. This should allow TCOM to deleverage its balance sheet and also reduce

capital intensity, with ~USD50m reduction in annual capex.

Exhibit 49: Data center sale to Singtel

Particulars

Data Center (SGD m)

Data Center EV (INR m)

Data revenues (INR m)

EBITDA (INR m)

EBITDA margin

EV/EBITDA (x)

Total value

232

31,300

6,000

1,620

19.3

@ 74% stake sale

23,162

4,440

1,199

27%

14.3

Source: Company, MOSL

Exhibit 50: RoE decomposition

PAT margin

Asset Turnover (x)

Equity Multiplier (x)

RoE

FY12

-5.6%

1.1

5.9

-34.8%

FY13

-4.5%

1.2

9.7

-54.8%

FY14

0.4%

1.4

18.0

9.5%

FY15

0.0%

1.5

41.1

0.7%

FY16

FY17E

0.2%

2.1%

1.5

1.6

-33.0

-137.2

-10.6% -484.4%

FY18E

5.3%

1.6

12.5

108.9%

FY19E

6.9%

1.7

5.3

60.4%

Source: Company, MOSL

18 January 2017

30

Tata Communications

Better placed than the conventional telcos

Competitive pressures, capex intensity lower







We prefer TCOM to BHARTI/IDEA from a medium-term perspective.

Despite operating in a B2B model, TCOM enjoys better competitive position and

margin outlook. We expect TCOM to post healthy cash flows and RoIC of 18% in FY19.

On the other hand, BHARTI/IDEA’s cash flows would be weak and RoIC would remain

below cost of capital.

Healthy future cash flows

Sweating of existing assets along with healthy core EBITDA growth and reduced

capex-to-sales ratio (10%) will keep TCOM’s cash flows healthy (INR20b annual

operating FCF). On the other hand, BHARTI/IDEA should see heavy capex towards

data coverage, leading to weak FCF generation.

Regulatory risk reduces

Regulatory risks are relatively low for TCOM, given its business model, which is

subject to little government intervention. It does not hold any spectrum. On the

contrary, BHARTI and IDEA are exposed to spectrum-related risk as well as cash flow

risk. Additionally, pending legal cases on 3G interconnect roaming agreement and

one-time spectrum costs remain contingent liabilities on their books.

Leverage coming down

TCOM is on its way to reducing the debt on its books (net-debt-to-EBITDA has

shrunk from 6x in FY12 to 3.4x in FY16 and is likely to decline to 1.8x in FY18), led by

sale of capital-intensive business and high FCF. Gross interest cost could decline 50%

to INR3.5b in FY18. On the contrary, IDEA and BHARTI’s balance sheets will bloat,

driven by high spectrum acquisition costs and heavy network-related capex.

Better competitive position

TCOM is agnostic to spectrum-related investments, as it is largely B2B and its deep

submarine network gives it a strong competitive advantage in emerging markets.

The survival and growth of B2C telecom companies, however, depends on spectrum

acquisition and infrastructure investments, more so with intensive competition in

the data space triggered by RJIO’s offerings.

Superior return ratios

TCOM should generate steady core EBITDA CAGR of 14% over FY16-19 (490bp core

EBITDA margin expansion). This would lead to RoIC to 18% in FY19, up from 6% in

FY16. On the contrary, IDEA and BHARTI’s return ratios are below their cost of

capital and in single digits, given high spectrum investment.

Compelling valuations

TCOM’s higher profitability, reduction in net-debt-to-EBITDA from a peak of 3.7x in

FY16 to 1.8x in FY18E, and higher RoCE should allow the core business to garner

better valuations than just 6x (excluding surplus land value) FY19E EV/EBITDA. IDEA

and BHARTI’s lower RoCE, FCF constraints, higher debt/EBITDA do not justify ~6x

FY18E EV/EBITDA.

18 January 2017

31

Tata Communications

Land valued at INR176/share

Recent developments raise hopes of land value monetization

Indecision on capital gains waiver had been holding up land transfer

In 2002, when Tata Group acquired 45% stake in VSNL, the deal excluded the 740-

acre land bank held by VSNL. As part of the transaction, the land was to be

demerged into a separate entity. This would trigger a capital gain tax liability on the

seller. However, TCOM was merely holding the land due to its legacy title with the

erstwhile government-owned VSNL, later renamed TCOM. Due to the indecision

surrounding capital gains waiver to TCOM, the land transfer has not fructified.

Recent developments raise hopes of land value monetization

In 2014, the new government formed a new entity, Hemisphere Properties, in which

it holds 51% stake, with a view to transfer the land parcel. In August 2016, the

government passed bill to allow transfer of land by TCOM without being subject to

capital gains tax. This resolves a key hurdle in the transfer of land.

Value of the land

The land identified for demerger at different locations measures 740 acres and

carries a book value of INR1.63m. Considering minimum government registration

value, the land is valued at INR75.7b. Even after factoring in a 20% capital gains tax

rate and a 20% dividend distribution tax, the land would still be valued at

INR170/share. Over the last 15 years, the land value has been a mere theoretical

calculation, with a potential option value of INR170/share. However, the current

government’s action towards creating a new entity in the first budget after taking

charge and passing the bill that removes the key hurdle in the transfer of land

provides visibility on the potential monetization. In our recent interaction, the DoT

(Department of Telecom) indicated that it is working on the transfer, without

offering specific timelines. We believe there is a high probability of the transfer

getting completed in the current government’s regime.

Of the shareholders, there are three key segments that have rights to the land:

1.) Government:

Its current 26% stake and additional 25% sold to Tata Group in

2002 entitles the government to 51% rights to the land.

2.) Minority shareholders:

The current 25% as well as 20% who sold their stake to

Tata Group in 2002 through the open offer have 45% rights to the land.

3.) Tata Group:

Tata Group’s (Tata Sons and related group entities) initial 45% stake

(25% government and 20% minority shareholders) acquired through the

divestment scheme in 2002 does not give it any rights to the land. However, the

incremental 4% acquired through the market should be entitled to the land

value.

18 January 2017

32

Tata Communications

Exhibit 51: Current TCOM shareholding

Exhibit 52: Surplus Land’s stakeholders

Tcom minority

shareholders

25%

Tata Group

(Promoters)

49%

Tcom

4%

Erstwhile VSNL

minority who

tendered

share to Tata

20%

Government

51%

Tcom Minority

shareholders

25%

Government

26%

Source: MOSL

Source: MOSL

Exhibit 53: Surplus land value (FY17)

Location

Delhi - Greater Kailash

Delhi - Chattarpur

Pune - Dighi

Chennai - Padianallur

Kolkata - Halishahar

Total

Less: Capital Gains Tax (20%)

Realisable land value

Realisable land value per share

Less: Discount (Potential dividend distribution tax-@17.304%)

Value per share (INR)

Land Area

(in acres)

70

58

524

53

35

740

Value/acre

(INR m)

828

180

10

24

22

Land value

(INR m)

57,960

10,440

5,240

1,272

770

75682

15,136

60,546

212

37

176

Source: Company, MOSL

18 January 2017

33

Tata Communications

Exhibit 54: Global Peer Comparison

Company Name

China Mobile Ltd

Axiata Group Bhd

DiGi.Com Bhd

Maxis Bhd

Advanced Info Service

Total Access

Communication

XL Axiata Tbk PT

Indosat Tbk PT

Telekomunikasi

Indonesia Perse

Far EasTone

Telecommunications

Taiwan Mobile Co

Globe Telecom

LG Uplus Corp

SK Telecom Co

M1 Ltd/Singapore

StarHub

Telstra Corp

SmarTone

Telecommunications Ho

NTT DOCOMO

Bharti Airtel

Idea Cellular

Reliance Communications

Level 3 Communications

Tata Communications

Revenue (b)

EBITDA (b)

PAT (b)

PE (x)

EV/EBIDTA (x)

ROE (%)

M Cap

(b) CY16E CY17E CY18E CY16E CY17E CY18E CY16E CY17E CY18E CY16E CY17E CY18E CY16E CY17E CY18E CY16E CY17E CY18E

228.2 103.7 108.5 113.5

9.4

8.5

10.2

13.1

3.0

2.2

2.5

29.9

7.7

11.6

4.4

4.3

15.5

1.4

3.8

46.5

1.6

94.5

18.4

3.6

1.2

21.1

2.8

4.7

1.5

1.9

4.3

2.4

1.6

2.2

8.8

3.1

3.7

2.6

9.6

14.7

0.7

1.7

21.3

2.3

40.4

14.8

5.6

3.1

8.2

3.0

5.0

1.6

1.9

4.5

2.4

1.8

2.4

9.7

3.1

3.9

2.7

9.9

15.1

0.7

1.7

22.3

2.3

41.6

15.8

5.9

3.2

8.4

3.2

5.3

1.6

2.0

4.7

2.4

1.9

2.6

10.5

3.2

4.0

2.8

10.1

15.4

0.7

1.7

22.8

2.3

43.0

17.0

6.2

3.2

8.7

3.3

37.3

1.8

0.7

1.0

1.7

0.8

0.6

1.0

4.5

0.9

1.1

1.0

2.0

3.9

0.2

0.5

8.1

0.3

12.6

5.4

1.7

0.9

2.9

0.5

39.6

1.9

0.7

1.0

1.9

0.8

0.7

1.0

5.0

0.9

1.1

1.0

2.1

4.0

0.2

0.5

8.5

0.3

13.3

5.7

1.8

1.0

3.0

0.6

41.6

2.0

0.7

1.0

2.0

0.8

0.7

1.1

5.5

1.0

1.1

1.1

2.2

4.1

0.2

0.5

8.3

0.3

13.9

6.2

1.9

1.0

3.2

0.7

15.8

0.4

0.4

0.4

0.8

0.1

0.0

0.1

1.5

0.4

0.5

0.3

0.4

1.3

0.1

0.2

3.1

0.1

5.8

0.8

0.1

0.0

0.6

0.1

17.1

0.4

0.4

0.4

0.8

0.1

0.0

0.1

1.7

0.4

0.5

0.3

0.4

1.2

0.1

0.2

3.3

0.1

6.2

0.8

0.0

0.0

0.7

0.1

18.6

0.5

0.4

0.4

0.9

0.1

0.1

0.2

1.9

0.4

0.5

0.3

0.5

1.3

0.1

0.2

3.2

0.1

6.4

1.0

-0.1

0.0

0.8

0.1

14.4

23.5

22.5

24.3

15.3

36.0

-

35.2

19.8

20.7

18.9

15.2

10.9

11.5

12.6

15.1

15.2

15.0

15.1

24.9

63.9

39.9

36.4

53.6

13.3

21.2

22.6

24.6

15.7

38.1

46.4

18.1

17.2

20.0

18.3

15.2

10.3

11.9

13.6

15.8

14.2

14.5

14.0

23.9

-

20.0

31.2

36.3

12.3

19.3

22.6

25.0

14.8

27.0

22.8

12.8

15.6

19.1

17.6

14.5

9.4

11.0

14.8

17.0

14.3

13.9

13.1

19.1

-

14.3

27.4

22.6

4.3

7.4

13.2

12.2

9.1

4.9

5.3

4.3

7.0

9.7

12.5

6.2

3.8

5.0

7.5

8.2

6.9

4.6

7.2

6.1

4.9

6.1

10.6

8.1

4.0

6.9

13.0

12.3

8.4

4.7

5.0

4.0

6.3

9.5

12.1

5.9

3.6

4.9

7.6

8.3

6.6

4.6

6.9

5.8

4.7

5.8

10.3

7.2

3.9

6.6

12.3

7.8

4.5

4.6

3.7

5.8

9.1

11.8

5.6

3.6

4.8

7.8

6.6

4.5

6.6

5.3

4.5

5.7

9.7

11.3

7.0

42.2

65.2

10.6

1.2

7.4

23.7

16.5

26.0

24.4

10.1

9.6

36.5

26.9

18.2

12.4

7.6

1.2

0.7

6.0

11.6

7.9

39.3

63.3

10.6

1.9

11.7

24.0

17.3

26.7

23.9

9.9

9.1

33.0

27.7

18.3

12.6

7.4

-0.9

1.3

7.6

11.7

8.7

38.5

62.5

12.7

4.1

15.1

24.4

17.9

28.0

23.7

10.1

9.3

28.8

26.7

18.2

12.6

9.0

-3.2

0.3

8.2

-3.3

12.7 317.0 314.9 315.8

8.6 183.0 166.0 167.2

6.2 -110.9 143.9

Source: Company, MOSL

18 January 2017

34

Tata Communications

Initiating coverage with a Buy rating

SOTP-based target price of INR778 excluding land value

Three reasons why we believe the stock is poised for further re-rating:





Secular 14% EBITDA growth potential over next three years: The core business EBITDA

(voice and data) is expected to grow at 14% over FY16-19, led by 490bp EBITDA margin

expansion and 3% revenue CAGR.

Increased FCF generation potential, triggering deleveraging







Cumulative FCF generation of INR76.2b on the back of ~INR55b through the

sale of Neotel and data center.

Additional FCF generation of INR17b from internal accruals over FY18-19.

This should lead to reduction in net debt from INR115b to INR45b, with net-

debt-to-EBITDA declining from a peak of 6x in FY12 to 1.1x.



RoIC to reach ~18% by FY19: With steady EBITDA growth and sale of RoCE-detrimental

businesses, we expect RoIC to improve to ~18% by FY19.

We initiate coverage with a

Buy

rating. We value TCOM using SOTP method. We

have assigned 7.1x to TCOM’s FY19E EBITDA of INR40b, yielding an equity value of

INR866/share. This implies 3x EV/EBITDA for the mature voice business EBITDA of

INR4b. This is due to its weak EBITDA outlook on the back of 7% revenue decline

over FY16-19 and low EBITDA margin outlook of 6%. We have assigned the data

business a higher EV/EBITDA of 7.5x due to its steady 17% EBITDA growth over FY16-

19E, led by 10% revenue CAGR and 470bp cumulative EBITDA margin improvement

to 25.7%. The data business’ high valuation is also justified by its healthy FCF

generation (EBITDA minus capex) from INR3.5b in FY16 to INR21.2b in FY19.

The stock currently trades at 6x FY19E EBITDA of INR40b. Higher profitability,

reduction in net-debt-to-EBITDA from a peak of 6x in FY12 to 1.8x by FY18E, and

improved RoIC should allow the core business to garner valuations of over 7x FY19E

EV/EBITDA.

Additionally, the surplus land bank holds an equity value of INR176/share post the

capital gains tax and dividend distribution tax. The overall value works out to be

INR1,042/share, 60% upside from the current value.

18 January 2017

35

Tata Communications

Exhibit 55: Valuation summary

India Business

Particulars

EBITDA (INR m)

multiple (x)

Voice EBITDA (INR m)

multiple (x)

Data EBITDA (INR m)

multiple (x)

Enterprise Value (INR m)

Net Debt (INR m)

Equity value (INR m)

No of shares (m)

Equity value/share (INR)

% Upside (Downside)

Land Bank (INR)

Fair Value (INR)

CMP (INR)

% Upside (Downside)

FY18E

33,731

7.0

4,082

3.0

29,648

7.5

234,610

71,181

163,429

285

573

-9%

176

749

633

18%

FY19E

39,996

7.1

3,938

3.0

36,058

7.5

282,251

60,493

221,758

285

778

23%

176

954

633

51%

Source: Company, MOSL

Exhibit 56: Tata Comm’s evolution over the years

Source: Company, MOSL

18 January 2017

36

Tata Communications

Exhibit 57: Key Metrics

FY10

Revenues Segments

Voice

growth

as a % of core

Data

growth

as a % of core

Core Revenues

growth

Non Core (Neotel)

Total

EBITDA Segments

Voice

margin

growth

as a % of Core EBITDA

Data

margin

growth

as a % of Core EBITDA

Core EBITDA

margin

growth

Non Core (Neotel)

Total

Dep

Voice

Data

Core Dep

Non-Core (Neotel)

Total Dep

EBIT

Voice

Data

Core EBIT

Non-Core

Total EBIT

61,319

0

0

42,054

0

0

103,374

0

6,882

110,256

FY11

65,259

6.4%

57.6%

47,946

14.0%

42.4%

113,205

9.5%

6,115

119,320

4,111

6.3%

0.0%

0.0%

9,973

20.8%

0.0%

0.0%

11,146

9.8%

0

-1,851

9,295

0

0

-10,779

0

-10,779

FY12

68,118

4.4%

54.7%

56,462

17.8%

45.3%

124,580

10.0%

17,381

141,961

5,443

8.0%

32.4%

30.2%

12,608

22.3%

26.4%

69.9%

18,050

14.5%

61.9%

-135

17,915

2,120

13,367

15,487

2,713

18,200

3,323

-760

2,563

-2,849

-286

FY13

85,647

25.7%

55.9%

67,534

19.6%

44.1%

153,181

23.0%

18,948

172,129

7,306

8.5%

34.2%

39.2%

11,343

16.8%

-10.0%

60.8%

18,649

12.2%

3.3%

1,948

20,597

2,046

15,596

17,643

2,628

20,271

5,259

-4,253

1,006

-679

327

FY14

93,024

8.6%

53.3%

81,485

20.7%

46.7%

174,509

13.9%

21,687

196,196

8,292

8.9%

13.5%

35.0%

15,418

18.9%

35.9%

65.0%

23,710

13.6%

27.1%

6,707

30,417

2,186

16,278

18,464

2,450

20,914

6,106

-860

5,246

4,257

9,503

FY15

87,761

-5.7%

49.4%

89,914

10.3%

50.6%

177,675

1.8%

21,416

199,091

6,359

7.2%

-23.3%

26.2%

17,885

19.9%

16.0%

73.8%

24,244

13.6%

2.3%

5,652

29,896

2,027

17,360

19,386

2,224

21,610

4,332

525

4,858

3,428

8,286

FY16

80,560

-8.2%

43.2%

105,971

17.9%

56.8%

186,531

5.0%

19,015

205,546

4,963

6.2%

-22.0%

18.2%

22,242

21.0%

24.4%

81.8%

27,205

14.6%

12.2%

3,514

30,719

1,893

17,965

19,858

2,532

22,390

3,070

4,277

7,347

982

8,329

FY17E

70,614

-12.3%

38.1%

114,499

8.0%

61.9%

185,113

-0.8%

16,070

201,183

4,669

6.6%

-5.9%

15.1%

26,255

22.9%

18.0%

84.9%

30,924

16.7%

13.7%

3,435

34,359

1,687

17,709

19,396

-28

19,368

2,982

8,546

11,528

3,463

14,991

FY18E

68,111

-3.5%

35.1%

126,154

10.2%

64.9%

194,265

4.9%

0

194,265

4,120

6.0%

-11.8%

11.8%

30,923

24.5%

17.8%

88.2%

35,043

18.0%

13.3%

0

35,043

1,601

17,487

19,088

0

19,088

FY19E

65,702

-3.5%

31.3%

144,527

14.6%

68.7%

210,229

8.2%

0

210,229

3,974

6.0%

-3.5%

9.3%

38,917

26.9%

25.8%

90.7%

42,891

20.4%

22.4%

0

42,891

1,570

18,502

20,072

0

20,072

2,519

2,404

13,436

20,415

15,955

22,819

0

0

15,955

22,819

Source: Company, MOSL

18 January 2017

37

Tata Communications

Exhibit 58: Key metrics: Core business

FY11

Revenues Segments

Voice

Growth (%)

as a % of core (%)

Data

Growth (%)

as a % of core (%)

Core Revenues

Growth (%)

Non Core (Neotel)

Total

EBITDA Segments

Voice

Margin (%)

Growth (%)

as a % of Core EBITDA

Data

Margin (%)

Growth (%)

as a % of Core EBITDA

Core EBITDA

Margin (%)

Growth (%)

Non Core (Neotel)

Total

Dep

Voice

Data

Core Dep

Non-Core (Neotel)

Total Dep

EBIT

Voice

Data

Core EBIT

Non-Core

Total EBIT

Interest Cost

Core

Non Core (Neotel)

Others

Total Interest Costs

Other Income

Tax

PAT

Core

Non Core

Total PAT

EPS

Core

Non Core

Total EPS

65,259

6.4

57.6

47,946

14.0

42.4

113,205

9.5

6,115

119,320

4,111

6.3

0.0

0.0

9,973

20.8

0.0

0.0

11,146

9.8

0

-1,851

9,295

0

0

-10,779

0

-10,779

FY12

68,118

4.4

54.7

56,462

17.8

45.3

124,580

10.0

17,381

141,961

5,443

8.0

32.4

30.2

12,608

22.3

26.4

69.9

18,050

14.5

61.9

-135

17,915

2,120

13,367

15,487

2,713

18,200

3,323

-760

2,563

-2,849

-286

3,891

1,807

-

5,698

1,861

857

(1,134)

(5,604)

(6,738)

(4.0)

(19.7)

(23.6)

3,876

5,516

(1,049)

8,343

1,448

766

493

(8,439)

(7,946)

1.7

(29.6)

(27.9)

FY13

85,647

25.7

55.9

67,534

19.6

44.1

153,181

23.0

18,948

172,129

7,306

8.5

34.2

39.2

11,343

16.8

-10.0

60.8

18,649

12.2

3.3

1,948

20,597

2,046

15,596

17,643

2,628

20,271

5,259

-4,253

1,006

-679

327

4,370

3,398

173

7,941

2,266

1,926

(2,463)

(3,770)

(6,233)

(8.6)

(13.2)

(21.9)

FY14

93,024

8.6

53.3

81,485

20.7

46.7

174,509

13.9

21,687

196,196

8,292

8.9

13.5

35.0

15,418

18.9

35.9

65.0

23,710

13.6

27.1

6,707

30,417

2,186

16,278

18,464

2,450

20,914

6,106

-860

5,246

4,257

9,503

4,268

3,350

(1)

7,617

1,433

3,429

76

939

1,015

0.3

3.3

3.6

FY15

87,761

-5.7

49.4

89,914

10.3

50.6

177,675

1.8

21,416

199,091

6,359

7.2

-23.3

26.2

17,885

19.9

16.0

73.8

24,244

13.6

2.3

5,652

29,896

2,027

17,360

19,386

2,224

21,610

4,332

525

4,858

3,428

8,286

3,998

2,471

1,039

7,508

4,008

3,720

(942)

957

15

(3.3)

3.4

0.1

FY16

80,560

-8.2

43.2

105,971

17.9

56.8

186,531

5.0

19,015

205,546

4,963

6.2

-22.0

18.2

22,242

21.0

24.4

81.8

27,205

14.6

12.2

3,514

30,719

1,893

17,965

19,858

2,532

22,390

3,070

4,277

7,347

982

8,329

4,082

3,027

-

7,109

2,958

2,400

2,071

(1,817)

1,778

7.3

(6.4)

6.2

FY17E

70,296

-12.7

38.2

113,616

7.2

61.8

183,912

-1.4

16,070

199,982

4,648

6.6

-6.3

15.3

25,778

22.7

15.9

84.7

30,426

16.5

11.8

3,435

33,861

1,679

17,717

19,396

-28

19,368

2,969

8,062

11,030

3,463

14,494

3,680

3,183

57

6,920

2,765

2,784

5,170

281

7,554

18.1

1.0

26.5

FY18E

67,494

-4.0

35.2

124,250

9.4

64.8

191,744

4.3

0

191,744

4,082

6.0

-12.2

12.1

29,648

23.9

15.0

87.9

33,731

17.6

10.9

0

33,731

1,586

17,502

19,088

0

19,088

2,496

12,147

14,643

0

14,643

3,382

-

-

3,382

3,848

4,986

10,123

-

10,123

35.5

-

35.5

FY19E

65,109

-3.5

31.7

140,312

12.9

68.3

205,421

7.1

0

205,421

3,938

6.0

-3.5

9.8

36,058

25.7

21.6

90.2

39,996

19.5

18.6

0

39,996

1,555

18,517

20,072

0

20,072

2,383

17,542

19,924

0

19,924

3,178

-

-

3,178

4,878

7,461

14,163

-

14,163

49.7

-

49.7

Source: Company, MOSL

18 January 2017

38

Tata Communications

Exhibit 59: Key Metrics: Segment wise mix

FY11

Client wise Revenue mix

Service Provider (%)

Enterprises (%)

Cash Flows

OCF

Capex

FCF

Capex

Core

Voice

as a % of sales

Data

as a % of sales

Core Capex

as a % of sales

Noeotel

Leverage

Gross Debt

Core Net Debt

Debt to EBITDA

Core Debt to EBITDA

Return ratios

ROE

Core ROE

ROC

Core ROCE

ROIC

41

59

12,064

(17,017)

(5,754)

FY12

51

49

17,525

(21,792)

(4,267)

FY13

51

49

24,547

(15,416)

9,131

FY14

47

53

30,616

(17,872)

12,744

FY15

43

57

30,283

(17,713)

12,570

FY16

42

58

23,713

(20,287)

3,426

33,566

24,475

58,041

25,374

(15,140)

10,234

28,920

(15,140)

13,780

FY17E

FY18E

FY19E

(1,043)

1.6

(14,174)

29.6

(15,217)

13.4

(5,573)

76,523

76,523

6.25

6.25

(636)

0.9

(19,552)

34.6

(20,188)

16.2

(2,464)

107,757

107,757

6.01

6.01

(27.0)

(27.0)

(0.2)

(0.2)

(0.2)

(684)

0.8

(15,155)

22.4

(15,839)

10.3

(2,719)

108,707

108,707

5.28

5.28

(33.5)

(33.5)

0.2

0.2

0.2

(485)

0.5

(14,667)

18.0

(15,152)

8.7

(2,959)

110,205

110,205

3.62

3.62

9.1

9.1

5.2

5.2

5.9

(397)

0.5

(17,856)

19.9

(18,253)

10.3

(3,159)

105,661

79,324

3.53

3.27

0.2

0.2

4.6

4.6

5.3

(241)

0.3

(18,703)

17.6

(18,944)

10.2

(2,904)

115,341

92,220

3.72

3.39

(59.7)

(12.8)

4.9

4.5

5.7

(244)

0.3

(18,988)

16.7

(19,232)

10.5

(1,635)

71,243

71,243

2.37

2.34

(142.9)

(28.3)

6.2

7.2

7.9

(244)

0.4

(14,896)

12.0

(15,140)

7.9

-

60,556

60,556

1.80

1.80

235.1

(87.9)

9.1

10.2

12.8

(244)

0.4

(14,896)

10.6

(15,140)

7.4

-

45,091

45,091

1.13

1.13

86.1

2,331.2

12.0

13.4

17.6

Source: Company, MOSL

18 January 2017

39

Tata Communications

Financials and Valuations

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

Network Cost

Staff Cost

Operating & Other Expense

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Minority Interest

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY12

141,961

19.0

78,936

21,199

23,910

124,046

87.4

17,915

12.6

18,200

-286

8,343

1,448

-7,180

0

-7,180

660

-9.2

107

-7,947

-7,947

2.3

-5.6

FY13

172,130

21.3

97,806

24,115

29,612

151,532

88.0

20,597

12.0

20,271

327

7,941

2,266

-5,349

1,042

-4,307

2,202

-51.1

-276

-6,233

-7,808

-1.7

-4.5

FY14

196,196

14.0

107,457

24,976

33,346

165,779

84.5

30,416

15.5

20,914

9,502

7,617

1,433

3,318

1,126

4,444

3,433

77.2

-3

1,014

758

-109.7

0.4

FY15

199,090

1.5

105,543

27,948

35,702

169,193

85.0

29,897

15.0

21,611

8,286

7,508

4,008

4,786

-1,052

3,734

3,705

99.2

17

13

21

-97.2

0.0

FY16

205,539

3.2

103,934

31,077

39,551

174,562

84.9

30,978

15.1

22,166

8,812

7,191

2,958

4,578

-1,928

2,650

2,386

90.0

14

250

443

1,986.6

0.2

FY17E

186,122

-9.4

93,932

28,167

33,999

156,097

83.9

30,024

16.1

19,368

10,657

6,228

2,765

7,194

-920

6,274

2,783

44.4

14

3,476

3,988

801.0

2.1

FY18E

191,744

3.0

95,683

24,613

37,717

158,013

82.4

33,731

17.6

19,088

14,643

3,382

3,848

15,109

0

15,109

4,986

33.0

14

10,109

10,109

153.5

5.3

(INR Million)

FY19E

205,421

7.1

97,370

24,624

43,431

165,425

80.5

39,996

19.5

20,072

19,924

3,178

4,878

21,624

0

21,624

7,461

34.5

14

14,149

14,149

40.0

6.9

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Minority Interest

Total Loans

Deferred Tax Liabilities

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Goodwill on Consolidation

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Appl. of Funds

FY12

2,850

19,973

22,823

92

110,818

453

134,186

224,256

89,987

134,269

7,769

11,489

7,527

62,340

224

25,668

3,061

33,387

89,209

38,409

46,971

3,829

-26,869

134,186

FY13

2,850

11,399

14,249

79

123,624

176

138,128

249,475

111,090

138,385

8,729

7,707

13,216

69,215

272

32,119

9,233

27,592

99,124

43,644

51,506

3,974

-29,909

138,128

FY14

2,850

5,145

7,995

62

136,944

-727

144,274

278,736

135,779

142,957

6,185

6,530

17,582

74,431

506

27,339

16,695

29,891

103,411

40,403

56,324

6,684

-28,980

144,274

FY15

2,850

365

3,215

59

130,757

-2,015

132,015

299,608

156,419

143,190

3,848

6,383

17,675

68,841

264

24,870

16,212

27,495

107,922

36,697

61,538

9,687

-39,081

132,015

FY16

2,850

-7,032

-4,182

69

143,724

-1,543

138,068

319,011

176,704

142,306

2,656

7,998

17,664

80,635

254

30,469

19,789

30,122

113,191

41,090

62,552

9,548

-32,556

138,068

FY17E

2,850

-3,673

-823

69

115,280

-1,543

112,983

294,535

196,072

98,463

2,656

7,998

17,664

99,899

235

33,145

35,444

31,076

113,698

41,814

62,720

9,164

-13,798

112,983

FY18E

2,850

6,436

9,286

69

108,578

-1,543

116,390

309,676

215,160

94,516

2,656

7,998

17,664

108,061

242

36,247

39,428

32,144

114,505

42,026

63,039

9,440

-6,444

116,390

(INR Million)

FY19E

2,850

20,585

23,435

69

101,876

-1,543

123,837

324,816

235,232

89,585

2,656

7,998

17,664

120,728

259

39,396

48,191

32,882

114,794

42,773

62,471

9,551

5,934

123,837

18 January 2017

40