Tata Communications Ltd:Annual Report 2023-24 Analysis

Tata Communications Ltd.: A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History #

Tata Communications (formerly VSNL – Videsh Sanchar Nigam Limited) was incorporated in 1986 and commenced operations as a government-owned telecommunications company. It was privatized in 2002, with the Tata Group acquiring a controlling stake.

Headquarters Location and Global Presence #

The company’s headquarters are located in Mumbai, India. Tata Communications boasts a significant global presence, with offices and infrastructure spanning across several countries in Asia, Europe, Africa, and North America. It operates one of the world’s largest wholly-owned subsea fibre networks.

Company Vision and Mission #

While specific officially stated vision and mission statements can fluctuate, Tata Communications generally focuses on:

• Vision: To be a leading global digital ecosystem enabler.
• Mission: To empower businesses with innovative and agile solutions, enabling seamless connectivity and digital transformation.

Key Milestones in Their Growth Journey #

• 1986: Incorporation as VSNL, a government-owned entity.
• 2002: Privatization and acquisition by the Tata Group.
• 2004: Acquisition of Teleglobe International Holdings, significantly expanding its global network.
• 2008: Rebranding as Tata Communications.
• Continued expansion of its global network and development of enterprise solutions.
• Focus on digital transformation, cloud, security, and IoT solutions in recent years.

Stock Exchange Listing Details and Market Capitalization #

Tata Communications is listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India. As of October 26, 2023, its market capitalization is approximately ₹44,586 crore.

Recent Financial Performance Highlights #

In Q2 FY24, Tata Communications reported:

• Consolidated Revenue of INR 46,870 million.
• EBITDA of INR 11,221 million.
• CAPEX was INR 11,385 million.
• Cash & Equivalents were INR 68,073 million.

Management Team and Leadership Structure #

• N. Chandrasekaran: Chairman of the Board
• A.S Lakshminarayanan: Managing Director and CEO

Notable Awards or Recognitions #

Tata Communications has received awards and recognitions in areas such as:

• Digital Transformation
• Network Performance
• Customer Service

Their Products #

Complete Product Portfolio with Categories #

Tata Communications offers a comprehensive suite of services, broadly categorized as:

• Connectivity Solutions: Leased lines, MPLS, Ethernet services, DIA.
• Digital Platforms and Services: Cloud enablement, IoT, security services, unified communications, collaboration tools.
• Media and Entertainment Services: Contribution, distribution, and remote production solutions.

Flagship or Signature Product Lines #

• IZO Cloud Enablement Platform: A hybrid cloud enablement platform designed to help enterprises manage their cloud infrastructure.
• Global Ethernet Services: High-bandwidth, low-latency connectivity for businesses.

Key Technological Innovations or Patents #

• Patents related to network optimization, security protocols, and cloud-based service delivery.

Quality Certifications and Standards #

• ISO 9001: Quality Management System
• ISO 27001: Information Security Management System

Any Unique Selling Propositions or Technological Advantages #

• Extensive Global Network: One of the largest wholly-owned subsea fibre networks.
• Comprehensive Service Portfolio: A wide range of services to meet diverse enterprise needs.
• Focus on Digital Transformation: Solutions designed to enable businesses to transform and thrive in the digital age.

Recent Product Launches or R&D Initiatives #

• Focus on 5G-enabled solutions and services
• Development of new cloud-based security offerings
• Expansion of IoT platform capabilities

Primary Customers #

Target Industries and Sectors #

Tata Communications serves a wide range of industries, including:

• Financial Services
• Manufacturing
• Healthcare
• Media and Entertainment
• IT and Technology
• Retail

Geographic Markets (Domestic vs. International) #

While having a strong presence in India, Tata Communications focuses significantly on the international market. A large portion of its revenue is generated from global operations.

Major Client Segments (agricultural, industrial, residential, etc.) #

• Enterprises: Large and medium-sized businesses across various sectors.
• Service Providers: Other telecommunications companies and network operators.

Major Competitors #

Direct Competitors in India and Globally #

• Global: BT, Verizon, Lumen Technologies, Orange Business Services.
• India: Bharti Airtel, Reliance Jio.

Competitive Advantages and Disadvantages #

• Advantages: Extensive global network, comprehensive service portfolio, strong brand reputation, strong financial backing from the Tata Group.
• Disadvantages: Face strong competition from larger global players, potential pricing pressures in certain markets.

How They Differentiate From Competitors #

• Focus on emerging technologies like 5G, cloud, and IoT.
• Emphasis on customer-centric solutions and digital transformation enablement.

Industry Challenges and Opportunities #

• Challenges: Intense competition, rapid technological advancements, evolving regulatory landscape.
• Opportunities: Growing demand for digital transformation solutions, increasing adoption of cloud computing, expansion of IoT applications, 5G deployment.

Market Positioning Strategy #

• Position themselves as a trusted partner for global connectivity and digital transformation.
• Focus on providing innovative and customized solutions to meet the specific needs of enterprises.

Future Outlook #

Expansion Plans or Growth Strategy #

• Continue to expand its global network and infrastructure.
• Invest in new technologies and services to enhance its portfolio.
• Strengthen partnerships with leading technology vendors and service providers.
• Focus on key growth markets, such as Asia and Africa.

Upcoming Products or Innovations #

• Development of advanced 5G-enabled solutions.
• Expansion of cloud-based security offerings.
• New IoT applications and services.

Sustainability Initiatives or ESG Commitments #

• Reducing carbon footprint through energy efficiency measures.
• Promoting responsible business practices and ethical sourcing.

Industry Trends Affecting Their Business #

• Growth of cloud computing and digital transformation.
• Increasing adoption of IoT and 5G technologies.
• Rising demand for cybersecurity solutions.
• Evolving regulatory landscape.

Long-Term Vision and Strategic Goals #

• To be a leading global digital ecosystem enabler, empowering businesses with innovative and agile solutions.

Comprehensive Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Consolidated revenue increased to ₹20,969 crores in FY2023-24, a 17.55% growth from ₹17,838 crores in FY2022-23, fluctuating from ₹16,725 crores in FY2021-22.
• Reported EBITDA margin decreased to 20.2% in FY2023-24 from 24.2% in FY2022-23 and 25.3% in FY2021-22, indicating increasing cost pressures.
• Reported PAT decreased to ₹968 crores in FY2023-24, down from ₹1,796 crores in FY2022-23, after a previous increase from ₹1,482 crores in FY2021-22.
• Net Debt to EBITDA ratio increased to 2.2 in FY2023-24 from 1.3 in FY2022-23, suggesting a rising debt burden.
• RoCE decreased to 18.8% in FY 2023-24 from 28.3% the previous year.

Business Segment Performance #

• Data revenue increased to ₹17,181 crores, driven by a 21.9% growth, with the Digital Portfolio contributing significantly.
• Core Connectivity revenue in Q4 FY24 was ₹2,574, representing growth. Digital Portfolio revenue in Q4 FY24 was at 55.3%.
• Incubation Services’ revenue has been maintained the same as the previous year.

Major Strategic Initiatives and Their Progress #

• Completed three strategic acquisitions: Kaleyra, Switch, and Oasis, enhancing capabilities in customer interaction, live video production, and IoT, respectively.
• Launched Tata Communications CloudLyte, an automated edge computing platform, and a cloud-based 5G Roaming Lab.
• Partnership with Jaguar Land Rover (JLR) to connect 128 global JLR sites using cloud-first, software-defined network (SD-WAN) technology.

Risk Landscape Changes #

• Increased macroeconomic and geopolitical risks were identified, including inflation, rising interest rates, currency fluctuations, and geopolitical tensions.
• Addressed risks through agile business models, sound business continuity frameworks, and diversified risk mitigation strategies.
• Legal and regulatory compliance efforts were managed proactively, with continuous monitoring and engagement with regulatory bodies.

ESG Initiatives and Metrics #

• Commitment to Net Zero by 2035 and Carbon Neutral by 2030.
• Achieved ‘A-’ rating in CDP Climate Change and CDP Supplier Engagement Rating.
• Sourced 27% of total energy from renewable sources, with 8 Indian and 6 international facilities operating on 100% renewable energy.
• Implemented 190 energy-saving projects, saving 7.7 million kWh of energy and ₹7.4 crores in India.
• Reduced water consumption by 5% compared to FY2020 and recycled 16% of total water withdrawal.
• 78% of waste recycled through OWCs and third-party recyclers.
• CSR initiatives benefited 9,82,471 people across 10 states in India, with a CSR spend of ₹24.45 crores.
• Launched ‘Winning Mix’ strategy to increase diversity and inclusion, leading to a 32% increase in gender diversity and a 53% reduction in women attrition.

Management Outlook #

• Focus on maintaining financial fitness and driving profitable, sustainable, competitive, and responsible growth.
• Continued investments in digital transformation capabilities to leverage emerging opportunities in AI, cloud, multi-cloud connectivity, and IoT.
• Expectations of improved profitability as synergies from acquisitions and operational efficiencies are captured.

Detailed Analysis #

Financial Analysis of Tata Communications Limited #

Three-Year Comparative Analysis (Consolidated) #

(INR in crores)

Segment-wise Assets #

(INR in crores)

Segment-wise Liabilities #

(INR in crores)

Significant Changes in Major Line Items (>10% YoY) #

• Total Assets (FY23-24): Increased by 19.51%, primarily due to increases within several catagories, and due to acquisitions, as well as increases.
• Total Liabilities(FY22-24): Increased by 19.82% from the previous year.
• Goodwill: Increased significantly due to acquisitions of Kaleyra and Switch.
• Borrowings (Non-current): Decreased, primarily because of the increase of current maturities and short term borrowing, with the shift happening due to the repayment of Debentures.
• Borrowings (Current): Increased, primarily because of the increase of current maturities of secured debentures, and short-term borrowings.
• Deferred Tax Liabilities (Net): Shows a increase.
• Other Liabilities: Both current and non-current showed changes.
• Revenue increased due to data revenue growth, and contributions from all buisnesses.

Working Capital Trends #

• Current Ratio (FY23-24): Decreased to 0.43 from 0.67 in FY22-23, indicating a reduced ability to cover short-term liabilities with short-term assets.
• Net Capital Turnover Ratio: Increased negatively to (3.01) in FY23-24, due to the Current Ratio.

Debt Structure and Maturity Profile #

• Debt-Equity Ratio: Increased to 2.2 in FY23-24 from 1.3 in FY22-23, indicating higher financial leverage, because of the increased debt.
• Maturity Profile: The Group’s borrowings have various maturities, with a significant portion of long-term debt becoming current in FY23-24.

Off-Balance Sheet Items #

• Contingent Liabilities: Increased to H 13,916.12 crores as of March 31, 2024, from H 12,022.05 crores the previous year, primarily due to tax and other claims.
• Guarantees: Decreased significantly, implying fewer guarantees provided by the Group on behalf of its subsidiaries or other entities.
• Other Commitments: Include loan facilities to subsidiaries and capital commitments.

Tata Communications Limited: Financial Analysis of FY2023-24 #

Revenue Breakdown by Segment/Geography #

• Data and Managed Services (DMS): FY2023-24 revenue was ₹17,240.23 crores (FY2022-23: ₹14,156.91 crores). Key contributors include Internet connectivity services (₹3,079.46 crores) and Global Virtual Private Network (₹1,984.35 crores).
• Voice Solutions (VS): FY2023-24 revenue was ₹1,699.06 crores (FY2022-23: ₹2,054.16 crores).
• Real Estate (RE): FY2023-24 revenue was ₹237.07 crores (FY2022-23: ₹200.87 crores).
• Geographical Revenue (FY2023-24):
  • India: ₹8,815.97 crores
  • United States: ₹3,959.08 crores
  • United Kingdom: ₹1,462.64 crores
  • Singapore: ₹1,022.83 crores
  • Others: ₹5,653.71 crores

Revenue Growth Highlights #

• Data revenue crossed ₹17,000 crore mark.
• Overall revenue YoY growth: 17.55%
• Digital portfolio YoY growth: 55.4%

Cost Structure Analysis #

• Network and Transmission Expenses: FY2023-24: ₹8,086.44 crores (FY2022-23: ₹6,375.49 crores)
• Employee Benefits Expense: FY2023-24: ₹4,452.95 crores (FY2022-23: ₹3,597.46 crores)
• Other Expenses: FY2023-24: ₹4,199.33 crores (FY2022-23: ₹3,547.08 crores)

Margin Analysis #

• Reported EBITDA Margin: FY2023-24: 20.2% (FY2022-23: 24.2%)
• Core EBITDA Margin: 23.7%
• Net Profit Margin: Decreased. Profit after tax was ₹968.34 crores in FY2023-24 (FY2022-23: ₹1,795.96 crores).

Non-Recurring Items #

• Exceptional Items (FY2023-24): Net loss of ₹235.66 crores (includes gain on sale of fixed assets).
• Exceptional Items (FY2022-23): Gain of ₹76.35 crores.

EPS Analysis #

• Basic EPS: FY2023-24: ₹33.98 (FY2022-23: ₹63.02)
• Diluted EPS: FY2023-24: ₹33.97 (FY2022-23: ₹63.01)

Quarterly Trends in Data Revenue #

• Q4 FY24: ₹4,656 crores
• Q3 FY24: ₹4,618 crores
• Q2 FY24: ₹3,995 crores
• Q1 FY24: ₹3,912 crores
• Q4 FY23: ₹3,670 crores
• Q3 FY23: ₹3,593 crores

Cash Flow and Liquidity Analysis #

Detailed OCF, ICF, FCF Components #

Operating Cash Flow (OCF) #

Increased to ₹3,182.00 crores in FY 2023-24 from ₹4,384.35 crores in FY 2022-23.

Investing Cash Flow (ICF) #

ICF showed an outflow, increasing to ₹(3,500.47) crores in FY 2023-24 from ₹(1,224.17) crores in FY 2022-23. This increase is attributable to the amount for acquisitions.

Financing Cash Flow (FCF) #

FCF showed an outflow of ₹(812.95) crores in FY 2023-24 in comparison to (2,240.80) in FY2022-23.

Capex Analysis by Segment #

• VS: ₹35.07 crores in FY 2023-24, ₹14.87 crores in FY 2022-23.
• DMS: ₹2,224.92 crores in FY 2023-24, ₹1,404.42 crores in FY 2022-23.
• PS: ₹18.52 crores in FY 2023-24, ₹23.64 crores in FY 2022-23.
• TS: ₹21.37 crores in FY 2023-24, ₹14.44 crores in FY 2022-23.
• RE: ₹0 crores in FY 2023-24 and ₹22.61 crores in FY 2022-23.
• Total: ₹2,305.18 crores for FY 2023-24, and ₹1,479.98 for FY 2022-2023.

Dividend and Share Buyback Trends #

Dividend was 167% for the year 2023-24 and the total pay-out amounts to 49.09% of the profit after tax.

• Dividend Paid: ₹598.50 crores in FY 2023-24, ₹589.95 crores in FY 2022-23.
• Dividend Per Share: FY24: 16.70, FY23:21.00, FY22:20.70.
• Share Buyback: No share buyback activity reported in the provided data for FY 2023-24 or FY 2022-23.

Debt Service Coverage #

• Debt-Equity Ratio: Increased to 0.27 times in FY 2023-24 from 0.05 times in FY 2022-23
• Interest Coverage Ratio: Decreased from 20.50 times to 12.24 time for standalone.

Liquidity Position and Cash Conversion Cycle #

• Current Ratio: Decreased to 0.43 in FY 2023-24 from 0.67 in FY 2022-23.
• Cash and Cash Equivalents: Decreased to ₹732.05 crores at the end of FY 2023-24 from ₹1,004.48 crores at the beginning of the year.

Key Performance Indicators #

Profitability Ratios (3-Year Trends) #

Return on Equity (ROE) #

• FY24: 6.47%
• FY23: 6.78%
• FY22: Not available

Return on Assets (ROA) #

• FY24: 4.88%
• FY23: Not available
• FY22: Not available

Reported EBITDA Margin #

• FY24: 20.2%
• FY23: 24.2%
• FY22: 25.3%

Net Profit Margin #

• FY24: 4.62%
• FY23: 10.08%
• FY22: Not available

Operating Profit Margin #

• FY24: 10.83%
• FY23: 11.75%

Liquidity Metrics #

Current Ratio #

• FY24: 0.43
• FY23: 0.67

Efficiency Ratios #

Trade Receivables Turnover Ratio #

• FY24: 6.69
• FY23: 6.39

Leverage Metrics #

Debt-Equity Ratio #

• FY24: 0.27
• FY23: 0.05

Interest Coverage Ratio #

• FY24: 12.24
• FY23: 20.50

Reported EBITDA/Total Interest #

• FY24: 3.3
• FY23: 5.6

Working Capital Ratios #

Net Capital Turnover Ratio #

• FY24: (3.01)
• FY23: (5.53)

Summary #

• Decreasing trend in EBITDA and Profit margins.
• Liquidity: below average.
• Debt-Equity ratio has increased.
• Interest Coverage Ratio has decreased.

Business Segment Performance Analysis #

Revenue and Profitability Metrics with Growth Rates #

• Overall Data Segment (FY23-24): Revenue of ₹17,000 crore, with double-digit growth. Digital Portfolio showed a reported growth of 55.4% and underlying growth of 14.7%, with a two-year CAGR of 37%.
• Voice Solutions (VS): FY23-24 revenue was ₹1,699.06 crore, a decline from FY22-23’s ₹2,054.16 crore. Segment results were negative at ₹(169.55) crore in FY23-24, an improvement from FY22-23’s ₹(217.92) crore.
• Data and Managed Services (DMS): FY23-24 revenue reached ₹17,240.23 crore, up from FY22-23’s ₹14,156.91 crore. Segment results were ₹878.50 crore, down from the prior year’s 957.55cr.
• Payment Solutions (PS): FY 23-24 revenue reached 166.02cr and segment results are (34.54) cr.
• Transformation Services (TS): FY 23-24 revenue reached 1550.43cr and segment results is 0.51cr.
• Real Estate (RE): FY 23-24 revenue at 237.07 cr and segment results at 156.19cr.
• Campaign Registry (CR): FY 23-24 Revenue at 264.52 cr and segment results at 159.16cr.

Market Share and Competitive Position #

• The company is facing increasing competition from non-telcos (system integrators, security and networking OEMs, hyperscalers, CDN providers, emerging tech) in the enterprise (B2B) connectivity space.
• There is growing competition from cloud providers offering their own connectivity solutions optimized for cloud environments.
• There is heightened competition in India following telecom sector consolidation, with consumer mobility players focusing on the enterprise segment.
• The Company is considered as one of the global CommTech player.

Key Products/Services Performance #

• Core Connectivity: Provides secure, reliable, and high-performance connections (Private Line, High-Speed Internet, Global VPN).
• Next-Gen Connectivity: Includes IZO™ Hybrid WAN, IZO™ SD-WAN, SASE/SSE, Tata Communications IZO™ Multi Cloud Connect, Managed Wi-Fi & LAN.
• Cloud and Cyber Security Services: Offers IZO™ Cloud Platform, IZO™ Financial Cloud, Managed Cloud Services, and a Cyber Resilience Suite.
• Customer Interaction Suite (CIS): Includes Kaleyra, InstaCC™, Tata Communications GlobalRapide, and Jamvee.
• IoT: Features the Tata Communications MOVE™ platform.
• Media and Entertainment Services: Provides end-to-end production management, distribution, and management of media supply chain workflows.
• Voice: Provides an array of voice solutions that serve business support, conferencing, call centers, and international retail communications for operators and carriers.
• A2P Messaging: Messaging Services.

Geographic Distribution and Market Penetration #

• India: FY23-24 revenue of ₹7,343.16 crore, up from ₹6,617.82 crore in FY22-23.
• United States of America: FY23-24 revenue of ₹3,959.08 crore, significantly increased from ₹2,446.84 crore in FY22-23.
• United Kingdom: FY23-24 revenue of ₹1,462.64 crore, up from ₹1,184.64 crore in FY22-23.
• Singapore: FY23-24 revenue of ₹1,022.83 crore, up from ₹900.74 crore in FY22-23.
• Bermuda: FY23-24 revenue of 54.59cr, slightly down from 55.80cr in FY22-23.
• Other Geographies: FY23-24 revenue of ₹5,653.71 crore, up from ₹5,445.49 crore in FY22-23.

Segment-wise CAPEX #

• VS: FY23-24 CAPEX of ₹35.07 crore, up from ₹6.10 crore in FY22-23.
• DMS: FY23-24 CAPEX of ₹2,224.92 crore, up from ₹976.53 crore in FY22-23.
• PS: FY23-24 CAPEX of 18.52cr.
• TS: FY23-24 CAPEX OF 21.37cr
• RE: FY23-24 CAPEX is 0.

Operational Efficiency Metrics #

• Power Usage Effectiveness (PUE): Improved to 1.5 in Indian and global network centers.
• Energy Intensity: Improved to 83.6 Mwh per million-unit revenue in USD.

Growth Initiatives and Challenges #

• Growth Initiatives:

  • Strategic acquisitions (Kaleyra, Switch, Oasis) to fill product gaps, expand geographically, and achieve scale.
  • Focus on the Digital Portfolio, particularly Next-Gen Connectivity solutions.
  • Launch of new services like Tata Communications CloudLyte (edge computing platform).
  • Partnerships (e.g., Microsoft for voice calling on Teams, Singapore Airlines for communication tools).
  • Expansion in Media & Entertainment Services, enhanced by The Switch acquisition.

• Challenges:

  • Macroeconomic/global economic slowdown, inflation, rising interest rates, currency fluctuations, and geopolitical tensions.
  • Aging subsea cable infrastructure and potential disruptions.
  • Downward pricing pressure due to enterprise transformation and competition.
  • Evolving and stringent legal and regulatory requirements globally.
  • Rapidly changing digital domain, new entrants, and the need to adapt to disruptive technologies.
  • Cybersecurity attacks and data privacy breaches.
  • Attracting and retaining talent with specialized skills.

Sustainability #

• Net Zero by FY2035 and Carbon Neutral by FY2030.
• 20% reduction in water usage by FY2030
• Zero waste to landfill by FY2027

Strategic Pillars #

• Fit to compete and Fit to grow.

Segment-Wise Financial Analysis: Risk Assessment #

Data and Managed Services (DMS) #

Strategic Risks #

• Severity: High
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies: Focus on differentiated platform offerings and innovation, including AI and sustainability.
• Control Effectiveness: Moderate
• Potential Financial Impact: Loss of market share, reduced revenue if competitors introduce disruptive technologies.

Operational Risks #

• Severity: Medium
• Likelihood: Medium
• Trend: Stable
• Mitigation Strategies: Automating and simplifying internal processes, strengthening operational and global presence through inorganic and organic growth
• Control Effectiveness: Moderate
• Potential Financial Impact: Service disruptions, and increased operational costs.

Financial Risks #

• Severity: High
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies: Hedging and treasury risk management.
• Control Effectiveness: Moderate
• Potential Financial Impact: Fluctuations in foreign currency could increase the revenue and expenses given the significant portion of revenue contribution.

Compliance/Regulatory Risks #

• Severity: Medium
• Likelihood: Low
• Trend: Stable
• Mitigation Strategies: Legal and compliance team ensures adherence, transparency, and accountability.
• Control Effectiveness: High
• Potential Financial Impact: Non-compliance with global regulations could result in penalties.

Emerging Risks #

• Severity: Medium
• Likelihood: Low
• Trend: Increasing
• Mitigation Strategies: Adapting of disruptive technologies.
• Control Effectiveness: Moderate
• Potential Financial Impact: Technology evolutions

Voice Solutions (VS) #

Strategic Risks #

• Severity: High
• Likelihood: High
• Trend: Increasing
• Mitigation Strategies: Focus on enterprise segment, optimize core connectivity, and invest in the transition of wholesale voice to next-generation services.
• Control Effectiveness: Moderate
• Potential Financial Impact: Revenue and profitability decline due to market changes.

Operational Risks #

• Severity: Medium
• Likelihood: Medium
• Trend: Stable
• Mitigation Strategies: Maintaining global presence and diversifying customer base.
• Control Effectiveness: Moderate
• Potential Financial Impact: Network disruptions and downtime.

Financial Risks #

• Severity: High
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies: Focus on driving profitable growth and strengthening balance sheet to fund acquisitions and investments.
• Control Effectiveness: Moderate
• Potential Financial Impact: Downward pricing and margin pressure.

Compliance/Regulatory Risks #

• Severity: High
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies: Constant monitoring, active engagement with industry bodies and consultation processes.
• Control Effectiveness: Moderate
• Potential Financial Impact: Non-compliance with legal and regulatory requirements affecting business.

Emerging Risks #

• Severity: Medium
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies: Innovate and adopt new methods and technologies
• Control Effectiveness: Moderate
• Potential Financial Impact: Loss of market share due to technology changes

Strategic and Management Analysis of Tata Communications #

Long-Term Strategic Goals and Progress #

• Data Segment: Aiming for consistent growth, with a goal to double data revenue by FY27. Data revenue crossed the ₹ 17,000 crore mark, powered by a surge in the Digital Portfolio. Digital Portfolio has achieved a remarkable CAGR of 37% over the past two years.
• Overall: The Group is focused on transitioning from product to platform to a digital fabric of solutions, increasing customer relevance. The group’s revenue surpassed H 20,000 crore with data crossing H 17,000 mark.
• Sustainability: Committed to Net Zero by 2035 across global operations.

Competitive Advantages and Market Positioning #

• Data and Managed Services: Holds a leadership position in emerging markets. Offers a broad range of services, including next-gen connectivity, cloud, and cybersecurity solutions. Recognized as a leader in multiple industry analyst reports (Gartner, IDC, ISG).
• Voice Solutions: Remains a major global player, despite the segment facing downward pricing pressure.
• Overall Group: Differentiated capabilities in the digital domain, making us a preferred partner for marquee clients.

Innovation Initiatives and R&D Effectiveness #

• Digital Portfolio: Launched Tata Communications CloudLyte, an automated edge computing platform. Amplified IZO™ Multi Cloud Connect solution. Introduced a cloud-based 5G Roaming Lab.
• IoT: Focus on developing industry-specific IoT solutions, emphasizing sustainability and smart city initiatives, leveraging AI and ML.
• Partnerships: Co-innovating joint propositions with partners, leveraging the Group’s core digital platform and startups’ innovations.
• R&D Investment: Operated six research labs across geographies, and actively researching next-generation technologies.
• Customer Co-Innovation: The Customer Co-Innovation program leverages Tata Communications’ digital fabric-led innovation engine to drive growth for strategic customers.
• Open Innovation: Partnership-led innovation approach with a strong ecosystem of partners, evaluating 3,500+ start-ups.

M&A Strategy and Execution #

• Strategic Acquisitions: Completed three strategic acquisitions (Kaleyra, Switch, Oasis) to address product gaps, expand geographic reach, and achieve scale.
• Kaleyra Integration: Enhances Customer Interaction Suite (CIS) and CPaaS offerings.
• Switch Integration: Expands media services portfolio, particularly in live video production and transmission, with a strong foothold in North America.
• Oasis Integration: Strengthens IoT offerings with eSIM and remote SIM provisioning capabilities.

Management’s Track Record in Execution #

• Revenue Growth: Achieved significant revenue growth milestones, surpassing ₹ 20,000 crore in overall revenue.
• Digital Portfolio Growth: Demonstrated strong growth in the Digital Portfolio, with a 55.4% reported growth and a 14.7% underlying growth.
• Customer Acquisition: Witnessed a 90% YoY increase in new client acquisition.
• Financial Fitness: The strategic theme around Financial Fitness guides us to maintain a healthy balance sheet and double-digit profitable growth
• Acquisitions and Integration: Executed three acquisitions during the FY24 while investing incrementally in our organic capabilities

Capital Allocation Strategy #

• Growth Investments: Focus on funding the next phase of growth through strategic investments in organic and inorganic capabilities.
• Acquisition Funding: Two of the three acquisitions were funded entirely by internal accruals.
• Profitability Focus: Expecting profitability to improve further as synergies from acquisitions are captured and operational efficiencies are leveraged.
• Financial Capacity: Creating robust financial capacity to capitalise on new opportunities in AI cloud, multi-cloud connectivity, and Tata Communications CloudLyte.

Organizational Changes and Their Impact #

• Kaleyra Inc. Acquisition: Kaleyra Inc., provided mobile communication services to financial institutions, e-commerce players, OTTs, software companies, logistic enablers, healthcare providers, retailers, and other large organisations worldwide.
• The Switch Enterprises LLC Acquisition: marks a strategic enhancement of our Media & Entertainment Services portfolio, combining the strengths of two industry leaders to offer a comprehensive global media services offering.
• Organizational Restructuring: Undertook organizational changes to enhance efficiency and align with strategic objectives, resulting in a one-time charge (disclosed as an exceptional item).
• Redomiciliation: Tata Communications (Bermuda) Limited was redomiciled from Bermuda to the Canton of Jura, Switzerland, under the name ‘TC Networks Switzerland SA’ with effect from March 22, 2024.
• Transfer of Business: Transfer of its identified new edged digital services business to its wholly-owned subsidiary, Novamesh Limited

ESG Framework: A Deep Dive into Sustainability Initiatives #

Environmental Metrics and Targets #

• Aims for Net Zero by 2035 across global operations and Carbon Neutrality by 2030.
• Targets a 42% reduction in Scope 1 and 2 GHG emissions by FY30 from an FY22 base.
• Targets a 25% reduction in Scope 3 GHG emissions by FY30.
• Achieved an A- rating (Leadership band) in CDP 2023, surpassing the Asia regional average of C.
• Saved 7.7 million kWh of energy in FY24, with 27% of total energy from renewable sources.
• Reduced water usage by 5% in FY24 compared to FY20.
• Recycled 78% of waste in FY24, with a target of Zero Waste to Landfill by FY27.
• Maintains 10 ISO 14001:2015 certified facilities in India.

Social Responsibility Programs #

• CSR spending for FY24 was ₹ 24.45 crores, benefiting 9,82,471 people.
• CSR projects cover sustainable livelihood, education, and the environment, aligning with 7 UN SDGs.
• 20 CSR projects were undertaken in partnership with 15 NGOs across 10 states in India, including 8 aspirational districts.
• 2,04,778+ lives were impacted through educational projects, with a CSR spend of ₹ 4.06 crore.
• 3,49,792+ lives were impacted through sustainable livelihood initiatives, with a CSR spend of ₹ 13.30 crore.
• 99,968+ lives were impacted through environmental initiatives, with a CSR spend of ₹ 8.09 crore.
• 94,671 volunteer hours were contributed under the Global Employee Volunteering Programme.

Governance Structure and Effectiveness #

• The Board’s Risk Management Committee monitors risks and ensures business continuity.
• The Board comprises five statutory committees: Audit, Nomination and Remuneration, Stakeholders Relationship, CSR Safety and Sustainability, and Risk Management.
• The Board held nine meetings in FY24, with a 100% participation rate of independent directors.
• Maintains a Whistleblower Policy and a Vigil Mechanism for reporting concerns.
• Implemented a comprehensive ethics and compliance framework.
• The Leadership of Business Ethics Survey showed high scores: 91 for employees, 96 for contractual workforce, and 95 for value chain partners.

Sustainability Investments and ROI #

• Invested ₹ 4.9 crores in 190 energy-saving projects, resulting in ₹ 7.4 crores in cost savings.
• Saved 90,000+ MT CO2 through remote production and cloud-based services.
• Implemented a sustainability-linked loan (SLL) framework, linking loan margins to carbon emission reduction targets.
• Approved 18.75MU Solar Power procurement.
• Benefited 15,000+ from a mini-watershed development covering 22 villages in Kolar District.
• Distributed 13,000 smart cookstoves, impacting 61,600+ lives and resulting in a 95% reduction in firewood consumption.

ESG Ratings and Peer Comparison #

• Achieved ‘A-’ rating in CDP Climate Change and CDP Supplier Engagement Rating.
• Rated above the Asia regional average (C) and the Media, Telecommunications, and Data Centre services sector average (B) in CDP disclosure.

Regulatory Compliance and Future Preparations #

• Ensures compliance with statutes, regulations, ethical, and transparent business operations, and corporate governance.
• Adoption of a sustainability-linked loan (SLL) framework.
• Engaged with Singapore’s Sustainability Reporting Advisory Committee (‘SRAC’) for a consultation paper named ‘Turning Climate Ambition into Action’.
• Engaged with regulatory and industry bodies, responding to ten consultation papers in FY24.
• The Company has a dedicated Forex and Interest Rate Risk Management Committee
• The Company publishes the Business and Human Rights Policy
• Tata Communications is a signatory of the UN Global Compact

Tata Communications: Forward Outlook and Financial Analysis #

Management Guidance and Assumptions #

• Data revenue is projected to double by FY27.
• Core EBITDA margin (excluding subsidiaries and M&A) was 23.7% and management expects profitability to improve as synergies from acquisitions are captured and operational efficiencies are leveraged.
• Management’s strategy integrates sustainability into core operations, aiming for Net Zero by 2035 across global operations.
• The company prioritizes adherence to the Reduce, Reuse and Recycle (3R) principle.
• Management is committed to maintaining transparency and accountability in operations and constructive engagement with regulators.
• The company expects its product portfolio of Renewable Energy to bring cost-effectiveness, with less price volatility, and to compete with conventional electricity tariffs.
• The company will prioritize upskilling and reskilling programs.

Market Growth Forecasts #

• Worldwide IT spending is projected to increase by 6.8% in 2024, reaching $5 trillion.
• Spending on IT Services is expected to grow by 8.7% in 2024, surpassing spending on communication services for the first time.
• The IaaS (Infrastructure as a Service) segment is projected to grow by 30%, reaching $178 billion in 2024.
• Global multi-cloud networking market is anticipated to nearly double in revenue over the next five years.
• Emerging and developing Asia is projected to witness accelerated growth of 5.2% in 2024.
• India’s growth is estimated to remain strong at 6.5% in both 2024 and 2025.

Planned Strategic Initiatives #

• The Group’s strategy is built on two pillars: “Fit to Compete” aiming to optimize financial fitness through cost control and improved efficiency, and “Fit to Grow” which fulfills the growth ambitions.
• Strategic acquisitions (Kaleyra, Switch, Oasis) were completed to enhance customer experience, expand geographic reach (particularly in North America), and strengthen capabilities in live video production and IoT.
• Integration of Oasis into Tata Communications MOVE™ platform to enhance IoT offerings with eSIM and remote SIM provisioning capabilities.
• Partnership with Microsoft leveraging the Tata Communications GlobalRapide platform and Microsoft’s Operator Connect to enable voice calling on Teams devices in India.
• Launch of Tata Communications CloudLyte, an automated edge computing platform.
• Introduction of cloud-based 5G Roaming Lab for Mobile Network Operators.
• Partnership with Singapore Airlines to transform communication and collaboration tools.
• Partnership with Jaguar Land Rover (JLR) for digital transformation using SD-WAN technology.
• Continue investments in core network infrastructure, customer interaction suite, and cloud security.
• Implementation of internal carbon pricing mechanism.
• Continue to explore alternate fuel systems and emission control devices, specifically for back-up power sources.
• Drive climate action through collaboration by integrating a carbon mitigation plan in Supplier Code of Conduct.
• Implementation of an API integrated supplier onboarding platform, and automated e-mail notification.

Efficiency Improvement Targets #

• Targeting a 7% year-on-year energy saving.
• Aiming for 100% recycling of biodegradable and recyclable waste by FY24.
• Targeting a 20% reduction in water usage by FY2030 (compared to FY2020), with a 17% reduction by FY2026.
• Striving for a “Zero Waste to Landfill” goal by FY2027.

Potential Challenges and Opportunities #

Challenges #

• Macroeconomic slowdown, inflation, increasing interest rates, currency fluctuations, and geopolitical tensions (Israel-Gaza conflict, Red Sea tensions, Russia-Ukraine war, US-China tensions).
• Aging cables and potential disruption in the subsea cable network, especially major cables linking India/Asia and Europe.
• Downward pricing pressure and margin pressure due to enterprise transformation and cost optimization expectations.
• The legal and regulatory risks, due to non-compliance to the regulatory framework, in India and other countries.
• Growing competition from new industry entrants, particularly non-telcos and cloud providers.
• Adapting to rapidly changing disruptive technologies like Generative AI, Quantum computing, Metaverse, AIOps, Free Space Optics (FSOC).
• Cyber attacks and data privacy breaches are a significant concern.
• Attracting, Retaining and upskilling human resources with specialized technical skills.

Opportunities #

• Exponentially growing opportunity landscape due to increasing demand for digital transformation solutions.
• Strong resonance of the Group’s digital fabric of solutions with customers worldwide.
• Significant white space for future expansion in network fabric, cloud fabric, customer interaction fabric, IoT fabric, and media fabric.
• Leveraging acquisitions to address product gaps, expand geographically, and achieve scale.
• Growing adoption of AI, Cloud and enhanced collaboration technologies.
• New service opportunities such as 5G Roaming Labs, SD-WAN, and Virtual Network Functions on the Tata Communications IZO™ Multi Cloud Connect fabric.
• Potential for expanded service portfolio and customer base through acquisitions like The Switch and Kaleyra.
• Potential to gain competitive advantage, by developing eco-friendly products and solutions.

Scenario Analysis and Sensitivity #

• Interest Rate Risk Sensitivity: A 100 basis points increase/decrease in interest rates would impact profit before tax by approximately H 21.64 crores (decrease) and (increase).
• Foreign Currency Risk Sensitivity: A 5% appreciation/depreciation of foreign currencies against the functional currency would result in a decrease/increase in profit before tax by approximately H 12.76 crores.
• Defined Benefit Obligation Sensitivity:
  • A 1% increase/decrease in the discount rate would decrease/increase the defined benefit obligation.
  • A 1% increase/decrease in salary escalation rates would increase/decrease the defined benefit obligation.
  • Changes in mortality assumptions and withdrawal rates have varying impacts on the defined benefit obligation.
  • A 1% increase or decrease in the healthcare cost trend has a significant impact on Medical Benefits

Audit and Compliance Analysis #

Auditor’s Opinion and Qualifications #

• The Statutory Auditors issued an unmodified opinion on the standalone and consolidated financial statements, indicating a true and fair view in conformity with generally accepted accounting principles in India.
• The Auditor’s Report includes an Emphasis of Matter paragraph regarding disputed tax matters related to license fees, with a contingent liability of H 7,751.94 crores disclosed, but no provision made.
• Material uncertainty exists in respect of the recoverability of investment in a subsidiary, TCPSL and the going concern status of a large customer, and a subsidiary has significant accumulated losses.
• Certain subsidiaries have not maintained the backup of books of accounts on servers physically located in India.

Key Accounting Policies and Changes #

• The financial statements are prepared in accordance with Indian Accounting Standards (Ind AS).
• There were no new standards or amendments to existing standards applicable for FY 2023-24 that had a material impact.
• Accounting policies are consistently applied, with estimates and assumptions reviewed on an ongoing basis.
• Property, plant, and equipment are depreciated using the straight-line method.
• The Group has used a simplified approach on a prospective basis to compute allowance for doubtful trade receivables.

Internal Control Effectiveness #

• The Board believes the Company’s internal financial controls were adequate and effective during FY 2023-24.
• The Auditor’s Report expresses an unmodified opinion on the adequacy and operating effectiveness of internal financial controls over financial reporting.
• An internal audit system commensurate with the size and nature of the business exists.
• Except for Instances related to use of accounting software by the Company and its subsidiaries for maintaining books of account which feature audit trail.

Regulatory Compliance Status #

• The Company is in compliance with applicable Secretarial Standards.
• The Company is generally compliant with statutory dues, though there has been a slight delay in a few cases.
• The Annual Secretarial Compliance Report confirms compliance with applicable SEBI Regulations, circulars, and guidelines.
• The Company, through its network of legal counsels and consultants, strives to ensure complete compliance with country-specific rules and regulations.

Legal Proceedings and Potential Impact #

• Disputed tax matters exist, with potential adverse financial implications if appeals are decided against the Company, with an interest exposure of 1,692.96 Crores.
• License fee disputes with the Department of Telecommunications (DoT) are ongoing, with significant potential liability. Claims and counterclaims before TDSAT and the Supreme Court.
• Other claims against the Company include those related to customer and supplier disputes, among others.
• The ultimate outcomes of litigations are uncertain.
• During the current year, the Hon’ble Supreme Court of India has pronounced a judgement regarding the treatment of Variable License Fee paid to DOT under New Telecom Policy 1999, since July 1999, to be treated as capital in nature and not revenue expenditure for the purpose of computation of taxable income.

Related Party Transactions #

• All related party transactions were placed before the Audit Committee for review and approval.
• Transactions with related parties were in the ordinary course of business and at arm’s length.
• No materially significant related party transactions occurred with subsidiaries, directors, KMPs, or their relatives, except for those disclosed in the financial statements.

Subsequent Events #

• Subsequent to year-end, the Group entered into a refinancing arrangement of H 2,084 crores (USD 250 million).

Analysis of Accounting Quality #

• Transparency and Disclosure: The Company provides detailed disclosures as required by Ind AS, including details of contingent liabilities, related party transactions, and segment-wise performance, however accounting quality is diluted by the emphasis of matter and qualification by the auditors.
• Use of Estimates and Judgments: The financial statements involve the use of judgments, estimates, and assumptions, particularly in areas such as impairment of investments, valuation of financial instruments, provision for decommissioning of assets, and deferred taxes. Changes in these estimates could materially affect the financial statements, thus representing inherent risk.

Regulatory Risk Assessment #

• High Regulatory Scrutiny: As a telecommunications company, the Group is subject to a highly regulated environment, with significant ongoing disputes related to license fees and tax claims. This poses a substantial regulatory risk.
• Compliance Systems: The Company has established systems and policies to ensure compliance with applicable laws and regulations, including a Whistleblower Policy and Vigil Mechanism.
• Uncertainty in Litigation: The outcome of pending litigations with regulatory authorities, particularly the DoT, represents a significant element of uncertainty and risk.