Good evening, everyone, and welcome to the Tata Communications Earnings Conference Call for Q3 FY24. We are joined today by our MD and CEO, Mr. A.S. Lakshminarayanan, our CFO, Mr. Kabir Ahmed Shakir, and our head for IR, Mr. Rajiv Sharma. The results for the quarter ended 31st December 2023 have been announced today afternoon, and the quarterly data pack is available on our website. I trust you would have had the chance to look through the key highlights. We will commence today's call with comments from Lakshmi, who will share his thoughts on the business and long-term outlook, followed by Kabir, who will share his thoughts on the financial progress achieved. At the end of the managers' remarks, you will have an opportunity to get your queries addressed.
Before we get started, I would like to remind everyone that some of the statements made or discussed on the conference call today may be forward-looking in nature and was reviewed in conjunction with the risks and uncertainties we face. A detailed statement and explanation of these risks are included in our annual filings, which you can locate on our website, www.tatacommunications.com. The company does not undertake to update these forward-looking statements publicly. With that, I would like to request Lakshmi to share his views. Over to you, Lakshmi.
Thanks, Chirag. Welcome to all of you for the third quarter FY 2024 earnings call. This being the first call for the year, I want to wish you all a very happy new year. We're very pleased to share that our reported revenues grew by 24.4% year-on-year. Our reported EBITDA is up by 5.3% year-on-year, and 11.7% Q-on-Q. Our adjusted PAT, excluding the exceptionals, was up 13.9% Q-on-Q. Further, we're very happy to report that our quarterly revenue crosses the INR 5,000 crore mark, and our data revenues crossed the INR 4,000 crore mark, coming in at INR 4,618 crore, and was up 15.6% Q-on-Q and 28.5% year-on-year. Digital services are now 45% of the total data business.
This is in line with our aspiration to get it to 50%, which will position us firmly as a leading CommTech player. This is an important milestone from where we started three years back. Our underlying data revenue growth, at 6.6% year-on-year, was affected by the macro conditions. Our YTD reported revenue growth was at 15.1% on a consolidated basis. Our YTD reported data revenues are up 20.1% and up by 10.2% from an underlying perspective. As part of our financial disclosures, we are reporting both underlying and reported numbers in line with our commitment to the highest standards of financial disclosure and governance. That said, it is important to recognize that Switch and Kaleyra are being run as an integrated business. For example, Switch and our media is led by one business leader.
We've already moved to a structure for Kaleyra, DIGO, and InstaCC, where they are in one customer interaction suite unit and led by one business leader. Customer opportunities will be looked at holistically, as opposed to looking at it from an individual product lens. Coming to profitability, our efforts have enabled us to report 11.7% growth in Q-on-Q EBITDA this quarter, and I'm encouraged to share that we have been able to fast-track the cost synergies of our Kaleyra acquisition. For Switch, the EBITDA losses have narrowed down further, and we hope to accelerate on our path to EBITDA breakeven. This quarter, the EBITDA margins came in at 20.1% versus 20.8% the previous quarter. The drop in margins is primarily due to the change in revenue mix as the revenue share of digital portfolio keeps increasing.
On the subsidiary review, which I talked about last quarter, we are making good progress. We have mutually agreed to exit a large contract in TCTS, which was not profitable, and we will share more on the review as we progress. Now, coming to our segmental performance, our core connectivity business revenues grew by 4.3% year-over-year. To remain relevant and to be the partner of choice for our customers, we continue to enhance our customers' experience by enabling our customers to consume the services digitally. Our digital portfolio revenues stood at INR 2,099 crore, growing strongly at 78.2% year-over-year and 44.1% Q-on-Q, aided by consolidation of the Kaleyra financials. Underlying digital revenues grew by 11.4% year-over-year this quarter. YTD underlying growth is at 18.3%.
From a YTD perspective, except for incubation, all segments have grown mostly above 20%. Next-gen and next-gen connectivity in particular, is up 43.6% YTD, and collab, which was a drag until last financial year, is up 10.2% on a YTD basis. Our underlying collaboration portfolio grew by 4.4% year-on-year and 3.1% Q-on-Q. The growth is on the back of robust traction in our Customer Interaction Suite, which has offset a seasonal decline in the usage-based revenues this quarter. With the joint capabilities of both Kaleyra and DIG, it helps us to position as a formidable player. We remain committed to building an intelligent, contextual, multi-channel communication solution and creating a customer category of CIS to help us scale growth.
We recently enabled Singapore Airlines to transform the airline's communications and collaboration tools to enhance employee productivity and boost user experience. This new transformative initiative, delivered on Tata Communications global reach platform, will help the airline create new benchmarks and customer experiences. Our next-gen connectivity offerings revenue declined by 1% Q-on-Q and up by 37.9% year-on-year. Our new offerings like Managed Wi-Fi, IZO Multi Cloud Connect, Flex SD-WAN and SASE continue to gain traction with enterprises. The case in point is with JLR, where we further strengthened our partnership by deploying our Digital Fabric, comprising of our agile infrastructure, platforms and managed services, that will help integrate JLR systems, workforce, suppliers, stakeholders, and customers across the globe, delivering a seamless flow of data to enrich key aspects of their business ecosystem. Our cloud content security revenues improved by 12.5% year-on-year.
Our IZO Private Cloud, encompassing both infrastructure as a service and platform as a service, grew well above the teens. Our media revenues, including revenues from Switch, were sequentially up by 0.6% Q-on-Q and 110.3% year-on-year. Excluding Switch, media revenues were up 6.5% year-on-year. Combining capabilities of Switch and our MES business, we are very well positioned to capture the incremental opportunities both in global and regional sports video market, and with a key focus on increasing wallet share from the existing customer base. Moving to our incubation portfolio, we witnessed a flat quarter. Muted growth this quarter is on the back of a large customer implementation we delivered in the same period last year internationally. Our new business continues to grow as we strengthen the segments we operate in while exploring newer avenues.
We also continue to stabilize the international opportunities and design wins in the IoT segment to propel this portfolio forward. To summarize, we believe that our Digital Fabric is a powerful concept which enterprises, especially in the international big markets, are beginning to realize. We are confident about the larger opportunity, and with this strong conviction, we will continue to improve and derive value of these organic and inorganic investments, and continuously augment our capabilities. With this, I will request Kabir to share the financial highlights.
Thank you, Lakshmi. Good evening, everyone. Let me take this opportunity to discuss the highlights of our financial performance for the quarter. This has been a historic quarter for us as we surpassed the benchmark of INR 5,000 crore in our consolidated revenues for the first time ever. Our data revenues continued the healthy growth momentum despite the macroeconomic uncertainties amidst a challenging demand environment. Our reported revenue for the quarter stood at INR 5,633 crore, improving by 24.4% year-on-year and 15.6% on a sequential basis. Normalizing for Forex, our consolidated revenues grew by 22.6% year-on-year and 15.1% quarter-on-quarter. Data revenue for the quarter stood at INR 4,618 crore, growing at 28.5% year-on-year and 15.6% on a sequential basis.
The underlying data growth stood at 6.6% year-on-year. Revenue growth for our digital portfolio stood at 78.2% year-on-year and 44.1% quarter-on-quarter, driven by the consolidation of the Kaleyra acquisition. Moving to margins, the reported EBITDA margins for the quarter came in at 20.1%, and the underlying EBITDA margins were at 21.7%. Our core business margins, excluding subsidiaries, were at 23.6%. Our absolute EBITDA stood at INR 1,134 crores, improving by 11.7% quarter-on-quarter and 5.3% year-on-year, aided by a strong focus on driving profitable growth from organic and inorganic investments.
I'm delighted to share that we continue to succeed with our Fit to Grow strategy, with Kaleyra turning EBITDA positive ahead of our expectations in the first quarter of consolidation itself, and Switch too making good progress towards EBITDA breakeven. We believe there is room to drive more value from both organic and inorganic investments we've been making, and we see multiple levers to achieve this. Net debt stood at rupees INR 9,310 crores, and net debt to EBITDA at 2.2x, ROCE for the quarter at 21%. Our increased debt levels and sequential decline in ROCE is driven by Kaleyra acquisition. Cash CapEx for the quarter stood at INR 630 crores, and the ramp-up is attributed to payments coming up from CapEx projects committed in the prior year, as suggested previously.
The free cash flow for the quarter is at INR 77 crore. These financial KPIs are very much in line with our expectations. PAT for the quarter stood at INR 45 crore, driven by a one-off provision of INR 206.6 crore, pertaining to a recent tax court judgment regarding the treatment of license fee being capital in nature and not revenue expenditure for the purpose of computation of taxable income. Though the company is not a party to the appeal judgment, as a matter of prudence, the company has assessed and taken the aforesaid provisions. Moving to subsidiaries, our payment business today has more than 95% of the current quarterly revenues coming from the franchising model.
We have 4,600+ franchisee ATMs and only 128 company-owned ATMs, which with this reversal being achieved in just 24 months, resulting in the business turning EBITDA positive. TCTSL revenues improved by 10.7% year-on-year, due to improving customer engagement and better pricing. We have mutually agreed to exit a large contract in TCTS, which was not profitable, and this will improve the overall business health. Secondly, we have reported revenues from The Campaign Registry, it's the integration hub that allows us to register messaging campaigns as part of our subsidiaries and it is being separately managed as a subsidiary as well. This is a business which is part of our recent Kaleyra acquisition.
Over the last few years, we have focused on changing the texture of the business to significantly improve the customer relevance quotient and drive sustainable and profitable growth. Our final strategy of Fit to Compete and Fit to Grow allowed us with the elbow room to invest in inorganic capabilities to improve, strengthen our Comtech positioning. To sum up, we will continue to invest in building long-term capabilities, which will help us cement our moats and our long-term ability to consistently create value for our shareholders. I will now ask Chirag to open the forum for Q&A.
Thanks, Kabir. Interested participants may kindly raise their hands for the question and answer session. We will wait for a minute for the queue to assemble. The first question is from the line of Sanjesh Jain from ICICI Securities. Sanjesh, you have been requested to unmute. Please unmute yourself and ask the question.
Hello?
Hi, Sanjesh, you're audible. Please go ahead.
Yeah. Okay. Okay. Thank you. Thank you. Hello?
Yeah. Yeah. Hi, Sanjesh, we can hear you. Please go ahead.
Okay. Okay. Thank you. A couple of questions. First of all, congratulations on a successful integration and probably a much better performance from the acquisition. So let me start with that. Can you help us understand what are the synergistic benefits we had, where last quarter Kaleyra was a negative minus 5% EBITDA margin, and this quarter we have achieved a positive PAT, which is a significant improvement in the performance of the Kaleyra. So one, what are the synergy benefits? And number two, what is the underlying growth in Kaleyra for this quarter?
Yeah, let me take the first part, and I'll, you know, come to the growth in a bit. Firstly, let me say integration is complete. We are far from it. We have just started that journey, Sanjesh. So there are three components to any, you know, acquisition. The most important one is integration. We have a project management team in place, and which is tracking various milestones in the integration, so that's on track. Then we have revenue synergies and we have cost synergies. As Lakshmi mentioned, and I, you know, alluded further, the cost synergies we have actually fast-tracked it. We had enough window available for us, even the pre-close itself, to understand what are the levers.
To just say it was an SEC-regulated, NYSE-listed company, so alongside came a lot of costs, you know, with that kind of a regulated structure. So obviously, we were quick to delist within 10 days of the close, sixth of October. We closed sixth of October, we delisted from NYSE. And there were multiple other low-hanging fruits from a cost perspective, which we were quick to, you know, take it out. So I would say that's definitely, you know, one lever which we have fast-tracked, and therefore, we have now seen that the CIS portion, you know, of Kaleyra has, you know, turned, you know, EBITDA positive as a result.
We continue to have the focus, you know, I would say, on the business to drive, you know, the revenue synergies. And of course, you know, it is the synergy of growth, the combined portfolio of DIGO, InstaCC, and Kaleyra, forming part of a new category that we are creating called CIS, which is what is going to drive the entire thing, and we are quite, you know, I would say, energized by that.
So, Sanjesh, and, I mean, let me add. I think, you know, one quarter would be too soon to call a success. I think, the teams are extremely focused. We are very excited about the talent that we have of the combined teams. And as Kabir mentioned, you know, we are going through this with a very disciplined execution, right? So, this whole integration will take time, extracting all the cost synergies, driving all the revenue synergies, getting all the products and platforms together. We will further invest in making the product more intelligent by adding AI and other capabilities. So we have some ways to go, but we are very pleased with the beginning that we have made.
Great. On the revenue growth... Sorry, revenue growth in Kaleyra for this quarter?
Again, only one quarter, Sanjesh. It's too soon to call out any quarterly trends and so on and so forth.
Fair enough. Fair enough. Now, how has been the Switch experience? Because there I can see there is a INR 25 crore reduction quarter-on-quarter on the losses. Last quarter was INR 37 odd crore, and we have brought it down to INR 12 crore. Is it again a combination of cost and revenue, or it is just cost as of now? Because revenue tends to look like a flattish quarter-on-quarter.
Yeah.
Where we had a cricket event also in India, I thought that should have benefited us.
Yeah, I think media overall. Okay, let me add on the Switch, again, we are going through the execution on both the cost and the revenue synergies. And as you pointed out, the losses are narrowing, and we will soon be you know, breaking even that, and thereon moving forward. From a revenue standpoint, there are multiple
... multiple things at play as far as the media business is concerned. And Switch, you know, we have to invest more on the front end, which we will be doing. So there were some one-off revenues, what they call as occasional use revenues in there, and that was a long tail. We are consciously looking at the long tail to see, you know, should we be having the long tail or focused on larger properties and larger contracts, and the business is going through that transformation and aligning to what our media business has been doing. On a year-on-year basis, overall media revenues, you would see, you know, last year we had a World Cup, which gave us a boost, and that's a once in a four year event.
Otherwise, there is nothing particular to call out on the revenue front as far as I'm aware.
Fair enough. Just one last question on the acquisition. We have earlier guided that a double digits in margins in Kaleyra is what we are targeting. With this initial start, do you think that's possible in, say, next 18-24 months?
Yeah, I think we mentioned that, Sanjesh, that we want to be breaking even in the short term, and we said in the medium term, we would want to get to double digits, and that's what we will be doing. So, I think we will execute, and we'll let you know as we progress. But we'll, you know... Again, as I said, one quarter is too soon to call out many things.
Okay.
you know, we did say that that's our direction of travel, and that is what we would be doing.
Sorry, my follow-up question, on the core business or the underlying business. We have seen this quarter a material deceleration in the revenue growth. 11% growth in the digital versus YTD 18%. If I remove this quarter, we were upwards of 20%. What has led to this sudden deceleration in the growth, and how does our order book looks like for remainder of this year and next year?
Yeah. So, again, I will take more of a YTD perspective, in this, Sanjesh. We have been saying that, yes, there is a deceleration in the digital. But that's one is largely attributable to the macro. I think last quarter also, you asked the same question, right, in terms of deceleration? And I think I answered the same thing. The macro conditions are still not very favorable. So if you look at other companies in the same domain, I think they've called out similar kind of slowdown. The positive that I'm gonna look at is, with our expanded portfolio, our levels of participation in larger opportunities continues to increase. Our funnel is therefore healthy.
I'm taking to close, is I, I called out last two quarters, not just last quarter, the last two quarters. I think it continues to be longer than than normal. So I think those are the conditions that we are, we are in. But overall, given the macro conditions, I think our, our growth is still very creditable and we are quite, you know, pleased with what we have delivered. Of course, we can be doing more. As and when the conditions improve, we are definitely positioned to deliver.
So, any more color on the order book? How do you see it growing? Because we were growing at double digit earlier. Are we still doing that? Because we have invested significantly on the foot on the street, particularly on the international market, product expansion. So this is, this should have significantly expanded our reach as well as the valid share. I thought it should help us in the winters right now.
No, it is improving. So our international growth is quite good. I wouldn't say all the regions in the international geographies are firing. I think certainly there are certain markets which are firing very well, and we are seeing a good double digit. You know, one of the markets has delivered, you know, upwards of 20%. One of them is just shade below 20%. But, you know, all regions are yet to fire, but those investments will pay dividends. And as I called out, you know, with our expanded portfolio, our levels of conversation and engagement with customers are definitely improving.
Thanks, Lakshmi. On that one last question, probably on the balance sheet side, before I come back in the queue. The cash conversion appears to be quite weak, Abhi, for last two quarters, and that is driving net debt higher than our acquisition cost. Is there anything change in we are seeing in the cash conversion, along with the decision-making getting slower in the deal? Are we also seeing a delayed payment from the customer side?
Sandesh, I'm acutely aware of that. There is no cause for concern there. We did have, in the past, a lot of tax refunds that the team meticulously went ahead and then collected. So obviously, after a point, that indeed dries up. So there is very little left to skim out, you know, there. So that is one. Working capital, there were indeed challenges in the previous quarter, not this quarter. This quarter is slightly, you know, better, although we could have done-
... a little more than better than what we should have. Our CapEx is going up. You know, if you recall, last year when our approved CapEx was higher, the cash CapEx was actually lower, because of delayed deliveries and better payment terms that we, the subsidiary teams had, you know, had negotiated. So all of that catch-up is happening, you know, in these quarters now, where the cash CapEx is actually higher than the approved CapEx. So, I would say a combination of all of these things, which is why we are seeing the impact on, you know, on the free cash flow.
Kabir, actually, there is a lot of disturbance in the background, and I'm sorry, I couldn't hear anything. But I will take it from Rajiv off the record, but I think there's a problem with the audio system.
I mean, not at this side, Sanjesh. I don't know if anybody else maybe will ask the next you know question and figure out if that is a problem. Sorry about that.
Our teams listening in remotely are saying that they have a good quality, so we'll check anyway. Why don't we pick it up, Sanjesh, with Rajiv separately?
And Kabir-
Yes. Yeah. Thank you. Thank you very much. And, thanks, Lakshmi. Thanks, Kabir, for all the efforts, and best of luck for the coming quarters.
Thank you.
Thanks, Sanjesh. The next question is from Santosh Sinha from Emkay Global. Sanjesh, Santosh, you have been requested to unmute. Please go ahead and ask your question.
So one regarding our trade receivables. So what we have seen is that there has been a marked increase from, in the trade receivable, to INR 2 billion from INR 1.7 billion in last quarter or from one of the customers. So, what is the plan of the company actually to recover this receivable, and what is the way forward for this? And second question is regarding, the slowdown in growth, in terms of, incubation, in particular. So there has been incubation was down 2%, 2% year-on-year basis. So what is the, key reason for that?
Let me take the receivables question first. It is, there's nothing, you know, to worry. It's just a consolidation of Kaleyra. When we actually added the Kaleyra financials to us, we've obviously added all the P&L item and the balance sheet items as well. So the addition of, of Kaleyra, when you add together, sees the absolute increase in receivables. The days, outstanding, which we track as a KPI, is completely under control, Santosh.
Yeah, on the incubation, Santosh, I think I had mentioned, there's one portfolio which got affected because of a large contract that we had last year in the international region in IoT. That project was delivered and that saw a bump up in revenue. So Q-on-Q basis, we are seeing that. But other than that, MOVE, which is a major part of the incubation on a Y-on-Y basis, we are seeing good growth.
Next question is regarding core connectivity. But there also, we have seen some moderation means in this quarter 4.3% year-on-year growth versus 7% last year. And also, it's actually a decline of 0.7% quarter-on-quarter. So what has led to this core connectivity and how we can see this in the long term?
See, core connectivity, we always call out in the long term, you know, it'll be a low single digit to mid-single digits is what we called out. I think last year and a couple of years, there was a lot of investment by the cloud providers, the major cloud providers and other CSPs, which helped to drive the core connectivity. Within our enterprise segment, the core connectivity is still holding up. But yeah, that is what it is. So, and at 4.3 is still, I would say better than what if for the, for the medium term, we had anticipated the core connectivity to grow at.
One last question regarding the margin outlook in the long term. So, since this quarter, the margin is better than what we were expecting. How should we see that in the long term, overall, the margins going forward? Is there a lot of synergy benefit that will come through, or there will be a means, going forward, the synergy benefit will not be as strong as we have seen in this quarter? How should we go look at it in terms of long-term margins?
Look, let me remind, our long-term ambition is to stay in the 23%-25% EBITDA margin range, you know. With the acquisitions that we've done in Switch and in Kaleyra, you know, mathematically, you know, one can do what that impact was. We are slightly, it's just one quarter, we are slightly better than, you know, what it would have been, because we have accelerated some cost synergies. Having said that, you know, our guidance that in the medium term, we will get back to the 23%-25% range, not just the EBITDA margin, I would say ROCE, RTech, net debt. All the financial KPI ranges, you know, will get back to that steady state in the medium term, and we are-
... absolutely on course, you know, to, to get there. So I have nothing further to add than reiterate that the only growth course for us on a steady state long-term basis is the 23-25 range.
Well, thank you. That's, that's my question.
Thanks, Santosh. The next question is from the line of Gautam Rathi, from Chanakya Investments. Gautam, you have been requested to unmute. Please unmute yourself and go ahead and ask your question.
Just wanted to understand a couple of things. You know, firstly, you know, probing again, I know you've answered a lot on the growth, but, you know, Lakshmi, if you just go back last quarter, one of the things you had said was, you know, the slower growth that we saw last quarter was partially because of the slowdown in order booking that we had seen in the H2 of last year. And we had seen much better order booking in the first half. So is it that, you know, some of these orders have been delayed because of the current environment, or how should we read it? Because if my understanding is right, the orders were in the bag, and it should have given us much better growth.
Is it slower execution of those orders, or is it churn, or what caused this slow growth?
I think I mentioned, related to last year, H1, we had a good and H2 had slowed down in the order booking.
Yeah.
Slowing down of the revenues. And subsequently, related to the H2, we were seeing good funnel and conversion, but it was not at the same levels of the H1 last year, Gautam, while it was improving. So I think the conditions are still the same. Our funnel still looks healthy. Our funnel additions and our participation levels are increasing. But I would say the overall order booking, you know, has not grown so much that we can call out special. So, I think the I called out last time, and even this time in my commentary, is that, you know, our participation levels are increasing and improving, and but the decisions are slower.
Sometimes in the funnel, we shelve the opportunities because the customers are taking too long to make a decision, and we are flushing that out of the funnel and starting all over again. But despite that, our funnel looks quite healthy. So I think that only tells me that our relevance to our customers are increasing and our participation is increasing, but the conversion is taking time. Having said that, compared to, you know, the international, we have seen growth, which is a good indication for us. And relative to two years ago, when we saw what our digital portfolio overall was doing, I think last year we did well, and we continue to do well this year. So this is only a reference point compared to what it was two years ago.
But looking at our ambition, our ambition is much greater, and we have to do more, and we want to do more. As and when the macro conditions improve, we will be well positioned to do it.
Lakshmi, the slightly better order booking in H1 versus muted order booking in H2. I'm just trying to understand, are we on a trajectory where... Have we hit the bottom in terms of revenue growth? Or we could see more pain if the environment remains the way we are today, right? I'm just trying to understand more color on how should we think of trajectory. Are we still in uncertain territories, or are we past the worst is behind us in a way?
It's difficult to say, Gautam. I would think, you know, and if you're referring to our Q1 growth narrative this quarter, and that's why I added the YTD growth. If you look at the YTD growth parameters, they are quite decent. So I would read more into the YTD growth and extrapolate as opposed to looking at a Q-on-Q or even a Y-on-Y, because there are some aberrations in last Q3 to this. So those, all those things I would ask you to look at. If I look at the YTD numbers, while the growth is slower, it is still much better than what the market condition—despite the market conditions we're doing. That is very creditable, is what I would say.
And sorry to persist on this, but is it fair to estimate that, you know, going forward, expect YTD to continue to happen on a much more sustainable basis? Because there is a very sharp deceleration that has happened in the three quarters, right? Two out of four growth services have reported negative Q-on-Q this time. And I can understand that this can happen sometimes, but is it the right way to think about it? YTD is the right way, then we can think of it that way going forward?
I would think YTD is a right way to look at it.
Yeah.
- because portfolio of various things, we have number of, you know, things happen.
Fair.
From overall commentary point of view, you know, we are going to be doubling down on our efforts to, you know, for marketing and sales and, and all of that, so.
Okay.
While at the same time being prudent on cost and driving all cost synergies. And even in our organic business, there's a lot of cost synergy activities that we have carried out even this quarter. So we will manage all of that prudently. But on sales and marketing, we'll be doubling down because we see that we are participating in more opportunities. In fact, in international, our presence is so small that we are not participating in all the opportunities that we could be and should be participating. That's because of lack of footprint, so we have to do more.
... Perfect. And Lakshmi, this JLR deal, if you could, you know, give some color that, you know, it - in our mind, it looks like, you know, this is the first digital transformation deal that you've really called out, right? Where you are your new gen network services kind of a win, kind of a deal, where you are, you're doing it at a global scale. So have we won similar deals or are there similar deals in the pipeline which you're looking at? And is our understanding right, that it is one of those large transformational deals where, which could be a big growth driver for us going forward?
Yeah, I think there are multiple, multiple large deals that we have, Gautam. Sometimes those deals are largely... I mean, we, in the course of last year, you know, in one of the major European customers, you know, we have displaced an incumbent. Similarly, in APAC, one of the large banks, we've displaced an incumbent with our IZO Internet. I think the reason why we called out the JLR is, you know, while being a large deal, it encompasses a larger part of our digital infrastructure, because we already do connected vehicles for them. And this will entail all the network underlay, plus the overlay and the security that goes with that. And therefore, we've called out this deal. But there are...
I mean, these are the type of deals that we are going to market with in the international regions.
Perfect. And the Campaign Registry business, which has been a real standout and a surprise for us, is it fair to assume that this is like a steady state revenue which could only grow going forward on a quarterly basis? Or is there any seasonality that we should be aware of?
Well, look, as I explained, this is basically a business which I think Kaleyra has done quite, they're quite proud of, you know, building this business, you know, in the U.S. So currently, it's just a U.S., you know, centric business. There are, of course, you know, they are looking at how they want to, you know, grow. After a point in time, it has all then led to the number of campaigns that are then run, you know, in that country, and their growth is linked to that.
But it's a robust business which validates, you know, and ensures that it reduces spam for both the operators and the users and the campaign, you know, runners as well, so that they bring, you know, sanctity into the entire, you know, network. So they're doing, you know, I would say, pretty well, and we are tracking, you know, them.
Kabir, just, just wanted to understand, this is what we've logged this quarter, it, it is more or less a steady state, number, right? It is not driven by any specific one-offs, or it's not like this Q4 is a, Q3 is a very strong quarter for them and, you know, seasonality and... Just wanted to get some color, because is it fair to assume that 120 into four is more like an annual revenue for them?
Look, again, one quarter, don't, you know, derive anything, you know, out of, out of that. But, yeah, it's... If I were to say, like any other, you know, business, it is driven by usage and the number of campaigns that are run in that particular quarter. So I really do not have the underlying data of what were the historical campaigns that were actually run, you know, you know, in, in this, in that country, and how much share we have and, and therefore. So I would resist from giving a very straight answer to Q4 that you asked, Nishit. So, but because, because the underlying nature of the business is, you know, dependent on the number of campaigns it runs. It has a fixed fee and then a and a variable fee, you know, linked into it.
That's how the pricing model actually works.
Fair. And is it fair to assume that right now it's a U.S.-centric business, but you will try to take this business to multiple countries?
Look, it all has a lot of investment linked to that.
Okay.
So yes, one can go. And it's not that easy to replicate the same business in other, you know, geographies, because mobile network operators, their systems, processes are different, regulation is different. So it's very easy to say, you know, otherwise a lot of people would have already done it by now. Plus, it comes with a huge investment, you know, bill as well. So end of the day, they will stand in line, like many other projects, you know, in front of us, and the resource allocation will be done on, on the ROI that, you know, that particular business case generates. So I'm not going to slam dunk and say, "Yes, we're going to expand to five countries," because that decision has not been taken.
That's very fair. That's very fair, and that's happy to hear that you, you're going to be looking at it that way. That's great. Just two, three more, two more questions. You know, the one-off that was INR 185 crore, is that it? Have we accounted for everything, or is there something more to come in that? I just could not fully understand what exactly it was. So, you know, it just looks like there was some license fee that was asked for, and you paid for the entire thing along with interest, right? Is that fair?
No, that's not what it is. There was a recent Supreme Court judgment of a large telecom operator that came in October. And although it doesn't pertain to us, we have been prudent to actually take, you know, that provision. Basically, in a nutshell, the Supreme Court judgment says that the license fee payable is not revenue in nature for the purpose of computation of taxable income, that it's actually capital in nature and should be amortized over the license period. So what it basically does is it just creates a timing difference. So instead of, you know... And we have done it for the past, you know, 10 years, and prudently taken that provision. So there is no shortfall of tax.
A small, you know, amount of shortfall of tax is because of the difference in the effective tax rate in the previous years that you actually see. But otherwise, it's just the interest component of having, if at all, you know, that comes to us, then that will be the impact. Going forward, until, you know, there's a resolution to this, there will be a true up of the interest, you know, that will happen. So, to that extent, you will, in subsequent quarters, see a true up of the interest.
Okay, perfect. Thank you. And then the last thing is AGR, right? Is there any update on that? Anything that we should be... Is there any chance of that liability coming up anytime soon for payment?
No. If it comes up for payment, then we wouldn't have recorded into contingent liability in our position. Whatever updates are there in AGR, we are reflecting that in our accounts. If you see, in the last four, six quarters, there has been, you know, a lot of activity. There's been, the DOT has looked at our, you know, our numbers. We have represented to them that there were errors on the face of it, and that's the reason why you see numbers going a little down. In fact, this quarter is because the department looked at the obvious errors and revised their show cause notices. We still maintain, you know, our stand that this is not applicable to us. This is sub judice, and therefore, whenever it comes up, we'll take it.
But with the limit of sub judice, what at least we did not want is not have, have wrong numbers, you know, into the, into the, into the show cause notices and demand notices. So that we've been working, you know, I would say, closely with the DOT to ensure that they, they put in the right numbers, you know, and we agree the principles in which they put, so that we know what principles we're going to contest when this comes up in court.
No, that's very fair, Kabir. Thank you so much. Thank you so much for patiently answering all our questions. Thank you so much.
No worries. Thank you, Nishit.
Thanks, Nishit. Thanks, Gautam. The next question is from the line of Daria Naumenko from Ninety One Investments. Daria, you have been requested to unmute yourself. Please go ahead and ask your question. Daria, please go ahead and ask your question. Daria has left the queue. The next question is from Vinit Manek from Karma Capital. Vineet, you have been requested to unmute. Please go ahead and ask your question.
Hello?
Yeah, we can hear you. Please go ahead.
Yeah, yeah. So thank you. Most of my questions have already been answered, but Lakshmi, just one question to you regarding AI. So anything on that development, are we doing? And do you expect any material business coming in for us in the next six to 12 months based on the developments? Because we have been going through a few reports and news articles saying that a lot of activity is happening on the telecom side of the business also. So any material advantages are we seeing, and are we building on such capabilities?
Yeah, we are building on capabilities, Vineet. I think this was part of our strategy three years ago. Starting from training people, so we trained over 1,000 people in the company. We already are seeing AI deployed in some of our processes and products, which we have taken to market. And we also are examining, because this whole AI, especially after the, the ChatGPT, the Gen AI, has become quite popular with enterprises. So we anticipate that, this is going to require, a lot of computing power, and therefore, we will enhance our, our cloud capabilities, the IZO cloud capability that we already have, and enhance it with, AI capability.
You know, we come through. At the moment, the Kaleyra bondholders had a change of control clause. So when the bonds, when the change of control happened, 30 days from that, they could exercise, and they exercised, and the entire $200 million of bond was repaid. We have therefore used our short-term facilities to cover that, and hopefully we will recycle that with a more medium to long-term, you know, instrument. So what you see as of now in this quarter is just that addition and that interest cost as a result of that. Associated, you know, with that as well is the Fed rates that you actually see that have been, you know, that have been increasing.
Even in the last quarter also that, you know, the increase has happened. So therefore, the benchmark rate has gone up. We have a certain portion of our debt which is hedged, but there's a certain portion that is actually open. And that's in line with our interest rate management and hedging policy. So whatever you see is the residual bit, is as a result of that increase in interest cost as well. I can't comment whether that will remain the same or not, because of the refinancing that we will do, hopefully at a lower cost on the $200 million, plus any other, you know, financing requirement that we will have or any other cash flow changes that we will do, which may mean we will, we will, you know, reduce it.
So our ambition, as I said, is to operate under 2x, you know, and hopefully we should get to that metric faster, you know, than the EBITDA and the ROC metric. So therefore, if that comes faster down, then the interest cost also should, you know, reflect that. But these are very, very, you know, dynamic things with a lot of moving parts, so I can't give you a handle on that, on the interest cost per se, but those are the drivers for this current quarter.
Okay. Got it. Thank you for answering my questions.
Thanks, Vineet. The next question is from Arvind Jagti, from Diamond Asia Capital. Arvind, you have been requested to unmute. Please unmute and go ahead and ask your question.
This is more on Kaleyra. Assuming that, you've reported Kaleyra revenues in the collaboration and CPaaS vertical, my calculation suggests that Kaleyra revenues on a YOY basis for this quarter has, sort of declined significantly from what they reported in December 2022 quarter. Is that a fair calculation?
No, it is, it is not the right way of calculating, because what you see is publicly reported, including the Campaign Registry business, which we have carved out and reported as part of our segmental performance. So, so it'll be difficult for you to do an apples and apples comparison that way. Our collaboration portfolio includes CIS, other aspects of DIGO and, and InstaCC as well. So, so let me assure you, it has not declined.
Sure. Thanks. And on the reported basis, in terms of EBITDA margin, since the integration of a fair level of integration has been done, is it fair to assume that on reported basis, the margins will see sequential improvement from here on?
Let me reiterate, I don't, I don't think neither Lakshmi or I said the integration is done. We just started on the integration, and we will keep a laser focus on doing the integration well. I mean, for me, doing that well is more important, and then doing on time and maybe ahead of time is the next, you know, thing that we'll look at. What we have highlighted in this particular quarter is one aspect of the integration, which is the cost synergies that have been fast-tracked, right? And therefore, we have a line of sight and a trajectory on the EBITDA improvement, which we have said that in the near to short term, we will do break even. It has happened this, the first quarter itself, so we are happy about that.
But in the medium term is when we will actually get it to the double digit, you know, EBITDA margin profile, and we will, you know, we will stay focused on that. And the reason why I'm reiterating that is there are investments that need to be made as we do the integration in the product organization, in the infrastructure, and the platforms that the combined portfolio needs. We don't want to rob them off and not, you know, achieve the revenue potential and, you know, and the capability that the entire CIS platform has got, if we myopically get driven only by, you know, the EBITDA and profitability. Not to say that there is no focus there, but, clearly we need to balance both of them together.
Thanks, Arvind. The next question from Vibhor Singhal from Nuvama. Vibhor, you have your question. Unmute. Please go ahead and ask your question.
Yeah. Yeah, I,
Please go ahead.
Yeah. Hi, thanks for taking my questions. Couple of questions from my side. So, one question is for Lakshmi. Lakshmi, many of the IT services vendors that have reported results this quarter, they have talked about some green shoots appearing in the overall U.S. macro. Your sister concern mentioned about BFSI watering out. A larger corporate mentioned about green shoots in discretionary spending. Now, I know there is a huge, I mean, difference between the client of clients and the work that we do. But when you mentioned that we had the growth in this quarter and the overall macro environment had been tepid, do you...
Are we also seeing some kind of conversations with the clients which are kind of hinting towards maybe things improving, maybe if not in terms of the timeline, but directionally, things improving for those tech spends going into 2024?
Yeah, Vibhor, I think I would definitely say overall, as all macro parameters have shown, the U.S. market is definitely at an improved condition. From our customer and our perspective, we are seeing funnels developing there. And as I said, you know, in our case, it's very different, right? In different markets, we have to invest and increase our footprints. In the U.S., we have to do more, and which is what we will be doing. But overall, the commentary that you heard is accurate. And I would not want to, you know, pick out, because our international presence in many markets are fairly small, and anything is a big upside for us.
So truly speaking, other than the slowness in decision, the macro shouldn't be affecting us too much.
Right. So apart from the delayed decision-making part, which continues to be at this point of time, maybe same as, as it was a quarter ago-
Yeah.
Other than that, the weak macro shouldn't be too much of a problem for us?
No, it shouldn't be.
Got it. Got it. Just one last question for Kabir. Kabir, I think you just mentioned about the interest expense going up because of the short-term loans that we had taken for the acquisitions. So, I think it's clearly visible in the numbers as well. So, I mean, at this point of time, I mean, the average cost of debt, if we say as a report, is around 6.5%, 6.3%. What is the target that you're looking at in terms of refinancing? Where do we eventually want this average cost of debt to hover around on a sustainable business model?
... If you actually look at, we have a debt equity, you know, structure that is, that is defined for us, an optimal WACC. That's the reason why we talked about debt to EBITDA, you know, being under 2x. You know, so that's the optimal WACC, you know, level that which I would like to operate under. And, and I'm going to, you know, answer the question by giving you the contours, you know, of, of our approach rather than pointing that, because, the context and the numbers and, and this might change, and therefore the number might change. That's the reason why it's important that we marry to the principle, right? So we are, we are committed to an optimal WACC.
I'm also, you know, want to stay committed to a, to an investment grade, you know, kind of rating. So therefore, our, coverage and, and service ratios, you know, need to fall within that, that ambit, as well. And we have a hedging policy which looks at giving a certainty to near-term PNL, and therefore hedging a, you know, a large portion of that. So currently about, I would say 60% of our, of our, current loan books is, you know, is, is hedged. And finally, in terms of refinancing that you actually mentioned, when we did the NCD issuance back in August, although our requirement was in U.S. dollars, we did borrow because there was an arbitrage that was available in the Indian markets.
So we borrowed in Indian market and did a cross-currency swap. And the landed cost of that was much cheaper than doing it, you know, directly in US dollars. So the treasury team constantly scans the market and is in constant conversations with our banking partners, to look at the right opportunities, where we will actually do that. So that's the reason why when we did not have certainty whether the Kaleyra bondholders were indeed tender all their bonds, so we just established a line of credit, in early December when the bonds came up for repayment. And now we will examine what is the right structure, right market, right currency, you know, for us to be able to do, the medium- to long-term funding to replace this short-term.
In line with our treasury policies that is, which I just, you know, explained about. So those are the contours with which we will operate, not just this, but I would say there are several other BAU that we have in terms of funding BAU CapEx, monetization, you know, activities that we do, organic cash flow generated by the business, and, you know, everything put together. So that's the whole cash projection and cash analysis with which we review this. Almost, I would say, well, hedging set is reviewed on a weekly basis with the dynamic market, you know, situation that we have. But all of the other things are reviewed almost on a monthly basis.
Got it. Got it. Thanks a lot for that very comprehensive answer. Just one small, bookkeeping thing. I'm sorry if I missed that. I think you mentioned that. Has all the debt related to the Kaleyra acquisition is in our books already, or there is some still, pending, amount that might come in the next couple of... next quarter or so?
No. The entire thing is in our books, so the full balance sheet has been consolidated-
Okay.
Rebalanced sheet has been taken, so the full thing is already reflected in our results.
Got it. Got it. Thank you so much. Thanks, thanks for taking my questions, and wish you all the best.
Thank you, Vibhor.
Thanks, Vibhor. In the interest of time, we will have one more question as the last question from Sanjesh. Sanjesh, you have the question on mute. Please go ahead and ask your question. We limit this to one question, please.
Yeah, thanks. Thanks, thanks for taking my question again. One, on the employee side, I wanted to understand, you did allude, Lakshmi, in your initial comment, that you want to repurpose the employees from both Switch as well as the Kaleyra to cross-sell the Tata Communications product.
Yeah.
So, is that agreed by the employees? And what are the areas of focus for us through those employees to target in the U.S. market? What are the key areas of focus that will drive that? And will they work along with the foot on the sales we have increased? How will that organization structure work?
It's probably too soon to announce externally the new structure that will be put in place, Sanjesh, but as I mentioned in my commentary, they are all working under one business leader, right? So Switch, for example, the sales teams are completely integrated. They take the offerings in a joint way. Both the teams are working together to bring the power of both companies. Similarly, in Kaleyra, we are looking at the sales teams to operate as one, as opposed to two different teams. And, you know, as we speak, the training for the teams have started on the various offerings within the CIS portfolio. For example, InstaCC is a portfolio that Kaleyra does not have, so the sales teams are being trained on that.
And that, that's what they will take to market. Whether the Kaleyra teams will take the overall Tata Comm offerings, you know, they are not capable of doing that, but they will work in an integrated fashion with our regional teams to look at, you know, what are the common accounts, which are the accounts where Tata Comm is present and they are not, and vice versa, right? Which is what we called out as sales synergies, which we will start looking at, and that activity has already started.
... So we will have both vertical and horizontal structure, because this appears to be more vertical, while I thought we were moving out of vertical to a more horizontal solution, let's say, kind of an organization structure. There is a change in that, right?
No, no, not really. So even within the Tata Comm portfolio, where if you look at, you know, we had what we call as, the product sales specialists. So if you look at InstaCC and DIGO, in the markets where we were operating, both in India and APAC, for example, we had a sales specialist team who will focus only on InstaCC and DIGO, for instance, right? They will work hand in hand with the account teams and the regional teams, because they are the specialists in that portfolio. Now, the account teams are charged with understanding the customer context, and they will position the overall Digital Fabric, you know, whether it's the network, whether it's security, whether all the portfolio that we have.
But once the opportunities are qualified, the sales specialists will go in to support the account teams to take the opportunities forward and close it. So, you know, in terms of Kaleyra, so Kaleyra would be the sales specialist for the CIS portfolio. So it's not any different from the philosophy that we've been operating in.
So that two-layer structure will continue, and that's what we are implementing-
Yes.
for the new coming companies as well?
Yes, yes. Yeah.
This also means that in upcoming year, our employee inflation will be lower than what we had historically, right? Because we are getting a very talented foot on street through these two acquisitions. Will that be a fair assumption?
No, why do you... See, I think each of the, you know, if you look at Kaleyra's existing business, that has to grow. So they come with that talent to sell that portfolio of CIS, right? So they will support. Whereas, the sales team, which covers a larger set of accounts and hunting for new logos, we need to continue to continue to invest as we grow. So I don't think this would, this would make up for the future growth, if you will. Yeah.
Fair enough. Fair enough. Thanks. Thanks, Lakshmi, for answering all those questions, and again, best wishes for the coming quarters.
Thank you.
Thanks, Sanjesh. I'll now request Lakshmi to share his closing comments.
I think we've answered a lot of questions here. No, I think my top of mind is, you know, we've crossing the INR 5,000 crore mark and crossing the INR 4,000 crore mark on the data business is truly a milestone that we are all very proud of. I think we are very proud of the activities of integration that is going on, and we will execute all of this in a very disciplined manner to deliver on our ambitions of doubling our revenues and achieving all the other financial KPIs. I think this sets up us very well. Thank you.
Thank you, Lakshmi. This brings us to the end of the investor call. In case of any queries, please write to investorrelations@tatacommunications.com. The recording will be available on our website in the next 24 hours. You may please disconnect now. Thank you.