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Earnings Call Analysis
Q2-2024 Analysis
Tata Communications Ltd
The company has exhibited strategic prowess with the accelerated closure of the Kaleyra deal, prompting a focus shift to integrating services between Tata Communications DIGO and Kaleyra. This merger is considered pivotal in positioning the company as a significant player in the multichannel communication solutions space, with a projected market growth of over 25% CAGR, representing a market opportunity of around $27 million. Moreover, discussions to build state-of-the-art AI infrastructure in India alongside infrastructure as a service solutions underscore a robust growth trajectory that supports the company's ambitious scale of growth.
The company has maintained a double-digit growth momentum in data revenues, reporting a 10% year-on-year increase and marking a 2.1% sequential improvement. An underlying data revenue growth of 10% year-on-year aligns closely with these figures, while revenue from the digital portfolio surged by 30% year-on-year. Despite the reported EBITDA margins settling at 20.8% due to recent acquisitions and the strategic investment direction, the core business (excluding subsidiaries) demonstrated a solid margin of 23.7%. The Return on Capital Employed (ROCE) was registered at 23.3%, with a minimal dip attributed to the dividend payout, reflecting a robust operational efficiency and a comfortable debt level at a net debt-to-EBITDA ratio of 1.68x.
Attention is being drawn to the digital architecture investments, notably in the collaboration space within CPaaS, which despite some growth fluctuations, has seen progress with offerings like DIGO and InstaCC. The amalgamation with Kaleyra is expected to enhance these platforms substantially, leveraging Kaleyra's strong customer base, particularly in the U.S. and Europe. Likewise, the Switch acquisition is integrating well, presenting new customer wins and synergies in technology and market access, particularly in the media business.
The company is orchestrating a balance between growth investments and margins sustenance. The short-term expectations for EBITDA margins are anticipated to be below the 20% benchmark, mainly due to the acquisitions of Kaleyra and Switch, which currently have a dilutive impact on profitability. However, management has articulated a clear glide path to regain the ambition margin of 23%-25% for EBITDA and above 25% for ROCE, invoking key levers such as organic mix, M&A impact, and operating leverage to achieve these targets in the medium term.
Good afternoon, everyone, and welcome to the Tata Communications Earnings Conference Call for Q2 FY'24. We are joined today by our MD and CEO, Mr. Amur Lakshminarayanan; and our CFO, Mr. Kabir Ahmed Shakir; and our Head for IR, Mr. Rajiv Sharma.
The results for the quarter ended 30th September 2023 have been announced yesterday 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 views on the financial progress achieved. At the end of the management's remarks, we 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 must be viewed 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 invite Lakshmi to share those views. Over to you, Lakshmi.
Thanks, Chirag, and good afternoon, everyone. I welcome you all to the Q2 FY'24 earnings call. We are very pleased to inform that the integration of the switch with our media business is progressing as per strategy, and we are excited about the combined opportunities that we see in the market. We are realizing early deal wins across customers through our joint offerings.
Next, I'm also happy to report that the accelerated closure of Kaleyra deal is much before the expected time lines. We will now shift focus to ensuring the right synergies are playing out between Tata Communications DIGO and Kaleyra, thus enabling our combined offerings to position us as a formidable player.
We will build intelligent, intuitive and innovative multichannel communication solutions and create a category of customer interaction suite that helps us to scale growth in line with our ambitions. The customer interaction market is expected to grow at a CAGR of more than 25%, thus creating a market opportunity to a tune of [ $27 million ].
To sum up, Switch and Kaleyra integration will set us up for a robust growth trajectory. Additionally, I'm excited to share that we are in discussions with in media to build a state-of-the-art AI infrastructure in India. Today, we offer infrastructure as a service solutions and several BaaS services while enabling enterprises to do with data analytics.
So the logical next step for us was to enable enterprises to do AI and machine learning. This is an exciting opportunity, and we shall keep you posted as we progress. Moving to our overall performance our consolidated Q2 reported revenue was INR 4,872 crores, improving by 10% year-on-year and 2.1% Q-on-Q. Our reported data revenues stood at INR 3,995 crores, growing strongly by 14.4% year-on-year. Our underlying data revenue growth, which is excluding Switch, came in at 10% year-on-year.
EBITDA for the quarter was INR 1,015 crores with 20.8% EBITDA margins. PAT was INR 221 crores. ROCE came in at 23.3%. Our India revenues continued to grow strong double digits. Our international revenues continue to gain momentum steadily as we strengthen our offerings and footprint across the global markets.
We witnessed another quarter of a healthy funnel and order booking growth. However, the order booking acceleration is lesser than our expectations because of uncertainties in the macroeconomic and geopolitical scenarios. We see greater caution globally and slower decision-making. Despite this, our engagement intensity with our customers and prospects are increasing.
Our recent product rollouts, including IZO Multi Cloud Connect, DIGO Engage 2.0 and AI-based cloud analytics reflect the strong conviction we hold about the growth opportunity ahead of us. Now let me dwell on the investments we've been making and how you should look at our profitability going forward.
We continue to invest in our underlying capabilities, both submarine and terrestrial in terms of augmenting capacity and new routes and are also investing to make them more intelligent and programmable. On top of this, we are building a strong digital portfolio to deliver a global digital fabric suitable for enterprises. Over the last 3 years, we have invested in people and platforms, which have yielded positive results.
Our incubation revenues have tripled, cloud and managed hosting, next-gen connectivity and media businesses have grown by over 50% in this period. Additionally, we've invested in inorganic competencies to bridge certain gaps. Because of all these investments, digital portfolio will be contributing upwards of 40% to our data revenue soon.
These investments in organic and inorganic capabilities come with a cost, which will have a dilutive impact on both margins and ROCEs in the near-term before they move upwards in the medium term towards our ambition of 23% to 25%. Our core business, excluding the subsidiaries, the performance is as per plan.
However, our subsidiaries, which account for roughly 8% of our reported revenues continue to have dilutive impact on our core EBITDA margins. Another factor affecting the EBITDA margins is a change in revenue mix. Our digital portfolio has a different margin profile. The calibrated increase in digital revenues, thus changing the revenue mix, comes with an impact on EBITDA in the near to medium term.
However, each platform has a profitability glide path, and we are sharply focused on and are confident for the businesses to operate in the 23% to 25% medium term. I did mention about the subsidiaries having a drag on the core margins and we will be initiating and undertaking a strategic review of these.
Before I dive deep into a detailed discussion of the quarterly performance, it is important to emphasize on our medium-term structural growth drivers. This includes maintaining our India market leadership, emerging as a strong challenger in international markets from our peripheral players today and to become a strong challenger.
With Kaleyra and Switch, we see this becoming more of a reality as we have scale now in the U.S. to accelerate and bring more credibility in the market. These possibilities are driving our conviction and our continuous investment in capabilities. Lessons from tech industry are loud and clear, investments in one capability never create sustainable competitive advantage, and it is always about a network of capabilities, which develop a source of competitive advantage and that's exactly how we are focused.
Now coming to our segmental performance. Digital portfolio, which is DPS plus the incubation combined, the revenue stood at INR 1,457 crores growing healthily at 30.2% year-on-year and 3% Q-on-Q. Underlying digital revenues, excluding Switch, grew at 16.4% year-on-year this quarter. Our core connectivity business revenues grew by 6.9% year-on-year and 1.6% Q-on-Q and reflect robust execution and initiatives around price erosion and churn management.
Now moving to the digital portfolio. Our collaboration portfolio grew by 7.5% year-on-year and declined 7.4% quarter-on-quarter. I would not read much into the sequential decline as these volatilities are due to specific customer implementation contracts and engagements we executed last quarter. H1 FY'24 revenues for Collab portfolio have improved by 13.4% year-on-year, largely driven by our CIS portfolio.
Going forward, the integration with Kaleyra will accelerate the growth momentum. Media business revenues, including revenues from Switch, were sequentially up by 4.9% quarter-on-quarter and 107% year-on-year. Excluding Switch, Media business revenues were up 3% year-on-year. The sequential decline is on account of lesser events this quarter. With the combined capabilities of Switch and our media portfolio, we are witnessing a healthy order pipeline, higher ACV deals and possibly better revenue conversions going forward.
The momentum around joint customer wins and more business from existing customers is positive and in line with our strategy. Our Next-Gen connectivity offerings revenues increased by 15.4% quarter-on-quarter and 46.9% year-on-year. Growth has been broad-based across the portfolio with our IZO WAN and IZO SD-WAN growing strongly. We successfully delivered our largest SD-WAN deployment of 5,000 sites for one of the India's leading banks.
Our new offerings like managed Wi-Fi and IZO Multi Cloud Connect, Flex SD-WAN, gained solid traction with enterprises. Moving to cloud hosting and security. This portfolio registered a growth of 6.3% Q-on-Q and 24.4% year-on-year, successfully delivering some large deals. We continue to witness encouraging engagement from small and large enterprises on cloud and cybersecurity deployments for ensuring consistent user experience and all-around protection from cyber-attacks and flexibility to scale.
With regards to cloud adoption in India, we see continuing momentum on the adoption of multi and hybrid clouds. The incubation portfolio grew by 3.8% Q-on-Q. However, on a year-on-year basis, the performance is subdued. MOVE has grown over 40% year-on-year. We continue to engage with enterprises for our IoT and MOVE offerings and are excited with the opportunities that we can tap in this market.
To summarize, we believe that our global digital fabric is a powerful concept, which enterprises, especially in the international markets, are beginning to realize. Our digital portfolio has the capability to address holistically the needs of the enterprise customers and we will continue to invest and drive relevance with these enterprises.
To add to this, we have invested in inorganic opportunities from a capability as well as market access [ less ] and now the focus will be on accelerating the value creation process. We are confident about the larger opportunity. And with this strong conviction, we will continue to improve and drive value of these investments and continuously augment our capabilities. With this, I will now request Kabir to share the financial highlights.
Thank you, Lakshmi. Good afternoon, everyone. I'll take this opportunity to discuss the highlights of our financial performance for the quarter. Our data revenues continued their double-digit growth momentum, both from a reported as well as an underlying perspective.
Our reported on for the quarter stood at INR 4,872 crores, improving by 10% year-on-year and 2.1% on a sequential basis. The reported numbers this quarter continue to have some ForEx benefits accruing from a strengthening dollar. Normalizing for this ForEx are consolidated revenues grew at 7% year-on-year and 1.9% quarter-on-quarter and the positive impact on consolidated EBITDA margin is seen at 30 basis points.
Data revenue for the quarter stood at INR 3,995 crores, growing at 14.4% year-on-year and 2.1% on a sequential basis. The underlying data revenue growth stood at 10% year-on-year. Revenue growth from our digital portfolio stood at 30% year-on-year and 3% quarter-on-quarter.
Moving to margins. Reported EBITDA margins for the quarter came in at 20.8%, and the underlying EBITDA margins by 21.7%. Our core business margins, excluding subsidiaries were at 23.7%. ROCE for the quarter is at 23.3% and sequential decline is an outcome of lower EBIT and higher net debt because of the dividend payout this quarter.
Cash CapEx for the quarter stood at INR 587 crores, and in this ramp-up is attributable to payments coming up from CapEx projects committed in the prior year as suggested previously. Lower profitability, higher cash CapEx and adverse working capital movement, a large part of which is seasonal, resulted in a muted FCF for the quarter at negative INR 61 crores.
PAT for the quarter stood at INR 221 crores, and the margin were at 4.5%. Net debt stood at INR 6,963 crores, and net debt-to-EBITDA is at 1.68x. Our debt levels continue to be at a comfortable gearing and well within our ambition.
Moving to subsidiaries, our payment business continues to make positive ships as we expand our portfolio under the franchise model. As on date, we've added close to 4,300 franchisee ATMs to our portfolio and working steadily to increasing this further. TCPSL's revenues declined by INR 6 crores this quarter on account of lower transactions as well as closing of a sizable number of our company-owned company-operated ATMs.
[ TCPSL's ] revenues improved by 4% sequentially due to improving customer engagement and better pricing. Let me spend time on our EBITDA margin trajectory. Aside ongoing focus on cost management and financial prudence, there are 3 important levers of margin performance: Organic mix, impact of M&A and the operating leverage.
Organic mix will continue to be a drag on our overall EBITDA margins. This is obvious given our stated ambition to rebalance our revenue mix more towards digital portfolio, which not only has a lower margin profile today, but will also remain to have a lower margin profile versus our core connectivity business.
The acquisitions we have made in the recent past make a lot of strategic sense for us. But in the short-term, they have a dilutive impact on EBITDA as they are loss-making. So this will also have a drag in the short-term. In fact, as we consolidate Kaleyra results next quarter, our EBITDA will be below 20%.
Even ROCEs will dip below 20% as both Kaleyra and Switch are not profitable and will gradually improve as they turn profitable. However, each of this business case has a path to breakeven and destination margin attainment. On operating leverage, we should see a steady improvement every quarter as each of these business attains scale, and we progress towards our ambition of doubling data revenues.
The sum total of these 3 drivers mean that in the short-term, they will put pressure on our margins. But as the strategy plays out, we are confident they will attain the ambition margin of 23% to 25% for EBITDA and greater than 25% for ROCE. We have a glide path of profitability, which is periodically monitored at a product level with a laser sharp focus on drivers.
I want to assure all of you that our margin performance is exactly as planned and as per our expectations. Investments in both organic and inorganic opportunities is a conscious and a strategic choice we made and accelerated closure of Kaleyra comes with near-term implications and reported KPIs.
Our core business, excluding subsidiaries, has been performing as per our laid out strategy in its expected margin profile considering the impact of our portfolio mix, investment in people and M&A-related expenses. The subsidiary's margin profile continues to be a drag on the core business.
We've been separately reporting margins for all the business, and we believe we will be taking cognizance of this while forecasting and modeling for core business profitability. Underlying core business margins were at 23.7% and a 40 basis point sequential decline in margins is purely on account of revenue mix and planned investments in new products.
Over the last few years, we have focused on changing the texture of the business and ramping up our digital offerings. We believe that this will help us improve the customer relevance quotient and drive sustainable and profitable growth. Our finance strategy of it to compete and fit to grow helped us improve our balance sheet, which allowed us to invest in organic capabilities -- inorganic capabilities to improve our market offerings.
Inorganic investments in Kaleyra and Switch will raise the share of digital revenues upwards of 40%, and this will only ramp up further as the integration picks up. We are in an exciting phase of driving growth to investment for Tata Communications. The financial fitness we have attained in the recent past has given us the elbow room to fund the next phase of our journey while remaining financially fit.
As a management team, we are acutely aware of the acceptable margin drop we are willing to take to drive growth and capture market potential and position ourselves as a formidable global contact player. To sum up, our KPIs are likely to see short-term volatility. We will continue to invest in building capabilities, which help us strengthen our moats and strengthen our long-term ability to create longer-term value for our shareholders.
I will now ask Chirag to open the forum for Q&A.
[Operator Instructions] The first question is from the line of Sanjesh Jain from ICICI Securities.
I got a few questions. First, on the order book. Lakshmi, can you give you more color because it appears that digital services, which has grown at 28% [indiscernible] Switch last quarter, this quarter, the growth on a year-on-year basis is 16%. There is a material deceleration. Was it one-off? Or you're also seeing some headwind as most of the IT companies have highlighted? Are we seeing any challenges -- and then we had a strong order book booking earlier, and we thought that easing of chipset with [indiscernible] to grow for a lengthier period of time. And this quarter looks like subdued any comments and outlook on the -- how does the order book looks like?
Yes. Sanjesh, on the order book, we had a good order book in H1 of last year. And while the funnel was improving, there was a slowness in the bookings towards the end of last year. So we are seeing that play out in the digital. But I think I wouldn't read too much into -- I think all of the digital portfolio, which includes our the DIGO and others, I wouldn't play -- and Media also is included in this. And this quarter, I explained on the Media side because of lower events, we have a lesser revenue. So it's very difficult to read into a quarterly trend because each one of them have a different profile. But overall, what I'm seeing is, yes, there is a caution with customers, and therefore, there is a slowness in the decision making. And as I called out, our funnel actually is improving. And it's a function of the fact that we have now invested in more salespeople in the -- especially in the international markets, and that's helping us to add the funnel. So the funnel is quite healthy.
I also called out that our order booking in H1 of this year has improved, even though it's lower than what we would like it to be. So there isn't much to sort of read into the deceleration in digital. It's still a very, very good percentage if you see. And the other data point that I would look at is, which I mentioned in my speech, is the level of interactions that we are having with customers, the workshops that we are conducting, on a more broad-based global digital fabric is happening more and more day by day, right? So we are conducting more workshops with our customers. Customers are interested in engaging. So our engagement intensity with customers are improving, which gives us the confidence that whatever we are putting out there as a digital fabric is resonating. But in terms of conversion to revenue, there will be some fluctuations. But overall, I'm quite pleased with the 10% growth that we saw this quarter.
Fair enough. One extended question on the collaboration in CPaaS side, that appears to be very volatile in the last 2 years and has been the single source of digital performance drag, if you see. Last quarter, we saw an encouragement there of almost 14% growth, but again this quarter that Y-o-Y growth has dropped to 7%. What's not working in our favor in collaboration? What are we missing there? Will acquisition of Kaleyra help us to fix that?
Yes. So if you look at the collaboration portfolio, it consists of what we used to call as GSIP, which was a plane GSIP offering that we had. And that suffered a huge decline. And if you look at the collaboration, in fact, even today, the collaboration is the biggest portfolio on our digital portfolio, right? Now -- and being the biggest portfolio and as you rightly point out, having a slower growth does have the impact of having a drag on overall digital growth as we report, that is one. But within the collaboration portfolio, GSIP was one -- GSIP suffered a big decline as customers move to more app-based communications, and we came out with a global appeal offering to provide more a managed solution for our customers that arrested the degrowth.
Now the global rapid, what we offered with Microsoft in partnership is growing, but it's still coming off a small base, and it's growing well, but it's not enough to compensate on the degrowth that we had on GSIP, but we have arrested -- largely arrested the degrowth. I mean, even there might be a marginal decline, but it's not declining as much as it did in the previous years.
The second point I would call out in the collaboration is the entire [ CI ] customer interaction suite, which consists of the DIGO platform that we launched only last year and the InstaCC, which is our offering to take the contact centers to the cloud for our customers. So these 2 put together is what is the customer interaction suite and customer interaction suite has been growing quite well. But since these are smaller relative to GSIP and GSIP is, at best, flat, we are seeing this slowness and sluggishness in the numbers and the collaboration.
Now coming to your point on Kaleyra, yes, that's exactly the reason why we launched the DIGO product last year. And we're very pleased in the very first year of the launch, we have acquired several customers in India and Asia Pacific markets and the very substantial customers as well, and it's accelerating growth. And combined with Kaleyra, we bring -- we think that will bring stronger synergies because Kaleyra comes with -- while we had to build out a lot more things on DIGO, Kaleyra comes with a solid platform and a set of very good customers in the international markets, particularly the U.S. and in Europe.
So as we play out the synergy and synergize our products and take to market, we believe that positioning will definitely help us in the growing market of customer interaction space.
Fair enough. Lakshmi, now is more than a quarter for us, which -- how has been our initial experience with the Switch team? Are we able to retain the entire team? What is the synergy benefit? Any example of a large customer who is now looking to either share more wallet or has completely come on -- any initial thoughts will be very helpful.
I think the integration is proceeding extremely well. I think the teams are gelling together very well. There are -- from a technology standpoint, the technologies that we were using for our Video Connect and Video Connect Plus and the technologies that Switch is using in the U.S. are almost identical. So there's a lot of synergies there. And in addition, the Switch comes with a U.S. market access that our Media team didn't have. I mean, a lot of our strengths came out of Europe and APAC for our Media business. So that is also very synergistic. And certainly, the fact that they have the production capability, and now we have a very impressive production facility in the West Coast, which many of our customers are truly amazed when they see that. And that production capability, combined with our existing Media capability, are definitely resonating with our existing customers.
And we've had a good amount of wins in existing customers as well as newer customers. And I think while one month doesn't make a huge difference, but September, we saw very good conversion and the best ACV we've had in the Media business so far. But it's only a month, but we are very pleased with the integration process that is going on.
One few bookkeeping questions for Kabir. The direct cost and data has gone up by 200 basis points from 31% to 33%. I don't think there is any material change sequentially. So what is leading to this increase in the direct cost by 200 basis points? And #2, on the working capital, again, there is a sharp jump in the 1H. There has been an outflow of close to INR 10 billion. What is leading to that? And #3, last year, you positively surprised on tax rate, but I think this year, it's all eating to it. We thought 22% was what we're looking for this year. And in the first half, it's almost 26%. Any change there?
Yes. Let me answer each of them. I think the direct cost is basically a mix issue, Sanjesh. We have -- when we take some nonrecurring revenue deals, I mean, these are normally packaged in such a way that we take the either hardware or a licensed resell and then we add services on top. When we recognize that upfront, and they normally come at a lower margin profile than what we have, so they had about a couple of lumpy deals in this quarter, which has actually resulted into the higher direct cost because of the lower NR margin profile that they bring. So that's just a deal specific issue, nothing organic about it.
On working capital, look, there are 3 reasons. I mean, 2 major reasons are one of the large customers in our subsidiaries, their outstanding grew to an alarmingly high level. And as they are securing their funds, and we got reassurance that it will be cleared quite soon. We already saw quite a few amounts cleared in the first week of October. So we are acutely watching that. The second one was, again, a sizable amount because of the government shifting the TDS return filing by about 15 days. So therefore, a lot of the returns were by our customers who actually [ impacted ] TDS were not fine and therefore, we couldn't take credit of that in our books. But -- and also there has been a way in which we've signed a lot of things which were not due yet. So I believe that all of the working capital movements are seasonal. That's what I pointed out in my speech as well and this should reverse in the following quarter. So I'm not acutely worried about it.
On tax rates, look, we had taken last year as our international subsidiaries start becoming profitable. We took the deferred tax asset last year. I called that out very specifically as well that deferred tax asset is subduing our tax rates -- and once we had a policy and as it fits into the policy that consistently once it started taking -- growing profitably, we had to recognize the deferred taxes. Now that is in our base. 12 months have elapsed. It's now part of our base, and therefore, that's how you're actually seeing the tax rates kind of climb up. I think this is fallout of a good performance that you're doing well in international geographies and therefore, you're seeing this, but nothing -- none of them I would worry about.
Great. Great. One last question. What is the CapEx outflow this year anticipated?
I'm still sticking to the range of [ $250 million to $300 million ] per se organically. We are slowly inching up. As I mentioned earlier, our cash CapEx will be higher than the approved CapEx because of the catch-up effect from last year. That aside fingers crossed, and I don't want to sum the gun. Lakshmi mentioned that NVIDIA deal, for example, we are trying to ink the specifics and the details. What they will come up with, what is the size of it, what is the timing of it, a lot of them are in the air, right? So I would probably maybe treat them separately as one-off whenever the company because they'll be backed by a solid business case with a good IRR and I assume. But otherwise, I am sticking in the [ 250 to 300 ] range, as I had mentioned earlier.
The next question is from the line of Santosh Sinha for Emkay Global.
So my question is regarding Kaleyra. So what kind of saving exercise do you plan to take for Kaleyra? And also, the company has a high ease of expenses. So do you want to -- would company want to tweak that ESOP expense for Kaleyra?
Look, the Kaleyra business case has detailed out synergies, both on the revenue side and on the cost side. So we will address that appropriately. For me, the biggest strategic reason of acquiring Kaleyra is the product strength and portfolio that they actually bring to the table. The complementarity of or go-to-market offerings where they are strong and where they are present and the ability to cross-sell to Kaleyra customers and then to Tata Comm customers, all of them are super exciting. And I want to mention that upfront first because I don't want people to listen in that we are only driven by cost. Having said that, there will be cost synergies that will come up. Kaleyra is a listed entity when we acquired. They have just been recently delisted, couple of days ago from the New York Stock Exchange, and they are no longer an SEC-regulated company.
So therefore, as a result of that, there will be naturally cost savings that would flow. And that has already been built into the business case. And our assumptions when we talked about getting Kaleyra to breakeven in the near-term and getting to destination margins in the medium term. So therefore, we are quite aware of that. But at the same time, I'm excited about the go-to-market and revenue synergies and the combination of DIGO and Kaleyra put together, the promise that we can offer to the market, create a new category entirely of a customer interaction suite that's the strategic rationale with which we acquired this business and we are completely committed to that strategic rationale.
Next question is from the line of Mihir Manohar from Carnelian Asset Management.
I just wanted to understand on the margins front, I mean, are you still looking at the similar margins, 23% to 25% margins? So you mentioned that you provided clarity on the Kaleyra part. So just wanted to understand how to this improvement, which should be there. What would be the organic and inorganic contribution? And what will exactly lead to this margin improvement? I mean it was just some 3, 4 steps around it, that will be helpful.
Committed to 23% to 25% range for this company in the way in which the current mix stays. And if you look at in the last 2 years, there have been many quarters where we have delivered more than 25%. Even then, we have said that 23% to 25% is the right range that we need to operate in. And we also called out as to why we have overdelivered. There were COVID-related savings. There was great attrition, and we were actually sitting with a lot of vacancies and therefore, not the right amount of spend in our staffing costs. And these are not healthy, right? Now we are getting to more normative levels where COVID is hopefully behind us. Travel has started. Our marketing spends are back to normal levels. Our -- not only have you arrested attrition, but we've actually gone ahead and invested in more people, about 1,500 people is what we have added in the last 18 months, if you see -- so all those costs have come in. Coupled with that is the inorganic activity that we have done, both Switch and Kaleyra.
Switch, we have detailed out what the margin dilution is. Kaleyra is a listed entity. The financials available in the public domain. You can do the maths yourself as to what it will result into and I've also called out that next quarter, we will be mathematically you just add that in. And we do no change to our core business, mathematically, when I add Kaleyra's quarterly numbers, we will be below 20% in EBITDA. But I want to reassure all of you in the call and the wider investor community as well that this is a conscious and a strategic choice that we have done. We have improved the financial fitness, both in the P&L and the balance sheet only we have scaled only to leap forward and drive growth for this business. So for the next few quarters, we will be below our ambition of 23% to 25%. But the 3 levers that I called out: Organic mix, the impact of M&A and operating leverage.
Aside the ongoing focus that we have on efficiency, on cost management, war on waste, those are my day jobs, and I'm not going to repeat that. But the Uber levers are these 3 levers. And I've just given a color of how these 3 levers will behave. So some of them will continue to have a drag, some of them will slowly improve, some of them will improve slightly faster. The sum total of all of them means that in the near quarters, there will only be a drag. But as we get out of it and in the short to medium term, this will start becoming positive and help us to get to 23% to 25%. So that's the color that I can actually give you. I'll leave it to your ability to model it as to when that will happen. And as we have always done in the past, our endeavor is and as a management team to be responsible enough to accept -- acceptable margin drop that we are willing to take in order to drive the growth and investment for our businesses and to get back to the 23% to 25%.
Again, when we get back to 23% to 25%, I mean, I can't tell you what more organic BAU investments that we need to make, what more attractive inorganic opportunities that will come our way, right? We will evaluate that on a case-by-case basis and take the right action for a sustainable and profitable growth for Tata Communications.
The next question is from the line of Namit Arora.
My question was around sort of slightly medium term. Your space is very dynamic. So do you foresee disruptions fundamentally when you talk to customers and some of your partners? And what are the kind of investments you are doing in R&D and sort of forward-looking investments from a more medium-term perspective to handle any disruption that may come by in your business?
Yes. Amit, that's an excellent question. I think the space has always been disrupted. Pure core connectivity was disrupted with everything becoming software defined with SD-WAN. Now that gave race to a lot of network security and newer companies, as you will, like the Palo Alto's and the Zscaler's. And today, there is a talk about SD-WAN and all of these coming together and converging to become a secure service edge at the edge. Similarly, we see the convergence of the LAN, which is becoming more software define with Wi-Fi 6 and others that will come into the market. And that converging with the wide area network will make the LAN and the WAN to be able to seamlessly operated. The cloud itself is giving rise to a completely new category, which is where we have invested to deliver the ability for applications to give superior and more deterministic performance as they connect to multi cloud.
And within networking space, the Multi Cloud Connect is emerging as a category by itself. So all of these areas and more with AI and what we are attempting to do in move essentially is like an IoT [indiscernible] while we don't own any spectrum, we still connect multiple -- millions of devices and several connected car solutions that we offer without being an MNO ourselves, right? So we are delivering that platform. So if you see even in some of the examples that I've given, these are ongoing disruptions that are happening. And we have been very aware of these disruptions and these are exactly the spaces where we have been investing to make sure that we can strengthen ourselves, and this is where we saw the opportunity for us to go and disrupt incumbents in established markets -- in international markets.
And those are the areas we are -- we have invested and we will continue to invest. And there are many, many more. We have talked about the AI and our participation in that AI cloud. We've been talking about AI embedding in our products. MOVE, for example, can now tell exactly what is the best time to deliver a software over there. And these are all part of the investment. So we are -- we have a very active team, a very solid framework on innovation, what technologies are emerging now, what technologies are likely to emerge. We have a program to see how we invest early in them, and then they take decisions on how and where we need to accelerate our investments. Even in our IoT business, we are setting out to build solutions around video analytics. And we are in very early stages of those video analytics and capabilities, and we already have several trials with customers that we are executing on.
So there are many, many areas that I can talk about. And we are -- we have very calibrated investments in all these areas. Our innovation teams are in discussions with research institutions in academia. We are talking to several start-ups. Our own digital fabric, we are opening up to innovators to come and innovate on top of our fabric. So on the innovation topic and on areas where we are making early investments, there are a number of programs that we are doing, all with very calibrated investments at this stage. And as we see the opportunities and it gets into Stage 1 in our Stage [ 1330 ] process and that is when we will determine whether any of these require accelerated investments so we can capture the market. So we have a very solid framework and we are following a well-defined process and strategy to track all of these and execute on these.
This brings us to the end of the Q&A session. I'll now ask Lakshmi to share his closing remarks.
Thank you all. As I said earlier, we are quite excited, and I think we are in a very, very good place. Our traction with our customers and engagement intensity is improving as we position our full portfolio of digital fabric. There might be slowness because of the macroeconomic conditions, but we feel very confident because of these engagements with customers. And we think that we are executing on our strategy very well to integrate all the acquisitions and inorganic investments, and we will continue to execute on this precisely to the plan. Thank you.
Thank you, Lakshmi. This brings us to the end of the call. In case of any queries, please write to investor.relations@tatacommunications.com. The recording will be available on our website in the next 24 hours. You may please disconnect now. Thank you.