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Tata Communications Ltd
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Ladies and gentlemen, good day, and welcome to the Tata Communications Limited Q3 FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Vipul Garg, Head of Investor Relations at Tata Communications. Thank you, and over to you, sir.
Thanks, Kanna. Good afternoon, everyone, and welcome to the Tata Communications Limited conference call. We are joined today by Vinod Kumar, MD and Group CEO; and Pratibha Advani, Chief Financial Officer.Our results for the quarter and 9 months ended December 31, 2017, were announced yesterday, and the quarterly fact sheet is available on our website. I hope you had an opportunity to browse through the highlights of the performance. We shall commence today's call with the key thoughts from Vinod, who will provide you an update on the market environment and strategic direction of the company. He'll be followed by Pratibha, who'll share the financial highlights during the review period. At the end of the management 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 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 is included in our annual filings, which you can locate at our website, www.tatacommunications.com. The company does not undertake to update those forward-looking statements publicly.With that, I would like to turn the call over to Vinod to share his views. Over to you, Vinod.
Thank you, Vipul, and good afternoon, everyone, and a very warm welcome to all of you. I will start by giving you a perspective on our strategy within the industry context, then discuss our performance in Q3 and then close off with a few updates.Several trends have created disruption and opportunities in the telecom sector during the past few years, including IoT, artificial intelligence, big data, cloud computing and so on. In the coming years, we will witness the impact of more technologies like edge computing, 5G, blockchain, et cetera. Very few telcos have been able to turn these technologies into business enablers for their core connectivity business and at the same time, build services that leverage these disruptive technologies. I can confidently say that Tata Communications is one of the rare telcos globally that has been bold in terms of both innovation as well as in terms of execution to make the shift from a pure connectivity provider to a next-generation service provider.We had defined our strategy to make this shift 3 years ago and have put our money where our mouth is, sometimes even to your slight disapproval, I must add. As you will see from the increased disclosure we've made this quarter on the operating metrics related to our growth and innovation services, we can confidently say that we've moved beyond just connectivity to being a digital infrastructure provider. I underscore to being a digital infrastructure provider and not just a telco. We've been bold to share these numbers with you because we are confident of the trend that we see building up. Most of what we have shared may look small in our overall context, but I urge you to look at the nature of the services, the type of customer engagement that lies below them, and the stickiness of what we're offering. I hope that this also provides proof on our execution capability that our team has to translate concepts and trends in technology, to products and services, and then to operating results and then to revenues. The funnel for our growth and innovation services is getting stronger as our sales teams get better at positioning our services and the base of our customers who are willing to refer us is growing. You will also see how this is translating into a steady improvement in our product penetration rates.Coming to the financial results that we just announced. Despite industry headwinds, our data business has delivered healthy growth. Our data business revenues grew by 6.8% year-on-year and 3.6% quarter-on-quarter. Last quarter, I talked about churn affecting us and how we've been proactively tackling it. I'm pleased that the growth trajectory in traditional services was back to usual levels on the back of active churn management as well as new wins.Our traditional services revenues grew by 5.7% year-on-year. Products like VPN, Internet leased line and Ethernet have been steadily growing in double-digits, which is industry-leading growth levels.Our growth services witnessed another stellar quarter, with year-on-year revenue growth of 38.5%. Growth services are scaling up as per plan, and they remain on track to contribute positively to earnings in the coming quarters. The achievement of a EBITDA-neutral exit rate for growth services in March will be a function of the speed of our delivery and the customer usage, but we are getting closer.Growth services contribution to our overall data will grow steadily from the 20% in Q3 to around 25% in the next 1 year. Innovation services will contribute additionally around 2% during this period of the next 1 year. We expect that the pace of growth in data business will pick up further as industry headwinds dissipate and the business attracts new customers. We expect the growth rates in traditional services and growth services to be maintained for the coming quarters.The voice business declined in line with industry trends. Q3 is generally a seasonally weak quarter, and we witnessed pressure on both volumes and pricing. The voice revenues declined by 26% year-on-year, but we could hold on to our EBITDA margins of 6% due to better cost management and operating efficiencies.The transmission services grew by 12.5% year-on-year on account of new customer wins, especially internationally and for higher value-added services than in the past. The funnel of international opportunities for this business remains strong, and we see growth being sustained for the coming year.Last quarter, I talked about the importance of consistency of earnings delivery and how stronger EBITDA and return ratios will drive our value in the future. We believe we are on the right track, and with stronger execution and operating leverage, we will elevate the growth and profitability further. Our transformation and digitization initiatives will bring in cost efficiencies in the future.As part of our global growth strategy, we expanded to Latin America during the quarter. Brazil is the ninth-largest IT market in the world and the largest in Latin America. IT investments in the country are expected to grow by 6.7% this year, twice the rate of global growth. By linking the new Seabras-1 cable system with the Tata Communications global network, Tata Communications has expanded to Brazil, connecting Latin America's largest economy with the financial capitals such as New York, London, Mumbai and Singapore. We entered into several strategic partnerships in the recent months, working together with leading companies to push the boundaries of innovation and to help shape the future. Some of these are the partnership we did with DRVR for international fleet management application for our MOVE platform. We partnered with the European PGA Tour for media services with cloud data for our big data platform, Motorsport.tv for Internet television platforms and to deliver video content and with Ultra Cast for live 360° videos and virtual reality content. The end result of all these partnerships is to build a best-in-class global technology platform that will help to underpin the partners' digital transformation.I'm happy to say that in the last quarter, we've been positioned for the first time by Gartner in its 2017 Matric Quadrant for Managed Hybrid Cloud and Hosting in Asia Pacific. Our inclusion for the first time in Managed Hybrid Cloud Hosting Matric Quadrant, Asia Pacific is a testament to our continued focus on making it easy for customers to accelerate their digital transmission strategy through a cloud-first strategy. Another important milestone this quarter was the filing of the land demerger scheme. The filing of this scheme for demerger of surplus land is a welcome move and one that we've been all waiting for. I'm sure that you're eager to know more about what we're doing with regards to the TTSL enterprise business. All I can say at this time is that we're convinced about the industrial logic of an integrated enterprise play that spans all subsegments of the market, that we find the network reach that TTSL has extremely interesting, and we see clear operating synergies between our 2 businesses. We're carefully studying the opportunity and continue to maintain a strong interest in the asset.To conclude, the digital transformation is making waves across all sectors. Arguably, in most businesses, the focus has today been on looking digital, but now organizations across industries want to actually be digital. Cloud has become a strategic platform for businesses to expand into new geographies, introduce new products and services faster and to drive their growth. Collaboration, mobility, and IoT are now more than a buzz, and companies are looking for providers who have real solutions that can be delivered here and now. Through our product portfolio and platforms, we harness the unparalleled reach of our network and empower organizations to become truly digital and drive their growth on a global scale. This proposition that Tata Communications offers is resounding with customers around the world, and they do see us as a digital infrastructure company, and we hope that you do too.With that, I invite Pratibha to discuss the financial highlights of the last quarter. Thank you.
Thank you, Vinod, for sharing your thoughts on the evolving industry dynamics and our strategic roadmap. A very good afternoon to all of you, and thank you for taking out the time this afternoon to be on our call. I would also like to thank you for the congratulatory messages that you've been sending to us since last evening on the strong set of numbers that we've delivered, and we are happy that we have not disappointed you and not only met but exceeded your expectations as well.Consolidated revenues came in at INR 4,115 crore, a decline of 2.4% quarter-on-quarter and 5.6% year-on-year. But you will agree, this is not the true reflection of our intrinsic performance. The decline in voice was compensated by strong growth in data business. Consolidated EBITDA stood at INR 613 crore and witnessed a growth of 8.6% quarter-on-quarter and 11.9% Y-on-Y. We had healthy EBITDA margin expansion this quarter. Margins expanded by 150 basis points quarter-on-quarter and 230 basis points on a Y-on-Y basis. Margin expansion was on account of razor-sharp focus on costs, coupled with strong growth in our high-margin traditional services business.Other income was high this quarter due to interest received on the advance paid to Tata Sons for Docomo settlement. This onetime interest income was INR 29.7 crores. Consolidated PAT stood at INR 10 crore against a loss of INR 250 crore last quarter. Tax amount looks high because of change in U.S. tax rate due to which the value of deferred tax assets had to be brought down in our P&L. The one-time impact on this account was INR 16 crores.Moving to our segment results. During Q3, data services reported a revenue of INR 2,884 crores, an increase of 3.6% quarter-on-quarter and 6.8% Y-on-Y. This growth was achieved despite industry headwinds due to operator consolidation. Growth services witnessed another stellar quarter, while traditional services bounced back to its usual growth trajectory. Revenue momentum in data services was healthy due to new client wins and better uptake of data bandwidth. Data EBITDA came in at INR 539 crores, witnessing a strong growth of 16.7% quarter-on-quarter and 14.9% Y-o-Y. EBITDA margin expanded by 210 basis points quarter-on-quarter and 130 basis points on a Y-on-Y basis and came in at 18.7%. Margin expansion was on account of higher revenue growth, productivity benefit and yearly cyclical benefit on account of reconciliation with our international service providers. Data business now contributes to 88% of our overall EBITDA. In traditional services, our revenue was USD 302 million and witnessed a growth of 1.6% Q-on-Q and 5.7% Y-on-Y. EBITDA for the quarter came in at USD 95.3 million, witnessing a strong growth of 16.4% quarter-on-quarter and 22.7% Y-on-Y. EBITDA margin for the quarter came in at an all-time high of 31.6%. As Vinod mentioned, products like [ PPL ], ILL, Ethernet and ILM are all growing ahead of industry growth rates.Growth services delivered another quarter of strong growth and are scaling up as per our plan. Revenue for the quarter came in at USD 89.6 million, a growth of 4.5% quarter-on-quarter and 38.5% year-on-year. We continue to invest in this business. As Vinod articulated earlier, we are on track, and with each passing quarter, growth services are becoming more meaningful and contribute to 20% of the overall data revenues and will contribute positively to earnings in coming quarters. Some products have already turned EBITDA positive, and as we keep on growing scale, the overall portfolio should turn profitable.Our UCC portfolio contributes to 58% of growth services, and this has grown Y-on-Y by 20% and is already EBITDA positive. Media services are growing by 28% year-on-year and are on track to break even. We continue to invest for our growth in our innovation portfolio, and our innovation portfolio presents an opportunity for us to participate in the emerging fields of IoT and cloud-based offering. We expect innovation portfolio to start making a healthy contribution to our overall revenue from FY '19, although I must reiterate, we would continue to invest in this portfolio. Revenue for these services is still not meaningful, but we have added some operating matrixes in our fact sheet so as to give you a flavor on how these products are shaping and their potential growth opportunity. You would have noted that during the course of the year, these metrics have grown multifold. For example, IoT India devices have grown by 10x, while SIMS ordered on the MOVE platform have gone up by over 11x.Moving to the performance of our subsidiaries. At transformation services, the revenue for the quarter came in by INR 294 crores, which is a growth of 10.5% quarter-on-quarter and 12.5% Y-on-Y. EBITDA came in at INR 40.4 crores, witnessing a growth of 19.6% Q-on-Q and 10.6% Y-on-Y. EBITDA margins expanded by 100 basis points on a Q-on-Q basis. We have added a few marquee international customers and continue to see a good funnel.The challenges in payment solution of business continue, albeit it is bouncing back. We are focused on cost optimization by closing unprofitable ATMs. We have, however, seen an improvement in the number of transactions, which have inched to 17 in December, but money supply continues to be at 50% of predemonetization level. Our emphasis is on driving an efficient operation and grow the business. Voice segment reported a decline in revenues of 14.2% quarter-on-quarter and 25.9% year-on-year. Q3 is a seasonally weak quarter, and we witnessed both volume and pricing pressure this quarter. EBITDA came in at INR 74 crores and grew by 28.2% quarter-on-quarter and 6.2% Y-on-Y. You would recall that last quarter, both EBITDA and margins were high due to one-time cost benefit. This quarter, the margins have normalized to 6%, which is very much in line with our long-term guidance. This segment continues to be important for us from a free cash flow perspective, generating year-to-date free cash flow of INR 258 crore.CapEx for Q3 was USD 57 million. Year-to-date, we have incurred a CapEx of USD 183 million. This is in line with the broad guidance given at the start of the year. Net debt at the end of the quarter came in at USD 1.245 million -- sorry, USD 1.254 billion, increase of USD 45 million over last quarter. The increase in debt is largely due to increase in working capital gap. The weighted average cost of debt was marginally higher than last quarter and came in at 3.6%. This was due to onetime arrangement fee on refinancing of a long-term loan. Adjusted for this fee, the cost of debt would have been flat.We are moving in the right direction. Our product portfolio and solutions are geared towards the future. And with a strong execution track record, we have created a niche for ourselves as a digital infrastructure provider. International transformation and productivity enhancement initiatives will continue the momentum in margins.I would like to bring my comments to a close and request the moderator to open the forum for Q&A. Thank you.
[Operator Instructions] The first question is from the line of Amruta Pabalkar from Morgan Stanley.
I have 3 questions. Firstly, on the overall traditional basket, you mentioned that a couple of products are going ahead of the industry. Would you give us some more color as to how much have you been able to gain in terms of market share? And have you benefited in gaining this share because of some other peers of yours being under pressure? And is there -- and is this funnel really accelerating in the near term? Any indication on this would be helpful.
Okay. Maybe I'll take that. So we don't have the market share figures that I can share off immediately now, Amruta. But where we are definitely gaining a share, I would point out too is in our ILS services in India and in our VPN services in India and outside. So both of those cases, we are gaining market share because of a couple of reasons. One is the strength of our network and quality of our services as well as, I think, in our VPN services, the continuum of offerings we have from traditional VPNs all the way going to IZO SDWAN or software-defined WAN services is quite compelling. And in India, nobody has that breadth of service. And internationally, we have comprehensiveness of offering, which is fairly unique. So I'd say in both of those cases, we are actually gaining market share and growing.
What I can share with you, Amruta, are some of the growth numbers in these services. VPN is growing by 11% year-on-year, ILL is growing by 15% and Ethernet is growing by 16% year-on-year.
And if I can add to what Pratibha just said, 11% and 16% on VPN and Ethernet is, I'd say, multiples of where our international peers will be in terms of year-on-year growth. And then ILL, if we look at the figures for enterprise internet access from our competitors in India, we will still be higher than them. I can't sort of give a figure off the top of my head how much faster we're growing, but we're definitely growing by gaining market share.
And actually, we're gaining market share in the international geographies. Those are growing by 11% for us year-on-year versus India, which is growing at 9%. So both are very healthy growth numbers that we are witnessing.
Sure. Secondly, on the Tata Teleservices' impact, we did get some flavor of it in the previous quarters, how it could be the potential impact and exposure. Do we have any kind of a revised guidance based on how the negotiations are shaping up? What could be the potential impact that one can expect in the TCTSL and traditional segment in revenue and EBITDA?
Amruta, we'll go by the numbers that we had shared in our last conference call, but we are still not seeing the impact coming in. And hopefully, Q4 will also be insulated, and we should see the real impact happening in the next financial year.
So is it fair to expect, say, 50% of revenues potentially at risk or just from the -- on back of TTSL wind up?
Did you say 50%?
Yes, 50% of the TTSL exposure at risk on back of the potential merger? Or you think that is an aggressive estimate?
I'm still not clear, what 50% of the revenues we get from TTSL or 50% of TCPS revenues?
No, 50% of the revenues you get from the TTSL.
It's tough to say. I think there'll be a gradual tapering off of services over a period of time. It's -- I don't think we've given an estimate of 50%.
No, Amruta, what we had not said was 50%. We had said that it could have an impact on our overall business of about $50 million, $55 million. But the revenue share to overall TTSL to TCPSL revenue is much smaller. Does that answer your question?
Okay. So just a small clarification there. So the total exposure to TTSL is about USD 50 million to the TCTSL segment and some exposure on the -- to the traditional segment? So is that correct?
That is right.
Okay. And lastly, on the potential acquisition as Vinod -- of TTSL, as Vinod mentioned that -- if you see this as a strategic fit for your business. Is it possible to kind of elaborate it a bit as to what exactly revenue and cost synergies do you see for Tcoms? And how should we really be thinking about this merger from...
At this point, I don't want to talk -- I cannot talk about numbers. But I'll just highlight qualitatively where we see the synergies. From an operating perspective, one shared services you really don't need the same extent of shared services when you're merging 2 businesses that have certain similarities and we also have significant geographic presence and understanding in India. The obvious functions like engineering, operations, field operations, there are synergy opportunities. And finally, on the revenue side, which is where the really exciting possibilities are, is we have a much broader product set than what TTSL currently has. And their 51,000 customers will be quite interested in, or many of them would be interested in the broad portfolio of services that we bring, that's already operational and live in TCL. So those are some examples of where the synergies would come from, but I'm not in a position to discuss numbers now.
[Operator Instructions] The next question is from the line of Naval Seth from Emkay Global.
I have 2 questions. First, on the cost-control initiatives. Can you highlight what has been the -- or which other the cost heads where we have done and where results have been seen? Because as per your reported number, network OpEx has seen kind of savings on sequential basis. So if you can elaborate on the same.
I'll give you sort of the overall strategy on cost control. So we are doing several things in this area, and we -- but it began with activities earlier in the year to reduce our manpower costs. And where we are now is we had a fairly major restructuring of the organization design itself in order to achieve 2 things. One is obviously to reduce our cost through delayering of the organization as well as flattening the pyramid, so to speak. And we also are looking at where work gets done as organization and customers, and where revenue gets booked and so on, evolves over a period of time. We think there's an opportunity to move costs to the right geographies closer to customers and revenues and those will result in some savings. So organization design and delayering are one set of activities. The second really is part of our digital transformation project, which is to look at our processes to streamline them and also to make them lighter touch and to see how we can automate it. We're in the early stages of that journey as you know. But this will be an ongoing exercise as far as technology and our structure is concerned, and this will result in manpower savings for us.
So Vinod, apart from manpower, I mean, if you can quantitatively give some color on the savings what we have seen, if at all you can, will be helpful.
Go ahead on the network, please.
Yes. On the network, we're doing actually a couple of things, as Vinod mentioned. We're leading a large transformation program across the organization. And we're actually leading one specifically in finance where we are closely looking at all the costs and seeing opportunities on how we can negotiate better with our vendors. We're also looking at capacity consolidation and design, and some of these have started to pay dividends, and we're seeing the benefits. I also mentioned in the call, we also got a 50 basis point benefit because every year we do our reconciliation with our vendors. This is seasonal and cyclical, and that benefit has also flown in into our network costs.
Okay. And second question on the transformational spend of $90 million to $100 million. I mean, last call, it was mentioned that extends it towards $5 million on quarterly basis. So was that part of current -- in 3Q as well?
That is right. But having said that, we are also -- we're looking at our entire transformation program and looking at what could be certain quick wins that we can attack, and you're starting to see that benefit in the network cost. So the investments have got a little staggered and you're not seeing the full impact in this quarter.
But it was there in the last quarter?
That is right.
Yes. So in terms of our transformational program objectives, they haven't changed. If anything we will see if we can do more. But we are spending very wisely, thanks to Pratibha's control of the purse strings.
And last question is on data EBITDA and data margin. So shall we assume that the EBITDA has been now bottomed out or margins have been now bottomed out at 16.6%, which was reported last quarter, and it'll continue to improve from what we have seen in 3Q as well?
You should see the momentum in our margins. But having said that, I would like to add that we would see our traditional portfolio margins actually stabilize more at 29%, 30% range. And the reason we're saying this is because we will see pricing or we are starting to see pricing pressure as the annual contracts come up for renewals. And at 29%, 30% level, we'd be comfortable.
And despite your growth services product mix changing and losses increasing this quarter, so our target remains on track for the services to turn -- some of the services to turn EBITDA positive in 4Q?
And that's right. Actually, in my commentary, I especially called out that our unified communication portfolio had already turned EBITDA positive. And also, Q3, even in growth services, we see an impact of seasonality coming on account of the usage-based services because most of the international geographies are on 2 weeks of vacation. So that is why you're seeing some of the impact on the EBITDA, which is almost a loss or flat quarter-on-quarter.
The next question is from the line of Rumit Dugar from IDFC.
Firstly, on the growth services side, if I look at it on an aggregate basis, you are run-rating at about $350 million, but you're still making losses. So should we think of the cost structure more at a product level in the growth services because, typically, $350 million is a pretty decent scale to start turning EBITDA. That said, what scale from a product cost-structure perspective do you think growth services can start delivering EBITDA on an aggregate basis?
Rumit, you're right. We have gained scale in growth services. But this is a portfolio, I have to point out, where we are also having to share commissions with our partners. So while at an EBITDA level it's not looking exciting, but as it scales up, you're going to see the real benefit from -- at EBIT level because the CapEx investment is not happening in this portfolio. The entire portfolio should turn EBITDA positive at about $425 million, $450 million. Having said that, the way we are defining growth services, what would also happen is as some of our other services in the innovation bucket mature, they will then come into growth services. So this is a portfolio that will continue to grow. But within this portfolio, you will start to see most of the products turning EBITDA positive next year.
Understood. My second question is, considering the kind of investments that you have been making in new areas, new services, products, it seems like there is a massive increase in your overall product and service offerings. So effectively, now you're straddling between legacy, new tech and innovative new services and offerings. In this context, how do you structure your sales organization from a structuring perspective, incentive perspective to maximize the sell-through? So if you can just give me some color on your sales.
That's a very -- it's a good question, but requires a long answer for you to get an understanding. What I can say is that over the last 2 years, we've learned a lot about how customers buy these growth services and the innovation services. And we have modified the sales organization to accommodate these buying behaviors. So at this point out 2 of many things that we've done, but 2 salient ones, one is, we have more product specialists now assigned to selling and driving the -- selling these growth services, right? So we have people for security, for Unified Comms and for IoT, for example. In addition to that, we have created, and this is just beginning to -- it's being put in place and will start showing effect in a quarter or two, is dedicated desks that will be tasked with driving adoption and usage. So this, again, is a new requirement or new thing that we've learned by selling services in the Unified Comms space and in the mobility space, which a traditional salesperson will not be focused on. And the third is we've made quite a few changes to our sales compensation structure to get people to focus on these services. One, to make sure that they get positioned in all our accounts; and secondly, we've also made changes in the compensation structure, tying -- in order for them to drive usage once a customer has come on board. So there are quite a few things, but these are some examples of what we're doing. And in fact, in growth from -- last year, we grew by 19.5% or 20% year-on-year, and this year, we are at 39%, 40% year-on-year. A large part of it, I would attribute it to the sales process getting more customized and sophisticated for growth services.
The next question is from the line of Rajiv Sharma from HSBC.
So just two questions from my side. The Tata Tele impact in the previous quarter on EBITDA was USD 1 million, so are we carrying that much impact in -- and so the EBITDA numbers have been adjusted for $1 million again this quarter? Or we've stopped taking the impact now and we'll take it once the merger is finalized?
No, that $1 million impact has already been taken last quarter. So I mean, that will continue.
So we'll not get any big spike or onetime adjustment in our numbers if that $1 million impact and the $55 million annualized revenue impact is getting adjusted, then there should not be any onetime big impact because you said a tapering down will happen in your earlier comment, so I didn't really get that.
Yes, so I just want to clarify, we anticipated that the impact would flow in on the revenue. That hasn't started to happen here. So that has got deferred. And most likely, you would see that impact coming in, in Q1 of FY '19.
And as -- if it takes more time, it's better for us because it allows us to replace that revenue with revenue from other customers, especially in TCTS.
But the impact will be at the revenue level. At the EBITDA level, there will be no impact because you're already accounting for it.
No, $1 million was just an initial ramp down of some services. But there would be an impact of the $55 million, that would be close to $8 million to $10 million.
Okay. So currently, we are adjusting for a $4 million annualized impact, but we are leaving out the rest, $4 million, given that we have some variables which are pending. Is that the way to look at it?
No, actually, the way I would say is that $1 million for services that we were doing, which has got discontinued. Those are one-off services that we were doing for them. You would still see, on the $50 million, $55 million, you would see the $7 million, $8 million impact next year.
So that'll be incremental to what we've been adjusting in this quarter and the last one, it'll be incremental to that.
That's right.
Okay. Second question was, I'm just trying my luck, but on your data margins at an overall level, currently you'll -- you're already 18.5%. You have a long-term suggestion of 27%, 28%, 30%. Do we see this going to at least 20% and above next fiscal?
I just want to clarify, when Vinod did talk about data margin that was really for our traditional portfolio services where we said we would hit...
No, I'm asking about the consol level.
The consolidated margin, as I said, they are on the right growth trajectory. We hope by end of next fiscal, we do touch 20%, 21% as the growth services portfolio turns profitable. And having said that, I do want to highlight that we would continue to invest in our innovation services. And you would have seen some of our operating matrixes there. So some of that investment would come in terms of product engineering, and the other piece will come from customer wins. So success-based wins will also compel us to make those investments.
And lastly, Vinod mentioned something on the demerger of land. So what's the progress in this quarter?
The -- I mentioned that the scheme has been filed, and now we're waiting for a study approval. That's the latest on that. We continue to maintain an August-September timeframe to conclude the process.
So when you say conclude the process, it will mean that the final monetization will happen?
No. No, it means that the land will be demerged into HPIL.
So final monetization may still take a year's time?
I can't comment on that because that is an HPIL decision, right? Because it's not ours to monetize.
The next question is from the line of [ Sandhill Kamaraj ] from Newbury Capital.
My question is in reference to the transformation from the 4G to 5G and the automated calls and connected mobility coming into force. So how do you see 5G panning out for the next 4 to 5 years?
Well, we see 5G as an opportunity for 2 reasons. One is we believe that overall data consumption will significantly increase. And the second is, with 5G, we believe that there will be last mile capital equity that we will get or last mile options which are based on 5G that will meet the needs of some of our enterprise customers. And hence, we look at it as one more access option that will be made available to us as and when the carriers roll it out. So it's not -- since you're talking a 4- to 5-year timeframe, yes, we can assume that, but it's not going to be a near-term thing. Globally, as 5G rolls out, again, we see it as a positive thing because it drives data consumption and gives us access options.
The next question is from the line of Himanshu Shaw from HDFC Securities.
Sir, just a couple of questions. You mentioned that Tata Teleservices having around 50,000 customers, and we are reporting around 5,000 customers. But I'm assuming our data service, our enterprise business would be probably much larger than that of Tata Teleservices. So why, if that is so, what's the difference in terms of customer count? Or is it they serve too many small enterprises and we just focus on large companies or something?
You answered your own question. You're right, we focus on large enterprises, whereas they focus on the medium and small end of the market. So that's why the customer count. Right now, there's no overlap. But we -- yes, that's why they have 50,000 compared to our 5,000.
Okay. Sir, so is it possible to share the opportunity size or something? And so if we acquire -- any specific reason we have not been entering into medium and small enterprise? Or is it due to some restriction or something? And once the Tata Tele business gets sold, we would be able to venture in that segment?
Well, the reason is just we see the -- we've seen until now an opportunity to expand our presence by selling more services into the large enterprise market. However, the SMB market in India is a faster-growing segment. And with the TTSL opportunity on the back of their network, we see the timing being right to get into that segment of the market. Additionally, we have now services such as hosting, security, Unified Comms, our collaboration services that can be taken to the enterprise -- small- and medium-sized enterprise customers who until now were just buying pure bandwidth, right? Now they are looking to buy more services. And the timing, we believe, is right to include that segment in our addressable market.
Sir, just one last follow-up on that. Is it possible to give some size of the market of large corporates and medium and small enterprise where we are not catering, it would -- help.
We don't have -- I don't have that off the top of my head, but we'll give you that relative market size thing the next time we have a call.
Sure, sir. Sir, second question is when I just compare our enterprise business, and that is primarily the data services, with that of Airtel, probably on revenue run rate, we are at par with them, but on the consolidated margin front, we're almost like half of Airtel. I understand that probably some of their costs, especially corporate costs, network costs may be sitting in some other business segment, but still, the difference is too high. So what could be the potential reason? And is it fair to assume 50% of our revenues are outside India? I'm presuming Airtel would have more in India because that is their India segment business only or 100% in India, so they're much larger than us in enterprise business.
No. You see, it's not an apples-to-apples comparison due to multiple reasons. One is, as far as I know, they report all of enterprise, all segments, small, medium and large; whereas what we focus on is large. Second, there mobile data and -- is included in their enterprise reporting, as far as I know, and I have to say I'm only giving you my opinion, I don't know these things for a fact, whereas our business is really all data and cloud services. And like you said yourself because both -- we have both India and international, and our international is a much bigger component than what they would have. In terms of like-for-like market share, we are bigger when it comes to large enterprise data services compared to any other player in the market in India.
Okay. And sir, in terms of margin profile, the difference is quite enlarged between us and Airtel.
I can't comment on their margins, to be honest. I'm not sure how they allocate costs across various segments. And as I said, the revenue itself is -- customer segment and revenue itself are different than looking at margin, and trying to compare may not be -- may not provide any insights, really.
The next question is from the line of Aliasgar Shakir from Motilal Oswal Securities.
My first question was on your traditional segments. So this quarter, the margin that we have seen I think is the peak margin. Even before we sold data center business, we were not at this scale of margin. So I understand you didn't mention about the cost-optimization measures that we have taken. I just wanted to generally understand, so what is the further room for improvement on these margins probably over the next 2, 3 years? Because I presume that the majority of -- 70%, 80% of your revenues come from this segment in the data, so an overall margin improvement in the data segment will have a very strong bearing from your traditional services.
So as Pratibha said, the margins in this segment from traditional data, you should be looking out 29% to 30% because we have annual contract renewals that are coming up in the next -- usually, it's in Q4 and Q1. So that's one. We will continue to look at taking costs out. We've redeployed people to some of our growth and innovation services. But for this level of margin, we don't want to commit to. Obviously, we're going to strive to maximize margin, but 29% to 30% is what we are comfortable with for traditional data.
Revenue is probably scaled down by about 150, 200 bps, given that in this quarter we've done about 31.6%?
Yes, that's the Math. Yes.
Okay. Second question is on your ATM business. So your predemon level, we were profitable. Just wanted to understand that what is the -- probably it's taking too long, and I understand like you already mentioned that the money supply has been very weak. So just trying to understand the long-term focus in this business, revenue, profitability, potential outlook and probably -- we were probably earlier looking for some strategic options. So is that still on the radar? And how do we see this business going forward?
The strategic options will remain on the radar. But at the same time, we've done a lot of heavy lifting. And we are the only player in the market that has meaningful presence. And by far, we're the largest white label provider with our Indicash brand getting traction across the country, especially in tier 2 and tier 3 towns. Pratibha, I don't think this is on the datasheet also, but our January count of transaction is 81 transactions per ATM, which is higher than even predemonetization level. And cash continues to be a challenge. We're operating at about 45% of the cash that we have, but transactions have come back up. In fact, there's an article in the newspaper just yesterday on this as well across banks. So that's positive. We've operationally tightened our belt quite a bit over the last year as a result of demonetization, both in terms of OpEx, but also redeploying our CapEx very wisely and not spending incrementally to deploy ATMs. So the way I look at it is, yes, strategically, it's on the radar. We look for options, but we are not in any panic. We are the last man standing in this space, and we have a great footprint. And Indicash is gaining as a brand, we will see what we can do with it. But we understand the underlying nature of the business and are aware of what the return possibilities are. But it is -- no, it's back to EBITDA-neutral level, and we see that inching up over the coming quarters. So it's, at least I would say, it's not a -- it's not in the troublesome state it was in 3 to 4 quarters ago, immediately after demonetization.
Okay. So a quick follow-up there. And so I mean, assume that the money supply doesn't improve very significantly in another few quarters, your -- the run rate that mention for January, should that allow you to turn profitable and sort of still probably generate some decent single-digit margin? Or it will continue to remain loss-making for some more periods? And if that does happen, then, I mean, do you sort of also explore the option of closing down this business if you don't find a strategic partner soon?
No, I'm not going to discuss those options on a call like this. I don't think it's a fair question. But we actually see it improving in terms of margin. And as I said, we're already at a neutral level so it will not be a drain on our EBITDA.
Got it, that's helpful. Just one quick query on this TTSL part. So Pratibha, you did mention about the $7 million, $8 million EBITDA impact on a $50 million revenue impact. I just wanted to understand the bifurcation between voice and data. What proportion of this $50 million would be probably voice component business with TTSL and data?
This is all data.
Okay. So $7 million, $8 million...
And others, right?
TCTS is us. That's all data.
Okay. So then -- so that is about close to around 14%, 15% margin that we were doing with them on the data business?
That's right.
Okay. And just last question on your working capital. So we've seen a continuous uptrend...
And I just want to clarify, when we say margin, a lot of costs also get allocated. Now when this business goes away, my costs don't go away immediately, right? And that is why the impact is there -- going to be there on the margin.
So then in that case, probably, the margin impact would be higher because the costs...
No, that is why I'm saying it -- when you said 14%, 15%, although it would be a lower-margin business, but because some of our overheads also get allocated, now they don't immediately go away. And hence, the overall impact on the margins would be around that.
Okay. Just final question on your working capital. So here, we've seen a continuous uptrend and I presume it's all -- like you mentioned previously, it could be because of the higher proportion of working capital getting allocated towards your data business versus earlier the voice business. So just want you to sort of, I mean, just probably give some -- share some thoughts on the, I mean, outlook in terms of what sort of working capital requirement we would have over there. And I mean, it's just growing because of the particular -- because of the enterprise requiring higher working capital? I mean, if you can just sort of throw some light about why is this growing, and how far it can grow? And what is the implication it could have on our free cash flows?
Ali, actually, you've answered some of those -- that yourself. What we are now seeing is a very strategic shift in the data services portfolio, with data contributing 70% to the top line and maybe 8% to EBITDA while, earlier, voice was a negative working capital business. Data, what we are also finding is that the enterprise customer is demanding higher credit period. Having said that, the other impact that we've seen this quarter is also on account of GST, which -- our billings got delayed because customers are required to register based on the place of supply rules, and all the customers weren't agreeable to registering themselves. So that kind of had a rippling effect, which further compounded the working capital gap. In Q4, we hope to be able to collect some money, and we should see the working capital's gap stabilize.
The next question is from the line of [indiscernible] Singh from Excelsior Advisers.
Just trying to understand this new breakup. In terms of the growth services, is it 20% of revenues? Or is it 20% of data revenues?
20% of data revenue.
So of the total revenues, actually 14%, if I'm not mistaken?
That's right.
Okay. And secondly, like, when you say voice services, voice services is your traditional services, basically, what you're referring to as?
No, in -- within the data portfolio, we break that data into traditional, which will be ILL, IPL, VPN and our traditional mobile services. We have then within data, the growth services. And the third bucket is the innovation services. And even the 2 subsidies come under the entire data portfolio. Voice is an entirely separate segment, and we report the segment results separately.
Okay. And you mentioned that for data business and traditional services, you're looking at around -- this quarter, you reported around 6 and -- 6% and 5.5% growth respectively. And you think data business will also go up in the future?
That's right. Actually, we expect that -- so while the traditional portfolio growth is going to stabilize at the 5% to 6% level, what we are seeing is a significant ramp-up in the growth services, and which is what Vinod alluded to earlier. That portfolio was growing by 19%, 20% last year, and now it's growing by 35%, 36%. So we are seeing a significant ramp-up happening in the growth services portfolio. And given that ramp-up, for overall data services portfolio, we should continue to see a double-digit growth.
Perfect. And in terms of margins, if I look at your traditional services, the data business excluding the growth services and the growth services, so growth services, right now, we're making losses. What about the other 2 in terms of EBITDA margins?
For traditional services, we are making 31.6% -- 30% margins we made this quarter. Innovation services, we are still investing, so that's EBITDA negative. Growth services, we're still investing, is also EBITDA negative.
And what about data business?
Pardon?
Data business, excluding the growth services?
No, so I explained to you, the data portfolio consists of traditional services, growth services, innovation services and the 2 subsidiaries.And the transformation services, that subsidiary is making -- is EBITDA positive, making 15-odd-percent margins, while the payment solution services, that's the ATM business, that is still EBITDA negative.
The next question is from the line of [indiscernible] from Quest Investments.
Just one question that this year, the kind of growth that we have seen in growth services, so what's your take on next year and going ahead? Because some of the innovation -- and what -- how many products that you expect that -- from the innovation to migrate to growth in -- next year?
We believe that the momentum that we have in growth services will continue. Obviously, in the innovation bucket, we have our global mobility, which is our move service portfolio; IoT in India; security services and net foundry as the 4 large ones, and then a few others that we have, but those are the 4 large ones. In terms of revenue contribution, we expect that they will contribute around 2% of the data numbers for next year. And so that will be, in terms of percentage jump, fairly significant. And so we will continue to report and show them as innovation rather than move them into growth. I think we are probably 6 to 8 quarters away before we do that.
And second, how with the help of this growth services and the innovation, how does it help us, I mean, to get a new customer on the old set we acquire -- use our data services? Does it get, I mean, some data service business, I mean, because of this growth in innovation product?
Yes, absolutely. It works both ways. We have several examples of -- I'll say, an equal number of examples of existing customers adding our growth services. And we have customers who are making -- having their first experience with Tata Communications on the back of growth services, and then very quickly buying our traditional services. So most of our network customers are buying security services or some form of SIP trunking for their unified communication deployment within their enterprise. So that happens quite frequently. Equally, we'll have customers coming in for, for example, hosted contact center offering or security services and then buying a traditional internet connectivity service along with it. So it works both ways. So it definitely helps us sell -- cross-sell services into customers, which is why you've seen our product penetration rates increase steadily on a quarter-to-quarter. I think that's included in the...
Yes, actually, our product penetration, Vinod, of 4.5 last year has moved to 4.76 this year.
Okay. And on security services, where we are looking at in the next couple of years? Where do we find ourselves? How much -- what is the opportunity?
We -- the opportunity in security is significant. So we see a business which is several hundreds of millions of dollars, that's what I would say. We see significant growth opportunity in the security space. During the course of this year, we've largely been building out our product portfolio to make a comprehensive managed security service provider offering, and we are building out security operation centers in multiple geographies. And we are actively in conversation with customers around the broader suite of security services.
Okay. Pratibha, on the -- with the cost optimization level we have seen this, I mean, a very good impact on the current year quarter number, EBITDA side. So how do we see -- what is the run rate that -- and what is the room further, I mean, that we can bring down the cost?
Our efforts for cost optimization will continue, and Vinod articulated some of the initiatives that we've taken, which will continue to bear results. Having said that, I had also mentioned that the maximum impact we saw was in our traditional services portfolio, but some of that benefit we expect to stabilize going forward because, typically, the customer contracts come up for renewal in Q4 and Q1, and we are seeing pricing pressure there. So the benefits, even though they will continue, they will get negated by the pricing pressure that we will witness.
Okay. And if my understanding is correct that data services, which is EBITDA -- currently, EBITDA is around 18% that you say that next year would be a 20-plus percent? Or exit to last quarter -- exit will be at 21%?
We would aim for an exit at 20%.
Okay. And the rates impact that you said that is INR 16 crore is onetime, correct?
That is right. That is, basically, because of the deferred tax asset impact.
At the -- in the U.S. piece of business?
That's right.
The next question is from the line of Nimit Tanna from CWC.
Just one clarification. So while our traditional margins remain -- you've given the range of between 29% and 30%. You've said in the previous calls also that the effort of the transformation, whenever it kicks in, maybe second half of next year or later, should also help us structurally move and take that ahead of that. Is that fair? Just clarifying that point.
Nimit, that's right, but I'd also mention that some of the low-hanging fruits that we've already captured that benefit, and that is why you're seeing the upswing in the margins.
But, Nimit, your point is valid. In the second half of next year when we see our transformation program or the new systems in places and more streamlined processes, we will see both business velocity, and therefore, some revenue acceleration, possibly a faster revenue realization, and we should see some associated costs take out.
Ladies and gentlemen, with this, I now hand the conference over to Mr. Vinod Kumar for his closing comments. Over to you, sir.
Thank you very much for your participation and your questions. I hope that our increased level of disclosure this quarter will help you get a better understanding as to the operating metrics that are driving our growth services transformation and our innovation portfolio. As I said, we will continue providing this level of detail in the coming quarters, and we look forward to demonstrating very clearly, through both the operating metrics and the financial performance that will follow, that we are indeed positioning ourselves and being accepted in the market as a digital infrastructure provider. Thank you, and look forward to speaking with at -- during our next call.
Thank you very much, sir. Thank you. Ladies and gentlemen, on behalf of Tata Communications Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.