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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 '19 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.
Thank you, Sampath. Good afternoon, everyone, and welcome to Tata Communications' earnings conference call. We are being joined today by Vinod Kumar, MD and Group CEO; and Pratibha Advani, Chief Financial Officer. The results for the quarter ended December 31, 2018, were announced yesterday, and the quarterly fact sheet is available on our website. I believe you would have had the opportunity to browse through the key highlights. We shall begin today's call with comments from Vinod, who will share insights on business dynamics, market environment and business progress. He'll be followed by Pratibha, who will discuss the financials during the review period. At the end of 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 are included in our annual filings, which you can locate at our website, www.tatacommunications.com. The company does not undertake to update these 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 would like to start by giving you a perspective on the industry and then discuss our performance in Q3 and close off with a few updates. A recent study called out that the most successful business model today in terms of customer value, in terms of revenue growth rates and market valuation is the digital platform business model. 70% of the world's top-10 most valuable companies and 70% of the $1 billion unicorn start-ups all operate using this model. Yet, fewer than 2% of all other companies operate on the platform business model. This is forcing companies to dramatically change the way they look at themselves. Digital transformation that is internal and external lies at the center of every business's strategy to transform itself into a platform. And this, frankly, transcends size of companies, industries and is equally applicable in developing markets and in developed economies. And there is no digital strategy without digital infrastructure. Digital infrastructure that is borderless, always on, secure and that seamlessly connects humans and things. Digital infrastructure that allows seamless migration from one generation of technology to another, especially for large enterprises that have to deal with many legacy decisions while also wanting to grow rapidly into the future. Digital infrastructure that leverages customized solutions with the open and flexible world offered by both the cloud and the Internet. Building such digital infrastructure has been at the core of our portfolio evolution, our investment strategy and our execution game plan for the past 4 years. This vision and steadfast focus is beginning to pay off in very tangible ways, as I will discuss. It may not have always gone according to the timing that we envision, but there is ample evidence that what we are creating has a very large market. Our strategy to drive convergence between the system wireless world and the Internet of machines or things is compelling and is demonstrated through the following proof points: Our overall data revenue has grown by a CAGR of 8.8% over the last 3 years. This has been slower during the past 1 year due to the shake-up in the India service provider business and slower revenue ramp in our growth services portfolio. However, in comparison, our large global competitors during the same period have grown from anywhere between minus 18.6% to 2.7% in the same period. During the past 9 months, our growth services order book has grown by 85% over the same period last year. The issue we are contending with in growth services has been explained before, is a slower ramp on usage-based services and the longer gestation to implement RFPs and wins. We have been doing some very hard paddling for the revenue growth by creating such an order book, and this will translate into numbers in the coming quarters. I want to talk a little bit about IoT India and then NetFoundry. Firstly, on IoT India, we have chosen to focus on safety devices, smart lighting, smart metering and asset-tracking solutions as our priority tracks in India. I'm happy to say that we're progressing well on each of these use cases with commercial pilots underway and sizable orders in the cards. As an example, we recently won a sizable contract from a reputed global manufacturing company offering safety solutions for their workers. Eventually, we will be providing safety and tracking services for 50,000 workers under this contract. We have done many successful pilots for smart street lighting and for utilities and gas metering solutions across India. And the use of LoRa is now being called for in many RFPs and, hence, the doors will open in the coming quarters. NetFoundry, I -- there's a lot going on in NetFoundry, but I do want to mention one very salient data point, and this can be verified in the public domain. NetFoundry is featured on both the AWS Marketplace and in the Microsoft Academy. This is no mean feat considering the elite names that we share this recognition with, and it really validates the readiness and the need for application-aware and Internet-based connectivity solutions. Moving on. Changing our internal processes and making Tata Communications digital, as you know, has been the large preoccupation for us over the past 18 months. We are seeing clearer evidence of this transformation with the end-to-end deployment of digitally-enabled 0-touch processes of fiberglass services. We had nearly 35 customers floated to our Optimus platform, and they are seeing dramatic improvements in turnaround times for everything from providing quotes, all the way to delivering our service. We probably have another year or so to go before this program gets completed and deport all our customer or the majority of our customers to these platforms. But the evidence that what we are building is futuristic and competitively differentiating. It's compelling and it's already here. I want to wrap up this 2-point section with the biggest proof of our strategy at work, and this is the largest-ever customer award that Tata Communications has received, at least as far as I remember, and this award was won in December 2018. Tata Communications was shortlisted against major global incumbent competitors and won a 5-year contract to provide connectivity in the IoT space, using its MOVE platform to a large international industrial company. The 5-year contract value is expected to be in the range of $250 million to $300 million, with revenues expected to ramp from Q4 of the coming fiscal year, i.e. FY '20. This solution leverages many parts of our portfolio, with MOVE as in its core, and will position us well for several other wins in this space. This win also moves us closer to the $150 million revenue goal we have set for ourselves for innovation services in FY '21. I want to talk a little bit about sales now. One of the important metrics that we track ourselves is on the total contract value sold during the period. This contract can range anywhere from 1 to 5 years. For year-to-date FY '19, our total contract value sold for data services has been $1.1 billion, witnessing a 52% growth over the same period last year. I do want to point out this is the gross contract value, but we also have price erosion and churn, which we -- will reduce the number as we look at it. But I'm just giving indication of the overall size of business that we have been able to close and the level of market activity that we have going on. The number of deals during this period also increased by 8%, and we added 705 customers during this period. Within this, the growth services total contract value sold for year-to-date FY '19 is $619 million, which is also an 85% increase over the same period. This piece we've sold, as I explained in the previous example of the large win of $253 million to $300 million, which is included in this, was in various stages of execution. And as we start to deliver, we will recognize the revenue in our books. Our strategy always has been to sell more products to existing customers and make the business stickier and reduce our pricing pressure considerably. The product penetration ratio for our top-300 customers is now 5.25, that is as of December 31, 2018, and that's an increase from 5.1 in December 2017. Again, I want to state that please note that all sales figures that I've provided are on a gross basis before taking to account any price erosion of churn from our existing business. Before I move on to quarterly performance, I want to give you a quick update on the land demerger. The MCA approval for the land demerger has taken longer than expected due to the administrative control of Hemisphere Properties shifting from DoT to the Ministry of Urban Affairs. The first motion of MCA has already been completed, and the Ministry of Urban Affairs is in the process of appointing new directors for HPIL. We expect the process to expedite once the new directors are in place, and we are in continuous contact and following up with the concerned officials in the Ministry of Urban Affairs. Let me now touch upon the highlights of the quarterly performance. Data business witnessed strong growth this quarter. Revenues grew 14.1% year-on-year and 8.4% quarter-on-quarter on the back of strong performance across all our portfolios. EBITDA for the quarter came in at INR 766.7 crores, witnessing a growth of 35.2% year-on-year and 42.6% quarter-on-quarter. During the quarter ended December 31, 2018, based on Supreme Court directives, TRAI issued a notification stating new regulation on the access facilitation charges for cable landing stations. These directives would be effective from November 28, 2018. Accordingly, the company has recorded onetime revenue and operating and -- of onetime revenues as well as operating and maintenance expense recovery. This has led to a onetime EBITDA gain of INR 348 crores. This quarter we also had onetime expenses of INR 138 crores. All the adjustments were made on the data segment. The key finance section will be providing more details about the financials and the one-offs. Growth services portfolio witnessed strong momentum despite Q3, as I mentioned earlier, being a seasonally weak quarter. Revenue grew by 13% -- 13.2% year-on-year and 4.6% quarter-on-quarter on the back of new deal wins. EBITDA for the quarter was marginally negative as we incurred an upfront cost of a large deal. And usage-based revenue in Q3 is low due to the holiday season. We have a healthy pipeline, as I mentioned earlier, of orders and execution, and this provides us confidence on the growth outlook. We continue to witness an uptick in growth service profitability, and we hope to end Q4 with positive EBITDA. The traditional services portfolio has started to stabilize and witnessed revenue growth of 4.2% quarter-on-quarter. The operator consolidation in India, as you know, has affected this portfolio, while the revenue impact from this is largely over -- is still affected by higher access cost. We expect this high access cost to normalize by the end of this financial year. We witnessed strong growth in the transformation services business on the back of new deal wins. Our international funnel is strong, and we expect strong growth in the coming quarters despite having to absorb the TCTSL impact. In payment solutions, we have streamlined operations to bring cost efficiencies, and we started to see results of a steady uptick in EBITDA numbers. Consolidated PAT for the quarter came in at INR 173 crores compared to INR 1.6 crores in Q2 FY '19. To sum it up, I want to say that we continue to deliver consistent results, backed by the strong performance in our data business. As the new year sets in, we are committed to bringing transformational change in 2019 by offering a plethora of services to enhance and support our customer experience and their evolving business model. We aspire to remain innovative and are gearing up to bring in the necessary synergies within our businesses. I realize that the pace of change may not always be what one expects, but the aspirations of our Destination '21 goals remain alive and in our hearts and forefront in our minds. We're seeing evidence that what we're doing is making an impact to our customers. We are growing faster than our competition, and most importantly, we are making our business model future-proof. With that, I would like to invite Pratibha to discuss the financial highlights of the last quarter. Thank you.
Thank you, Vinod. A very good afternoon to all of you, and thank you for joining us on our earnings call today. I will take you through the progress we had made during the quarter and 9 months ended 31 December. Let me begin by giving a brief on our consolidated financials. Consolidated revenue during quarter 3 came in at INR 4,269 crores, an increase of 4.9% Q-on-Q and 3% Y-on-Y. This was primarily led by strong performance in data services portfolio. Consolidated EBITDA for the quarter stood at INR 843 crores, an increase of 33.7% Q-on-Q and 31% Y-on-Y. Margins have expanded by 420 basis points, both sequentially as well as Y-on-Y, largely due to one-off benefit and strong performance in the data portfolio. Profit after tax on a consolidated basis came in at INR 173 crores as compared to INR 1.6 crores in the last quarter. Before I move to segment performance, let me call out the one-off during the quarter. During the quarter ended 31 December, based on Supreme Court directives, TRAI issued a notification stating new regulation on the access facilitation charges for cable landing stations. These directives would be effective from November 28, 2018. Accordingly, the company has recorded onetime revenue of INR 91 crores and operating and maintenance expense recovery of INR 257 crore. This has led to a onetime EBITDA gain of INR 348 crores for this quarter. You would recall that in Q3 of FY '17, we had to take a provision against revenue and maintenance expense recovery write-back of INR 147 crores. This quarter, we also had a onetime expense of INR 138 crores. These expenses are on account of a one-off payment towards contractual -- prior-period contractual employee obligation of INR 38 crores. INR 14 crores was in payment of licenses, which had become redundant due to the ongoing customer transformation program. High access and colocation costs due to operator consolidation has also impacted us this quarter. This contributes to INR 86 crores. You would recall that in my last commentary -- in my last quarter commentary, I specifically called out the expected impact on access costs. This cost, I would like to add, is temporary and we are investing in our own last-mile capability and optimizing our network architecture. We expect this cost to come down to INR 30 crores to INR 40 crores in Q4, and will -- and it will normalize or go away from Q1. All the one-off adjustments were made in data segments. Consolidated normalized EBITDA for the quarter was -- came in at INR 632 crores. During the quarter, we acquired 100% stake in Teleena, which is now consolidated line-by-line in our books. Teleena EBITDA loss run rate of INR 30 crores is part of our innovation portfolio. Talking about the segment performance. Data business revenue came in at INR 3,326 crores and recorded a growth of 8.4% sequentially and 14.1% year-on-year. This growth was on the back of strong performance across all segments. Data services now contribute to 78% of overall revenues, an increase of 7.6% as compared to same quarter last year. Data EBITDA for the quarter came in at INR 767 crores and grew by 42.6% sequentially and 35.2% Y-on-Y, which was primarily led by one-off benefit. Our performance in data portfolio is strong even if you exclude the one-off revenue gain of INR 91 crores on account of the access facilitation charge. We witnessed a sequential growth of 5.4% after adjusting the AFA one-off revenue. Let me also remind you that seasonally, this is a weak quarter for our usage-based services. Moving to our traditional services portfolio. Revenue for the quarter came in at $299.5 million, an improvement of 4.2% quarter-on-quarter despite operator consolidation impact. On a constant-currency basis, this portfolio witnessed a growth of 5.8% quarter-on-quarter and 5% Y-on-Y. Traditional services had the benefit of AFA. Post adjustment of AFA, our revenue grew by 1.2% sequentially compared to last quarter, where we witnessed a decline of 1.3%. And in Q1, this portfolio was down by 1.8%. As you can see from these data points, this portfolio is rebounding to normal growth levels. The impact of operator consolidation on revenue has normalized, but we are still affected on the cost side due to higher access cost. Growth services witnessed strong momentum. Revenue grew by 13.2% year-on-year and 4.6% sequentially, coming in at $101.4 million. EBITDA was negative due to lower usage-based services in Q3 due to holiday season and higher upfront cost for the large deal wins that Vinod shared with you earlier on during this quarter that we had won and due to change in our product mix. The change in product mix has impacted the margin as we continue to invest in cloud security and media services. We have expanded our footprint of our security operations in Dubai and London in current year. On a year-to-date basis, we witnessed strong growth of 137.6% year-on-year for IZO services. We have added over 40 customers in IZO between March and December of 2018. IZO brings a lot of stickiness to the business. As a contract, that's typically for a 5-year duration.Mobility services grew by 64.1% year-on-year. Media services grew by 39.2% year-on-year on the back of recent deal wins for some of the marquee sporting events. Our wallet share has been increasing due to our superior delivery and execution, and we are getting more and more events from our existing customers. We have also added 5 new customers during current financial year. Moving to innovation services. This quarter our innovation services have been seen a significant growth. Revenue has grown from $0.5 million in Q2, to $2.4 million in Q3 aided by MOVE. While these numbers are small, but the movement is definitely significant as we have graduated from PoCs to commercial pilot, as mentioned by Vinod earlier. Moving on to our subsidiaries. Transformation services revenue came in at INR 337 crores, witnessing a growth of 14.7% year-on-year and 17.8% sequentially for the quarter. The growth was largely due to execution of deals in the pipeline. EBITDA for Q3 stood at INR 35.1 crores, witnessing a growth of 22.4% quarter-on-quarter. We will continue to see the strong growth momentum going forward.Payment solution is part of our strategy. We have optimized our ATM portfolio. In this quarter we have closed over 1,500 less profitable ATMs. This has led to an increase in profitability, and we recorded an EBITDA of INR 6.4 crores against INR 0.4 crores in Q2. EBITDA margin expanded by 680 basis points as compared to last quarter, coming in at 7.2%. Our average transaction per day per ATM has gone up from 85 in Q2 to 92 in Q3. This is also seasonally one of our stronger quarters. In voice business, we continue to witness a decline. Revenue for the quarter stood at INR 943 crores, translating to a decline of 5.6% Q-on-Q and 23.3% Y-on-Y due to continued decline in volumes. Year-to-date, our volumes have declined by 7 billion minutes. EBITDA stood at INR 75.9 crores, witnessing a decline of 18.1% Q-on-Q, but flat on Y-on-Y basis. You would recall that we had onetime gain in voice business last quarter. EBITDA margin for the quarter was at 8%. We continued to focus on cost efficiencies, and our aim is to generate as much as free cash flow as possible from the voice business. Year-to-date, we have generated free cash flow of INR 235 crores. CapEx for Q3 was at $69.3 million. Year-to-date, we have incurred CapEx of $206.7 million. This is very much in line with the broad guidance that we had given at the start of the year. Free cash flow, that is EBITDA less CapEx for the quarter, came in at INR 343 crores, an increase of 99% over last quarter. Even after deducting finance costs and taxes, we have delivered a free cash flow of INR 172 crores this quarter. Consolidated net debt stands at $1.287 billion, an increase of $36 million compared to last quarter due to working capital gap as voice business is declining, and also on account of acquisition of 100% stake in Teleena during the quarter. Our average net debt for the quarter was at same level as last quarter with spike at quarter end. Average cost of borrowing is at 3.76%, which has increased by 9 basis points quarter-on-quarter due to increase in average LIBOR movement from 2.11% in Q2 to 2.35% in Q3. We have seen a steady ramp-up in our financial performance as the year has gone by and delivered strong numbers across all parameters. Data business continues to be strong, and growth in services has been instrumental in our overall revenue growth. We are confident that we are moving in the right direction, and our product portfolio and solutions are geared towards the future as we gain scale in our group and innovation portfolio, we will see stronger momentum in our top line growth as well as profitability. This brings an end to our commentary, and we'd now like to request the moderator to open the forum for question and answers. Thank you.
[Operator Instructions] The first question is from the line of Girish Raj from Quest Investments.
So good numbers on growth and innovation. Just wanted to confirm this TCV that we have mentioned of $619 million. This is net new or there is a renewal part also.
That's what I said. This is for -- let me just make sure I respond to the right number. The $619 million for growth services is -- the 85% increase over the last year is gross. So to that, there has to be some -- in the increase of growth services is mostly going to be new because these are in the new portfolio, but these are gross numbers that I shared.
Okay. And so this would include innovation also, right, Vinod?
Yes, this is growth and innovation, yes.
Well, can you break down for...
I don't have it handy. We will have to provide that later, Girish. I don't have that.
Okay. And the order book, can you please -- this is the TCV, right. So we would have order book for growth and innovation also. If you can share that?
Yes. We can. Well, there is $1.1 billion, and we're saying $619 million is for the growth services.
I thought this was TCV, but we would have some other orders in hand, which was booked otherwise. Anyway, I'll confirm this with Vinod.
When we say -- this is a contract value, right, so it's over a 5 year -- it can be anywhere from 1- to 5-year period generally. There may be some exceptions. But by and large, that's what it would be. But that's what I'm referring to, is contract value and order book. I don't know how you're seeing it differently. Maybe you could take that with Vipul.
Sure. And this is over 5 years, and you said ramp up, will it be...
It will be various terms. I just wanted to be clear that it's not 1-year contract value. It's going to be -- some of it could be 1 to 3 to 5.
Okay. And the typical deal size in innovation would be, Vinod, in what range?
It's very tough to call it out, because also keep in mind that this time in the growth services, we have one $300 million deal. That skews things up.
Right. You noted that ramp up will start fourth quarter, but can you also tell us meaningful revenue for innovation services? When can we -- on a quarterly run rate basis, when can we see that?
For innovation services -- what is meaningful? I don't...
Somewhat related to growth services.
To the growth services level, we said that we expect in FY '21 to be about $150 million from innovation services. So if you're waiting for growth services level, you'll have to wait till then.
Okay. And what kind of net revenue margin can we expect in innovation?
In the innovation services, in the 30% range.
30% range. Lower than what we do in growth services, right.
Yes, because in the -- it will take some time for them to reach steady state, right. I'm giving like an FY...
But steady state, it would be -- so when we do $150 million, and assuming that is steady state?
Not really. If you look at growth services on an annual basis, it is more than that, right. So I would say steady state will be in FY '22 onwards. FY '21, I still think that parts of the portfolio will still be growing.
Okay. So one question on -- growth services has grown very well, but operating expenses around it is only $49 million to $50 million per quarter despite the growth. How do you see this operating expenses trending because we have more pipeline of orders?
The operating expenses will -- and Pratibha, maybe you can answer that while I -- help just quickly check that number. But let me explain that the manpower cost and platform cost associated with growth services will largely remain flat, and we will show operational leverage economies of scale in that portfolio. I'll -- that's a general comment, and your specific number, let me just quickly look at while Pratibha can answer.
As revenue ramps up, there is going to be a bit of a scale effect. While it's not going to be directly proportionate to growth, but there will be a slight increase as the revenues increase.
Pratibha, where I'm coming from is, we started with $88 million quarterly run rate, and we have done $101 million. Still operating expenses in dollar terms has remained more or less flat at $50 million.
Right.
Just want to understand how we should build our numbers.
No, so as Vinod said, that they would remain flat at these levels. But there is a step up, in fact, that happens at revenue grows. But more or less, at least for the next year, they should be at these levels.
Cool. And we also had expectation on new-build EBITDA in FY '19. It will still maintain that for growth services?
So we would be marginally maybe negative, and the only reason for that is the fact that we've had this upfront cost for some of the large deal wins that we've had. But we will close Q4 on a positive note.
So largely what would be the size of these large deals?
Vinod just shared that -- some of this -- like one of the deals that we won for our unified communication portfolio is close to $30 million, $35 million.
Okay. And now excluding this one-off in the traditional services, what kind of operating expenses run rate can we see? Because this is more of a stable business and it has been in the range of $140 million, $145 million range. This quarter, it came in at $125 million?
That's right. Again, this quarter, while we did get the benefit on account of ASA, there was also the incremental cost that we incurred, close to INR 86-odd crores on account of access, right. We expect this access cost to be in the range of INR 30 crores, INR 40 crores in Q4 and, thereafter, it would normalize.
So overall for traditional services, you will see fairly flat cost going into next year. But as Pratibha said, we are doing a lot of access reengineering, and there's cost associated with it. Access reengineering on account of the Indian market shake-up and options have decreased in terms of using third-party access over the course of this year. And we've had to redesign our network in how we'll provide access. That's -- those are the costs that Pratibha is referring too. But we hope that we'll be over that hump by -- once this -- the quarter that we're in closes.
Okay. If I may just ask, margin more or less in the transformation services remain flat despite good growth in revenue. What kind of business are we handling? And the pipeline growth outlook and margin on this particular business.
For transformation services, the margin contraction has been on account of some of the fiber maintenance contracts and fieldwork or India-related contracts. But we have a healthy pipeline of closed deals as well as healthy funnel of international activities. That gives us comfort that the margin profile will change in the coming quarter.
[Operator Instructions] The next question is from the line of Aliasgar Shakir from Motilal Oswal.
Just first question on this traditional business. So you have done, even if I exclude all the cost and one-offs, that includes what -- the EBITDA margin. I think historically we have sort of, give or take, of about, close to of 29%, 30% or thereabouts. So you think there'll be a step up in this EBITDA margin, which is a stable-state number, which is sustainable?
Ali, we would still go with the 29%, 30% range.
Okay. So in that context, are you suggesting that we should see a downward trend in traditional EBITDA number going forward?
I would say you would see stability of margins at 29%, 30%.
Fair point. And on the growth services, so you mentioned that you will be slightly negative in -- on the overall business in FY '19. But we have done cumulatively about INR 93 crores of loss in EBITDA for our growth services. Related question is that given that Vinod mentioned that we have a very strong deal pipeline, and there are costs associated with that. So even if you do turn profitable in the fourth quarter, do you see this concern that, although we will remain EBITDA-positive if you exclude that interrelated cost, but if you add that there will be a substantial impact on EBITDA, and it will be -- may not probably be in the kind of EBITDA number that we have been suggesting.
Ali, the way to look at it is that if this one-off deal cost had not come, we would have ended the year with a marginal loss or EBITDA-neutral. This quarter, of course, the impact as I mentioned in my commentary, has been on account of 3 reasons: One is the fact that it is a seasonally weak quarter. Secondly, the product mix has undergone a change. And you -- but the numbers that I shared to you showed that our media services portfolio and the other portfolios have grown. Now these are portfolios that we are still continuing to invest, right. And of course, the one-off impact, because of the large deals that we did.
To add to that, I just want to say that, yes, there are one-off costs, and your concern is that future revenue will also have these one-off costs. We believe that they will start getting offset by the usage revenues growing on some of our sold deal and on services -- contracts which are being implemented reaching completion stage. And we can deliver them to customers and bill. They'll offset it. So we can say that going from Q4 will be positive on growth services for EBITDA, and we believe that it will stay positive going forward after that, if that's what you were trying to net out there.
Correct. Just quick follow-up on that. So this quarter, I think, was -- can you just suggest a number that we spend towards this growth services for the deal-related cost?
This would be close to $2 million.
Okay. So that kind of a cost, should one build in our numbers going forward consistently for the kind of growth in your P&L building in this segment?
No, Ali. Vinod just explained that you don't need to build out that cost because it will get offset with the revenue scale of this year's change, right?
Fair enough. Got it. Okay. And just on this TTSL deal. Should one assume that given that Bharti deal with TTSL had got slightly delayed, any deal with TTSL will be linked to when Bharti gets DoT approval from TTSL. And in case, now that the June elections are coming, if it gets delayed, then our deal with TTSL should probably also be linked to that.
I don't know whether it's linked to general election or not. I'll take this opportunity to make a commentary on the TTSL deal. So we continue to remain interested in the asset and the business as we believe it's complementary, and it will also help us on the access side. However, the -- as and you say, the transaction with Bharti has to be concluded, and that is taking longer than was expected. So once that happens, then the clock will start on our transaction. And so just by the nature of these things, if you could take the closure of the Bharti transaction on TTSL related to mobile as time 0, it will probably take anywhere from 2 to 4 quarters after that to go through our own process to consummate a deal. So if you're thinking of time frames, that's how you should think about it. But we have bridges to across before we get to that day 0 milestone, and which we are not involved in ourselves. I want to be clear about that.
This is very, very helpful, Vinod. Just one clarification over there. So the liabilities -- TTSL have all the liabilities that Bharti is not going to take. Do they remain with Tata's hands or there is a possibility of...
I can't comment on that as that's nothing to do with that. That's TTSL.
Okay. Fair enough. And just, if I can slip in a last question on the part -- the land sale part that you mentioned. Again, over there, given that general elections are coming, should one assume that -- now the ball will be in the next regime to sort of be ready, given that now, with the shifting with the cabinet? Or is this just procedural and this does not really require any Ministry approval? Can you just throw some light on that?
My personal view on this is that this is now procedural. The Ministry of Urban Affairs is in the process -- they're in the process of appointing directors. But, it is not with the cabinet. It is just the process of clearing the MCA procedures, and we believe it will happen largely mechanically. And it does not require any further executive review or approval.
The next question is from the line of Sanjesh Jain from ICICI Securities.
On the TCV side, which we mentioned, we have an order book of $1.1 billion on the data side. And this, you mentioned, is gross, right. So what kind of price erosion generally do we see in these kind of deals over the period of execution?
Sanjay, that's a good question, but too broad a one for me to give you a simple answer. Our -- the price erosion on a blended basis across our base of services can be in the high single-digits. That's probably the -- but we really have to look at it service by service and analyze and comment. But you can take high single-digits.
On the other side, if I look at the way our GDS revenue has grown over the year, the robustness which we are seeing in the order book is still not getting reflected in the revenue. Is there still time for us to show this kind of growth -- of a 52% growth in order book and a 10% growth in revenue? Still doesn't match a lot, as in...
I think there are so many things happening, right, which we have to look at. One is we lost a big chunk of our India service provider business on account of the market consolidation. So that -- so this year, therefore, has dampened our traditional growth rate -- group traditional services growth within our data portfolio considerably on the back of that. The second, as I said, is on the growth services part of GDS is a longer duration to ramp revenues once the order is in hand. Partly in the case of the given services because of the complexity of the implementation and in the case of our usage portfolio to turn up usage and to drive adoption within the customer. So this year, we have seen both playing out and, hence, you see the lag and, hence, you see it, although we've had a CAGR of 8.8% over the last 3 years, we've only driven low single-digits for the year that we are in right now.
So when can we expect this convergence happening wherein our revenue growth also got the kind of order growth, which is showing up for?
Well, I don't think, it's 52%.
No, no, 52%, I think is the...
I think you were going...
Because I agree, over a period of time but...
Yes. So over a period of time, and if you take, for example, an IoT deal, it will -- the volume will build up even for the customer over -- and it will peak maybe in its third year and then go. So those are the kind of services we are dealing with now. The -- but I would say that going into the next year, you will see revenue beginning to act -- pick up speed, which is why I have been able to say that in the innovation portfolio, we still feel that we have a good chance to get to the $150 million number that we have in our FY '21 goals, which we shared.
That's helpful. On the margin side -- on the growth services, I was seeing last 3 year, revenue on a quarterly basis has gone up by 124%. And our losses have also increased in the same proportion. This is 164%. So despite such a strong growth, still, profitable growth is missing in the growth services. So how is it going to change probably from here when we are looking to double the revenue from here on the cost side and in the margin side?
Well, we have alluded to this in earlier answers, right, that the growth services with the operating expenses will start flattening out. The growth rate will decrease because we have the critical mass of people, systems, capabilities, sales force and so on. Yes, we have to add. We want concrete double-digit growth without any investment, but it won't be at the same rate as we have done in the past. And this has been the key metric that we have been tracking and all of you have been tracking, which is how is the growth services turning profitable. And that has come through, yes, increased, but not compared to previous periods, slower ramp in expenses and the revenue is beginning to pick up. We believe that going into next year, that, that will -- the gap between the 2, between revenue growth rate and cost growth rate will widen. And hence my remark that we believe that once turning EBITDA-positive in Q4, we'll remain that way and grow the quantum.
And in the innovative services, when we will turn around that revenue? Or in what year do we think we will turn around? Because that, again, will keep adding to the drag on the profitability on the GDS side. So what kind of a math you're looking in wherein the losses are cleansed from the innovative services side?
I'll just give a rough time frame. In FY '21, '22 period, we should start seeing innovation services portfolio turn positive.
Positive. Okay. That's helpful. On the enterprise side, for the last 3 year, the enterprise contribution has somewhere remained in a range of around 56% to 59% aggregated that we used to expand quarter-after-quarter. And this, again, is in the background of our growth services have grown a much stronger way, which is mostly on the enterprise side. So what's happening there? Why is this contribution not growing?
Well, firstly, I would just say that we should look at what is profitable revenue and not over-worry about enterprise or service provider for -- in one way, at the very macro level. The reason why we want to pivot more towards enterprises, we believe that there's more potential to sell more services to enterprise customers, i.e., increase our PPR. And that creates stickiness and reduces price erosion. So our strategy continues to remain that we will be double barreled in our market approach to go after service provider and enterprise to leverage the scale at which we can sell the service provider business to achieve unit cost, which will make us more -- and reach that will help us in the enterprise space and then keep that virtuous cycle growing. So I think, it's important to track that number, but not get too alarmed if it doesn't change dramatically as -- by large percentages on a quarter-to-quarter basis. But the general trend in of our business over the last 5 years has been enterprise is growing, and that would continue to be the case. But we are equally focused on leveraging our assets and sweating our -- leveraging our reach and sweating our scale to grow in the service provider business as well.
How does mixes in your order book, as in -- incrementally, if I look at order book, are we inching up from this level in the enterprise side?
The very fact that growth services is a big part of our order book, it's largely from enterprise.
Enterprise. That's a fair closing. Last question from my side. Can...
Also, if I can just add, Sanjesh, to what Vinod has already said. That if you look at the share of enterprise, even between last year to September, it had gone up by 2%. This quarter it has fallen only because of the ASA impact coming in our service provider revenue.
Right, right. This was also on a background that we have lost a lot of India service provider revenue. In that sense, I thought 200 basis points is slightly low. And if we look at to a year back, we have reached up to 59%. Now we will, again, come back to 57%, 58%.
Yes. Actually last quarter, we were at 59%, stable at that number.
Just on the CapEx side, can you give a little more break up on the data side? Where are we spending between traditional growth and subsidiaries? Because this number remains quite sticky for us, and even if we look at order book, predominantly, it is coming up from growth side. So how should we see it in the view that our order book is more towards growth side? Will -- is there a probability that the CapEx number could come down from the levels we are now today?
No. I would keep CapEx in your models at where they are today. We still have to refresh network. We have to increase our access. Keep in mind that we can sell more growth services once we have a customer on our network. Yes, we are moving to Internet-based solutions and so on, but especially in India, access is an important competitive advantage. And hence, that will grow, and we have been very prudent with our CapEx spend. Our ratio is lower than any of our competitors globally, but there is a net -- there is an entry-ticket level of CapEx that we have to invest in to be in this game. So I would model it at the current levels.
Can you break that between the segment and the data which is traditional growth and subsidiary?
Broadly, do you have that handy? Subsidiaries will be very...
Just give me a minute, I'll just share that with you.
In the interest of time, why don't we move forward. As soon as Pratibha has that data point, we will share that on the call.
Just one last question here. Given that Reliance is looking to share its fiber, and they look like having a very sizable piece, will that start reducing your CapEx or downwarding CapEx into OpEx?
I don't know the answer to that. We haven't had any discussion with them.
[Operator Instructions] The next question is from the line of Bharat Sheth from Quest Investments.
On innovation side, this quarter our operating expenses has seen -- our run rate has increased which was 11.4% in Q1 then 12.1%. This quarter it is 15.6%. I believe this is largely on account of the Teleena merger, correct?
The odd increase is on account of Teleena merger, yes.
So how do we see now from here on -- or, this run rate...
I won't call out Teleena separately. I will just say...
No, including Teleena, it is 15.6%.
Yes. I'm saying so. But we will maintain and even grow our expenses on the innovation side, but we expect to start seeing some revenue growth, as evidenced by the order book that I said that we have to move and IoT. So we will start seeing that offset. But we are not calling for a positive EBITDA on the innovation category for the coming 3 to 4 quarters.
So if you are thinking current quarter, 9 months, you have done a revenue of around $3.3 million, $4 million, and we are looking for $150 million in FY '21. So what in your gauge will be approximately in FY '20? And so will that bring down the loss percentage?
We haven't modeled that fully yet to share a figure. I'll say that we will -- if I had to -- we will see revenues in the order of $25 million to $30 million next year.
That is net revenue or gross?
Gross.
So that will be somewhere around $7 million, $8 million, correct?
Depending on the mix, yes, you can take that $8 million to $10 million -- yes, $8 million to $9 million.
Okay. And so further, there could be an increase in the overall expenses. So loss may remain at this level.
Loss could be at this level or slightly greater. It will be only at incubation -- innovation services.
Okay. Now with -- we'll not be able get -- I'll get that our, say EBITDA of data business, 23% to 25% in FY '21, which was, say, 17.2% in FY '18. So where do we stand in this whole journey?
We are -- the aspirational goals that we shared of the 25% EBITDA still remain. It will have to come from the growth services. In the innovation services is really building a future-proof business, but also to -- I'll come to the valuation remarks separately. But the growth services is where we will have to deliver significant economies of scale. We also hope that some of the large wins that we have in the innovation services, we can multiply and, therefore, we will be able to deliver a positive and a meaningful EBITDA contribution from FY '21 onwards to the data services. But the point that I want to make on this is the innovation services, the 3 areas we have identified, the 3 larger ones, are all getting significant traction in the marketplace, and we don't want to think short-term and pull back on investing to create the inflection for the future. And we're not living a pipe dream here. It's real services, real customers who are doing pilots, and many of them are increasing the size of the pilots and the applications. And we will not overspend in this area, but at the same time, we don't want to just squeeze it out of necessary investment to -- that will lead to a bigger ramp in the future.
So say that FY '21, $150 million, we are trending down expecting from innovation. Still at that level, do you think we'll be EBITDA-positive? Or still it will be a breakeven?
I don't have that information right now. I have spoken only at the portfolio level. So I -- we still -- we believe that our aspiration is the 25%. That's the number we called out for EBITDA for data services on a blended basis. That continues to be our aspiration. Is it a walk in the park? The answer is no, because that is a industry-leading level, especially since we have to contain our CapEx and deliver a high ROCE, which is better than industry also. And all parts of our portfolio will have to play a role to achieve that number. That's as much as I could comment now.
Okay, okay. So on growth service, this year, 9 months we have already clocked in, 287. So roughly, we'll be closing the year around the $400 million level. So how do we see this in FY '20 and then FY '21, this kind of -- what kind of a growth do we envisage for...
We will maintain or beat this growth rate.
So 9 months in, your dollar term, you've grown around 15%. So do we expect to beat this growth?
Yes.
Okay. So that will give a substantial positive EBITDA next year onward, correct?
That's the plan.
And traditional data, again, after all this one-off, so you -- Pratibha, can you just stage -- operating expenses, which was around $148 million. So after all this thing, whatever adjustment and closings, so next year onward, would it be at lower level than $148 million run rate for the quarter?
Yes. These should be lower at lower levels. Hopefully, we wouldn't get these INR 136-odd crores of one-off expenses hitting us.
Okay. Fair. So that data -- traditional data, I would like to put, again a 29%, 30% of -- kind of wholly EBITDA margin? Or it will be some -- there will be some increase because there are transformation service that -- which we are spending. Are we continue -- earlier we were investing substantial amount in that, so OpEx side also. So how that is happening?
Sorry, is your question on...
On internal -- in transformation which is...
Yes, so that is growing, but frankly speaking, as we said, we are doing it at much lower, both CapEx and OpEx cost than what we'd shared 2 years ago, right, the digital transformation project, Pratibha, if -- keep me honest here, was -- you said between $20 million to $25 million a year, we would spend only on that, right.
That's right.
And we are not spending anywhere near that and we are achieving similar kind of outcomes. Because we are -- that's a longer conversation on how we are doing it. But we are doing it at much lower levels. We have even managed to do it largely within the previous IT spend levels that we had.
And what kind of a revenue target are we looking for this transformation service and EBITDA margin from next year onwards?
For transformation services, EBITDA margin mix, Pratibha, what will be...
We should look at the range of about 16% to 17%, Vinod.
On this 10% level, 10.5%.
No. Transformation services is doing a 12%, 13% margin.
No, Q3 it was...
Okay, okay, okay. I think you're looking at the stand-alone financial, which is correct. That stand-alone EBITDA margin would move up to about 13-odd percent.
Transformation stand-alone, no, no, I'm not getting what you're saying because this what we have reported in our fact sheet.
Yes. That's correct because that's a subsidiary, so we reported the stand-alone margins. But when we look at the consolidated, we net it off at the company level. Some of the expenses get netted up at the company level.
And how do we see the scenario of working capital since, in this whole year, working capital is increasing but the voice revenue is coming down?
You rightly pointed out the working capital gap is primarily because of the steep decline that we are seeing in voice. We hope to augment the gap by monetization of some of our real estate assets, and that's really to help us bridge this gap.
So are we talking of the land? Last question related to this. Are we talking of this land parcel? Or other asset that we have in our book?
No, I'm talking about both land and buildings that we have.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Just a response to Sanjesh's question on CapEx break-up between traditional, growth and subsidies. So growth and innovation together would be around $60-odd million. Our traditional we spent about $100 million, and subsidies is $5 million.
Okay. Thanks, Pratibha. Thank you, everyone, for joining the call. We -- I think we had great questions, and we've given a commentary on where we stand with the business. We expect to see the momentum in growth services continuing. And we are also emboldened by the wins that we have had in the innovation category of our services. And we remain committed to our FY '21 goals and the aspirations that we have shared with you. I look forward to reporting good numbers in the next call that we will have in about 3 months or so. Thank you so much.
Thank you very much, sir. Ladies and gentleman, on behalf of Tata Communications, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.