Tata Communications Ltd

NSE:TATACOMM

Earnings Call Transcript 2023-Q3

[Chirag Jain, executive]

Good afternoon, everyone, and welcome to the Tata Communications Earnings Conference Call for Q3 FY '23. We are joined today by our MD and CEO, Mr. Amur S. Lakshminarayanan and our CFO, Mr. Kabir Ahmed Shakir for the results for the quarter ended 31st December 2022 as we announced yesterday, and the quarterly fact sheet is available on our website. I trust you would have had the chance to look for the key highlights. We will commence today's call with comments from Lakshmi who will share his thoughts on the business and long-term outlook, followed by Kabir who will share his views on the financial progress achieved. At the end of the management's remarks, you will have an opportunity to get your queries addressed.

Before we get started, I would like to remind everyone that some of the statements made or discussed on the conference call today in the forward-looking in nature and must be viewed in conjunction with the risks and uncertainties we face. A detailed statement and explanation of these risks are included in our annual filings, which you can locate on our website, www.tatacommunications.com. The company does not undertake to update these forward-looking statements publicly. With that, I would like to invite Lakshmi to share his views. Over to you, Lakshmi.

[Amur Lakshminarayanan, executive]

Thanks, Chirag. Good afternoon, everyone. I welcome you all to the Q3 FY '23 earnings call and wishing you all a very happy new year. Coming to the results of Q3 FY '23, we witnessed another healthy quarter, reflecting strong growth momentum in our data revenues, and our profitability continues to be robust. Our YTD PAT is up 31.6% and ROCE is at 28.4%. Our results reflect the disciplined execution of our reimagined strategy, focus on deeper with fewer and our ability is to impact both the cost and the revenue side outcomes for our customers with our new portfolio of products. Our products to platform shift increased investments in the front-end sales, particularly in the international markets and building new capabilities across the portfolio has helped data revenues grow by 11.1% year-on-year again this quarter.

To add more color to our data growth, we have added INR 948 crores of incremental data revenue in FY '23 till date against an incremental revenue addition of INR 903 crores in FY '21 and FY '22 combined.

Our continuous investments in our core infrastructure and digital capabilities give us the confidence to efficiently cater to our customers' evolving digital transformation needs.

We continue to be a leading player in India's large enterprise B2B segment and are continually investing in our undersea cable assets, which form the backbone of our suite of offerings, almost 30% to 40% higher versus our closest competitor over the last few years.

Growth in international markets continues to show encouraging trends and is steadily progressing towards our long-term ambition of improving the international revenue pipe. Large deals order book in the Enterprise segment has exceeded the full year FY '22 performance and funnel additions in the Enterprise segment have improved significantly, both from an India and an international market perspective.

With our Media business making strong strides, we announced our intent to acquire The Switch Enterprises, LLC for a consideration of $58.8 million. With this transaction, we will gain a strong foothold into Americas media and entertainment market. We have an established leadership in global sporting events, catering to a global audience. This acquisition will help us strengthen our region to region as well as the region to global play in the live sports industry, bringing these sports closer to the global audience.

Not only this, upon completion of the acquisition, it will also open gates for us to the live production business, which will complement and further strengthen our offerings in the media portfolio.

These synergies will help uniquely position us as an end-to-end media ecosystem player, the entire content development value chain globally and deepen our moats. Moving to our performance for the third quarter of FY '23. Our data business remains instrumental to our overall revenue growth momentum. It improved sequentially by 2.9% coming in at INR 3,593 crores. Our Digital Platform and Services revenues stood at INR 1,056 crores, registering a healthy growth of 17.2% year-on-year and 5.8% Q-on-Q.

Our Q3 consolidated revenue was INR 4,528 crores, improving by 8.2% year-on-year, and 2.2% Q-on-Q.

EBITDA for the quarter stood at INR 1,077 crores, while EBITDA margin stood at 23.8%. The profit for the quarter was INR 394 crores, flat on Y-on-Y basis.

Let me talk about our margins and aspects shaping the EBITDA trajectory. We are making planned investments in platform portfolios and also sales and marketing, particularly in the international markets. Our investments in enhancing our talent and tools are in line with our strategy, and we will continue to stay invested.

These investments, coupled with our product mix, plays a part on our margin profile in the given growth in the DPS -- given that the DPS growth is higher than the core connectivity segment. We had some headwinds of inflation as well, which has resulted in some near-term volatility in our margins.

That said, we intend to stay the course as we continue to sharply focus on executing our strategy.

We are seeing good traction across the DPS portfolio and a good pipeline on our sales funnel. We have a good pipeline of new products and feature releases in the coming months.

From a medium- to longer-term perspective, we will see benefits accruing from our razor sharp focus and investments in our product platform shift. More importantly, each part of our data portfolio is driving stickiness, deepening our moats and will help us to improve our yields in the medium term.

Let me give you some more details about our data portfolio. One key essence, which is heartening, is a huge transformation that is happening with the way our GTM is being approached. Most of our customer discussions have moved beyond connectivity to those factors that affect them, which are cost efficiencies as well as helping the revenues to grow through our secure and intelligent digital fabric.

Let me spend some time talking about our strongly growing incubation portfolio. The incubation portfolio progressed multifold, growing by 125.3% year-on-year and 1.1% Q-on-Q.

Our Connected Solutions, which is the MOVE platform, is a sophisticated platform, delivering connectivity management and data enablement with APIs across the globe. Our MOVE business continues to grow strongly and expanded by more than 2.1x compared to last year.

Our on-campus connected solutions opportunity is driven by our IoT offerings, where we cater to both enterprises and smart cities. This quarter, we completed our first international order of Smart Street Lighting Solutions, which has opened up opportunities in the international markets.

Our core connectivity services grew by 6% year-on-year and 1.7% Q-on-Q. We will continue to invest in the core capabilities that's transforming our networks to be smarter and more agile to cater to the new market needs.

Now coming to our digital platforms and services portfolio. It has grown by 17.2% year-on-year and 5.8% Q-on-Q. Our multitude of offerings in the digital platforms portfolio are intended to consistently deliver more holistic solutions, stitching multiple products together for our customers' ecosystems.

Our digital fabric helps create a robust moat around increasing customer stickiness and insulates us from structural pricing decline seen in the legacy business.

The portfolio grew broad-based across all offerings. Our collaboration portfolio grew by 8.8% year-on-year and 6.2% Q-on-Q. We continue to benefit from an increasing customer interest in our new offerings, namely Tata Communications GlobalRapide, InstaCC and Tata Communications Legal. Legal continues to grow in capability as a customer interaction platform where it focuses to unify all customer interactions. In our augmentation strategy, we now integrate seamlessly with other CX ecosystem players like InstaCC platform, Salesforce and more to enable contextual omnichannel interaction capabilities for businesses.

Further, we have partnered with Meta as a business solution partner and with Google as Google Communication partner, which enables us to add more channels to our omnichannel offers globally; WhatsApp, Global Business messaging, RCS and more.

Besides a rich set of connectors, we would also launch this quarter the Engage 2.0 beta version that can enable the marketing campaigns.

Moving to Cloud Hosting & Security. This portfolio registered a growth of 23.7% year-on-year and 8.8% Q-on-Q. In Q3 FY '23, we are focused on increasing customer experience with digital onboarding, automated provisioning and transparent billing through our TCX portal. We've also created a single pane of glass for multi-cloud management using our cross-product integration, which is cloud security and network.

We have created several upsell opportunities in our premium customer base, contributing to higher gross revenue growth. The global cybersecurity threat landscape continues to be grim. And as a result, we are seeing good traction for our security offerings and solutions, especially among enterprise customers looking to strengthen their estate with our Threat Management Solutions.

We have been continuously expanding our threat management platform with new use cases and playbooks to ensure that they can help our customers faster detect threats as well as respond to them.

Coming to our next-generation connectivity offerings, this increased by 26.8% year-on-year and by 5.5% Q-on-Q. The increasing adoption of the Internet and the shift to cloud is helping us drive growth in the segment and expand our market share. Our offerings such as IZO WAN and IZO SDWAN are gaining traction with our enterprise customers as we enable them with our simplified and cloud-like solutions to aid them in their network transformation journey.

Our Media Services revenue grew by 17.1% year-on-year and declined marginally by 0.9% Q-on-Q. We are witnessing a sustained push towards the digital services, more focus on cloud and edge-based workflows for better performance and user experience in our Media business.

To sum up, as a digital ecosystems enabler, we remain committed to building innovative and scalable platforms to empower enterprises. And with that, I would like to invite Kabir to give an overview of our financial performance. Kabir?

[Kabir Shakir, executive]

Thank you, Lakshmi. Good afternoon, everyone. I'll take this opportunity to take you all through the highlights of our financial performance for the quarter.

Q3 of FY '23 continue to witness a healthy growth momentum. Our consolidated revenue for the quarter stood at INR 4,528 crores, improving by 8.2% year-on-year and 2.2% on a sequential basis.

Data revenue for the quarter stood at INR 3,593 crores, improving by 11.1% year-on-year and by 2.9% on a quarterly basis. The reported revenue numbers this quarter, like the previous quarter, continues to have certain ForEx benefits, accruing from a strengthening dollar.

Our EBITDA for the quarter stood at around INR 1,077 crores, reporting a margin of 23.8%. Our YTD PAT is up by 31.6% and our PAT margins for the quarter stood at 8.7%, and YTD is at 11.1%.

Last quarter, we revisited our deferred tax asset recognition policy. With our international operations becoming profitable, it's allowing us to utilize our NOLs, helping us to drive a healthy balance sheet and maximize our returns.

Our ROCE is up at 28.4% and is up by 3.6% year-on-year with -- and within ROCE guidance of 25% to 30%.

Net debt for the quarter stood at INR 6,270 crores. Net debt to EBITDA is now at 1.4x compared to 1.5x last quarter.

Most notable part is that our debt has been consistently coming down.

Our cash flow generation continues to be healthy, reporting a free cash flow of INR 335 crores this quarter.

To sum up, I'm quite delighted that our fit-to-go strategy is coming to life, as both the healthy balance sheet and financial prudence has allowed us to fund inorganic growth opportunities, and the acquisition of Switch is an outcome of our broader finance strategy.

Let me now talk a little bit about our consolidated EBITDA margins, which have declined 170 basis points this quarter to 23.8%. Our YTD EBITDA margin stand at 24.7%. Both the current quarter and the YTD are in line with our EBITDA margin guidance of 23% to 25%.

This fiscal, we have laid strong foundations for achieving our growth ambitions through deepening customer engagements and investing in expanding our global sales and product organizations to address emerging market opportunities. With pandemic receding, COVID benefits we had are no longer there.

Today, our revenue mix is driven by a higher growth in DPS, where margins are lower versus core connectivity. Though these factors may build in some volatility in our quarterly margins, we will continue to operate within our margin guidance of 23% to 25% for the full year.

We always maintain that there will be times we'll operate at the lower end, and there will be times when we operate at the higher end. We've been operating at the high end of the range for the past several quarters. And that said, if you have the right proposals from the business to fund customer success, we will stay the course and fund those opportunities.

At the same time, we are focused on levers, which will sharpen our moats and help us improve our trajectory in the medium term.

Cash CapEx for the quarter stood at INR 440 crores, though our approved CapEx is close to INR 500 crores. This is due to delayed deliveries and better payment terms.

Moving to subsidiaries, we see a steady improvement in TCTS. TCTS revenue improved by 6.6% year-on-year and 3.7% sequentially, coming at around INR 333 crores.

EBITDA for TCTS stood at INR 15 crores for Q3.

Our Payment business continues to make positive shifts as we expand our portfolio under the franchisee model. Revenue for the quarter came in at INR 50 crores and an EBITDA of INR 2 crores. As on date, we have added close to 2,800 franchisee ATMs to our portfolio and working steadily on increasing this further.

Our continued focus on delivering best-in-class bespoke solutions is enabling us to drive both the cost side and the revenue side outcomes of our customers, and this will help us in a long way in being a strategic partner to the digital and network transformation journey of our customers.

Our new positioning with our digital fabric, combined with our strong balance sheet and healthy operating performance, gives us the headroom to invest both organically and inorganically, innovate and grow and align with the evolving needs of our enterprises.

I will now ask Chirag to open the forum for Q&A. Thank you for your attention.

[Chirag Jain, executive]

Thanks, Kabir. [Operator Instructions] The first question is from the line of Sanjesh Jain of ICICI Securities.

[Sanjesh Jain, analyst]

I got a few of them, but let me touch up on the revenue side of the question. Lakshmi, can you help us understanding how the order book and sales funnel have seen a trajectory in this quarter? And how is this new sales effort helping us to drive that faster? That's number one.

Number two, on the enterprise side, I think this is the fastest ever growth in last many years that I have seen, where we have seen enterprise revenue growing by 20% Y-o-Y and 6% quarter-on-quarter, while the wholesale business, which is the risk provider, is seeing a decline.

It's a conscious effort where we want to change the revenue mix or it's just a coincident to see? And what is it driving the strong enterprise revenue? That's the second one.

And the third one on the collaboration side of the business. This is probably first quarter on a Y-o-Y basis we have seen growth after many quarters. Can you help us understand within the collaboration the 3 new products, which touched upon, which is Rapide, InstaCC and DIGO. DIGO is growing and where are we in terms of drag from the [indiscernible]? These are the questions towards...

[Amur Lakshminarayanan, executive]

Sanjesh, what did you say? Where are the drags you said?

[Sanjesh Jain, analyst]

Yes, the SIP was a drag on us, right, on the collaboration business. Is that over? We are growing there or it still remains declining for us?

[Amur Lakshminarayanan, executive]

Okay. Thanks, Sanjesh. Let me take each of those 3 questions. The first one relating to order book and sales funnel. I think I've been maintaining that -- our order book is getting better every quarter, and our sales funnel is improving.

I think it's interesting to see the mix in our funnel as well is quite healthy. In terms of digital platforms is much higher in our sales funnel compared to core connectivity, which is in line with what you would expect, in line with our strategy to grow the DPS and incubation portfolios.

In terms of what is driving that, I sort of alluded to that, there are 2, 3 things I would want to point out. One is we are able to have a more engaging conversation with enterprise customers at senior level beyond connectivity. So we are able to go and talk. We are able to meet with not just the head of network, but meet with a CIO, a COO and a CMO, for example. And even sometimes, we held half day workshops with CEOs because the positioning that we have as a digital fabric, when we tell them that, "Hey, car is nothing but another node in the network," and all the way to what happens in the factories with industrial connectivity as a service, which is part of our connected solutions and then say how we can help them to connect various personas, branches to the network and transforming the network with Internet and software-defined WAN, but also software-defined LANs and branches, taking them all the way to the cloud and between the clouds, how we connect.

And also address some of the -- their customer experience problems through our customer interaction platforms and so on. We are able to have a more holistic conversations with customers. So that is one, I would say, where we feel that, something that I call internally as a relevance [ cautioned ] is increasing with our customers.

The second is -- and as a reflection of that, we are able to have better pipeline. And as we improve our footprint in terms of our coverage in the markets, the funnel is growing. We are also seeing that our win rates are inching slowly forward, not as rapidly as I would want, but it's definitely improving and inching better, which is helping us to convert the deal. So that's the sort of the color and flavor I would like to give on the order book and the sales funnel.

In the -- to your second observation that enterprise is seeing the fastest growth? Is it a conscious effort? I mean exactly, that's the -- all our narratives on our strategy, if you saw, it is all tuned towards enterprises. So service provider is an important segment. But that's -- we buy from them, they buy from us. It's more of a trading relationships that we have. It is still a significant segment, and we continue to address that segment.

But the core of the growth and core of whatever we have articulated in our strategy, the new platforms are all addressed towards the enterprise segment. So it is a conscious effort, and that is what is bearing fruit.

[Kabir Shakir, executive]

If I may, it also includes a reclassification, Sanjesh. We've done, especially primarily in the Mecca region where we don't have a license, and we have to go through some of the service providers, either two we were classifying that as service provider revenue.

We are now looking at the kind of revenue it is. If it is pure play connectivity, which is this resold by them and as Lakshmi said, buy and sell, that continues to be a service provider. But if the end customer is actually an enterprise, and that's what we are doing, and we are using the service provider to reach them, then we have reclassified that.

That impact is about 2.9%. So it still doesn't take away the point that Lakshmi is making. Our strategy is on enterprises. That is where we do our coverage. That's where is our feet on street investment is also going, and that is bearing fruit.

But I will -- it will be amiss if I don't mention that there's been a reclassification in this quarter also. Sorry, Lakshmi. Please.

[Amur Lakshminarayanan, executive]

And the third part of the question on the collaboration, Sanjesh, yes, I think collaboration, I think we've been -- we have talked a lot about this in the last few quarters. It -- and GSIP particularly was a large part of our digital platforms and solutions. And as it started going down, we had an impact, even though there were other parts of digital platforms that are growing.

I'm glad to say that overall collaboration is back on the growth trajectory. There has been a significant effort in terms of pivoting the segment away from purely depending on the usage-based GSIP to a more fixed [ UPM ] plus the usage kind of a model that we are going with the GlobalRapide, InstaCC which has seen -- not just our own InstaCC platform, but also partnering with Genesys and AWS to deliver a holistic solutions in the area of contact center as a service.

All of that is helping to put this back on the growth track. So with respect to your question on GSIP, yes, we are betting less and less on that. So while we would want to keep it steady, slowly, our dependence on that is going away, but we would like to see that stabilize since -- it is stabilizing, but the -- our dependence on that is not that much as we were a few quarters ago.

[Sanjesh Jain, analyst]

The second is on the acquisition, which is Switch TV. What is the synergy? I know we have given the potential revenue, which they do. But want to understand more how much will it contribute to the profitability. And what is the synergy from Tata Com to Switch and from Switch to Tata Com? And how our merged entity can deliver a much better, if at all, there is a probability for that? And once merged, will this be an EBITDA accretive? Or initially, you see that be a lot looking and from there on, we take it to more profitability?

[Amur Lakshminarayanan, executive]

So let me talk about the synergies and invite Kabir to talk a bit about the margins. I mean, firstly, all these acquisitions that we do, as we had said, that we will do that for capability or regional and customer reach, and they have to make financial sense. So that having said, Switch particularly is very interesting because they are one of the leaders in the U.S. market, taking a lot of regional sports and taking to regional U.S. audiences.

If you look at our Media business, which I briefly commented in my statement, our media play has been largely, what I would call, as a global to global play. We take global events and take it to global audience. And that is where our strength was. And we are one of the strongest players in that space.

The other 2 segments, if I were to call, is a region to global play and the region to region play. And in those places, it's like a regional sports taking to like -- maybe the cricket would be a good example where it's a regional one, but it's got -- while it's got some global appeal, it's not as global appeal as in terms of number of countries, the audience reach out.

So those are the 3 players that we see, the global to global, region to global and region to region. We are pretty strong in the global to global. We have some play in the region to global. What Switch does is helps us to strengthen the region to region in the U.S., which is a large market. It also helps to take that region to region to region to global through our global footprint. So that is one synergy.

The second synergy that we see is they have a product for production, which we do not have at the moment. And that production capability enhances and will enhance our product offering once we merge, and we can take that offering to our other global customers.

So these are broadly the synergies from markets and product perspective and how we see the segments in our minds.

The third question regarding the margin accretive, Kabir, do you want to...

[Kabir Shakir, executive]

Yes. Look, with first year being integration, and it is -- it will be dilutive, Sanjesh. But as Lakshmi mentioned, with all the synergies that we actually see and the business case and the rationale, overall, we do see that the overall margin portfolio for Media business will definitely be helped by Switch and we are able to pencil more -- we are able to give more value to our customers.

And in the medium term, that EBITDA will pick up. But in the first year, it's all about integration and about the thing that will be a bit margin [indiscernible].

[Amur Lakshminarayanan, executive]

I think if you take the PMI costs out, then it should be okay. But as a business, we are very clear that it will be marginal [indiscernible].

[Sanjesh Jain, analyst]

Got it, got it. Just last question on the cost inflation. Are we behind in terms of peak of the cost inflation and since we are on those, the inflation will be more stable because this quarter, we have seen almost INR 150 crores of cost getting added to the total operating cost. Are we behind in terms of the majority of the cost investment, which we intend to do?

[Kabir Shakir, executive]

Let me unpeel that for you, Sanjesh. We are -- for example, on hiring, I think now we are seeing the full impact of the hiring come through. In fact, we did not see that full impact in Q1 and Q2, as we still had, I would say, attrition along with the hiring.

Now that attrition is stabilized. It's behind us, and I'm assuming things will probably reverse with all the layoffs that we actually see. So that the pressure on that side on talent market should come down. And we see the full impact of that staffing cost increase come through this quarter.

There are other elements of inflation that will continue to be there, which -- energy, for example, if you actually see there are a lot of energy costs that impact our power and in top locations across the world, both Europe and U.S.

That I don't think -- I can put a finger on it and say when that will come down. I don't think anyone can say it in both in Europe and in the U.S., the energy crisis that we actually see today.

We are -- in some places where we have the ability to pass on the price, we will do that, but there are a lot of longer contracts, which we have. Where we don't have the ability to pass on the price, we will have to take that hit and manage in our P&L overall.

So that's how I would put both of these together, plus one of the reasons, as I mentioned, is also the COVID benefits, which we've always called out. We used to have about INR 50 crores of benefit every quarter. That benefit is no longer there this quarter, as we are resumed to, I would say, 100% normalcy. We are back in office, travel started. We're spending on marketing. We are going to events. And that's all coming back to normalcy.

[Sanjesh Jain, analyst]

Just on the power cost, I think we speak inflation is behind. I don't think anybody is anticipating the power cost to go up from here. I know a decline is something we cannot expect. I'm telling from the inflation perspective, we are done, right?

[Kabir Shakir, executive]

I hope so, but the impact of it will trickle in, Sanjesh, because not all of that has also been coming for us because we also had contracts and stuff like that.

[Amur Lakshminarayanan, executive]

And the last, Y-on-Y, Sanjesh, is also the staff cost, and I think we had called out as early as last -- we said we're going to start investing in the front end of the sales and marketing. We also said that we would add to our products and platforms and developing new capabilities.

So I think the INR 150 crores that you are talking about year-on-year, a fairly large part of it is also the staff cost. And as you know, in specific digital skills and so on, there was a wage inflation and retention schemes that had to be put in place. So there were many factors that went into it. So we're just -- as a Y-on-Y, the staff cost is a fairly significant part of the increase that you see.

[Sanjesh Jain, analyst]

Got it. I have a few more questions, but I better come back in the queue. But it looks like we are in an interesting journey, and I hope all the best for the guys for the coming quarter. Thank you.

[Chirag Jain, executive]

Thanks, Sanjesh. The next question is from the line of Shubham Shukla from Voyager Capital.

[Shubham Shukla, analyst]

Sir, on the debt level of our company, so like the debt has like reduced from INR 6,400 crores to INR 6,270 crores, which is good, but our finance cost has gone up like 25% quarter-on-quarter, like from INR 98 crores to INR 123 crores.

Just want to understand what the reasons are like it. Can only be due to like -- is it only because of the increase in cost of borrowings or like there's something missing?

[Kabir Shakir, executive]

Well, Shubham, I'm sure you're seeing the news as much as I do. You see the Fed hikes that has been happened since March onwards. Even in this last quarter, there were 3 hikes that have happened in September, in November and in December, 75 basis points and 50 basis points, respectively.

So I would say it's great that we've been able to do the cash generation that we have been doing for the last 2 years, and it reduced our debt significantly in the last 2 years. Otherwise, our interest cost would have been a lot higher than what you currently see in the P&L.

So it's completely because of the Fed taking the interest rates up, which we see. All the economies also reporting. But for us, a lot of our -- in fact, I would say most of our debt is dollar denominated and it is as a result of the base rates going up.

[Shubham Shukla, analyst]

Okay, okay. So like my second question is around the other income, like if you could give some colors on like what it includes? And is it like -- it is at its lowest like in last 4 to 5 quarters, which also affected our margins for this quarter?

[Kabir Shakir, executive]

Well, see, I would say other income is -- has its vagaries in it. When we have income tax refunds and then the interest component of the income tax refunds that come through, I can't give you an idea on the projection because these are related to old cases. And again, I would say, I would really like to thank the cross-functional teams in tax and regulatory and treasury, who actually are putting their mind behind in, clearing up all these old dues.

So we've collected quite an amount of all of those refunds of the past. And I -- this is not predictable, Shubham. So I wouldn't know as to when the order is going to get passed and when the case will come up for hearing and when will we actually get.

So this -- the other income gets impacted largely because of the interest income that we received for the refunds that are due from the authorities.

[Chirag Jain, executive]

Thanks, Shubham. The next question is from the line of Mr. Abhishek.

[Unknown Analyst]

Okay. Sir, my question, what is EBITDA margin of Switch Enterprises, LLC? And second question, company has grown at 6.5% Y-on-Y 9 months. So what is the follow-up of the company that the growth should be come in double digit?

[Kabir Shakir, executive]

Well, we have not spoken about the EBITDA margin of Switch, and that's one of the part of -- one of the portfolios within DPS, within data. So we are restricting to [indiscernible] and answered on how you would like to [indiscernible] the margin progression of our data port.

I wouldn't want to go into [indiscernible] talking about the profitability of that. We looked at the merits of the whole acquisition and it makes strategic sense for both Tata Com and for the Media Services portfolio, and that's the reason why we are quite optimistic about this opportunity, and we have -- like to have Switch as part of our portfolio.

[Amur Lakshminarayanan, executive]

Yes. Abhishek, I think we've already answered the growth and -- quite extensively in the previous ones in terms of funnel pipeline. We are quite encouraged about what we see as opportunities.

[Chirag Jain, executive]

Thanks, Abhishek. The next question is from the line of Mr. Pratap Maliwal.

[Pratap Maliwal, analyst]

So I just wanted to ask the share of EBITDA by segments, the breakup of the data segment into core connectivity, the DPS and incubation. It was given last quarter, but I don't think it's there in the present fact sheet. Can we have those numbers, please?

[Kabir Shakir, executive]

Pratap, we've taken a call that -- and I've said it about the last 3, 4 quarters when these questions have been asked saying that we would like you to look at our data business as a whole because there are vagaries that happen.

These are all at various stages of evolution. We are investing in platforms. We are investing in capabilities. And some of them need upfront investment. Some of them are design wins where we invest and we learn from it, and then we scrap it and then we reinvest again.

So there are multiple elements that actually go in. And sometimes, quarter-on-quarter, these tend to -- without context, if these numbers may give a wrong picture. And that's the reason why we've taken a call to take this off. And I would encourage you to look at the overall data portfolio, which probably gives a little bit more stability and a little bit more clarity from a future growth perspective as well. So that's one of the reasons, and we don't intend to give those breakdown anymore, Pratap.

[Pratap Maliwal, analyst]

Okay. Sure, sir. Now you just said about the Switch TV acquisition, I think a previous participant had asked, not the margin, but the potential revenue. Can we please have that number, the revenue base?

[Kabir Shakir, executive]

Yes. We have already mentioned the revenue. It's about $80 million of revenue last fiscal of this business, yes.

[Pratap Maliwal, analyst]

That's $80 million, 8-0, right?

[Kabir Shakir, executive]

8-0, yes.

[Pratap Maliwal, analyst]

Yes. Okay. And you just said that there were some ForEx benefits that we got for our margins. So can we quantify that? Because of the stronger dollar, can we quantify the ForEx benefits, please?

[Kabir Shakir, executive]

On margins, it's a very -- it's a small portion. On revenue, it was still material. But on margins, it's a very minor portion benefit that we've got on -- on dollar.

[Pratap Maliwal, analyst]

Okay. Sure, sir. And just one last observation I had. I think you've addressed this in the previous quarters from other participants as well. But regarding the DPS segment growth that we've had, 6% increase in gross, but there's been a decline in the net revenue.

So what was it about the product mix? Because I think we had good growth in a lot of our DPS products. So what is actually driving that?

[Kabir Shakir, executive]

Yes. It is -- as you rightly said, it is largely mix, which is contributing to it. Plus, there are some upfront costs and certain deal-specific vagaries that probably explain DPS. But I'm less worried about it because these are the right things -- each and every individual proposal is the right thing for us to do.

So I wouldn't worry about quarter-on-quarter vagaries about net revenue. I think our focus is on improving the mix of our business more towards DPS versus core connectivity. So while we do that, there will be headwinds on margin that will come through overall at a company level because of the shift between DPS and core connectivity.

And that also has in the short- to medium-term, headwind between products within DPS as well. But I think that's the right thing to do, until we gain scale in each of these products. And therefore, that is the right business call to take.

[Chirag Jain, executive]

Thanks, Pratap. The next question is from the line of Aliasgar Shakir from Motilal Oswal.

[Aliasgar Shakir, analyst]

So quite a detailed explanation on the revenue funnel and the trajectory. I just wanted to look at it in the context of your cost increases.

So I mean, Kabir, you've been mentioning in the past that we are investing for growth, both on the CapEx and on the OpEx side. So in that context, as we've seen some increase in cost in this quarter, could you share some visibility in terms of this is -- this increase in cost is related to any specific projects that we are foreseeing given the point that I see Lakshmi also explain in terms of the funnel looking strong?

So how should we see this cost? Should we expect growth to inch up? And are there any specific projects that we are seeing that should come by in the near term?

[Kabir Shakir, executive]

Yes. Thanks, Ali, for that question. So I've kind of said it in bits and pieces, but let me summarize for everyone. It's at various levels that we actually see the margin explanation. At the net revenue level, as I explained, it's largely mix, which has resulted in the net revenue fall.

If I go below net revenue to EBITDA, these are cost increases that we actually see. Majority of the cost increases is the staffing cost increase that we have this quarter compared to last and compared to last year as well. And that is something which we had called out earlier. You can see in our fact sheets the number of employees increase that we actually have this quarter, roughly about 1,000-odd. All of that is -- and as Lakshmi also alluded earlier, the wage increase that we had to give and retention bonuses that we have to -- for retaining our people plus also the warrant talent that we saw 2 years -- 2, 2 quarters ago, the great attrition, which was occupying all our vocabulary. All of that -- so we had to kind of retain and attract the right talent in our organization. So that was one plus, so not just, I would say, on the product and engineering side, but also investment on [indiscernible] street, investment and largely shifting towards the international geographies where the cost is higher, as you can imagine, of an FTE out there.

But these are the places where we are also seeing the benefit already come through. When you are investing in those geographies, when we are getting sales coming in international geographies, and they become profitable, and I'm sitting with NOLs in those geographies, they actually utilize faster, and our PAT is up.

So EBITDA may still be lower because they may not be getting full there. But as they become profitable, because I'm even adding a little bit of revenue to what I have, I'm seeing a PAT level that is being accretive.

So staffing cost is one big element. The return to office and the COVID savings going away is the other element. And there are minor things, like energy costs that I talked about. In relation to these 2, that is minor, but on its own, it's still a material amount.

So I would say these are the 3 broad elements on cost that sit there and combined with mix explains the margin profile, none of which is something which we did not know, none of which is something we did not plan for. And this is the reason why 2 quarters ago, when I talked about, I did say that, look, we will operate at the low to mid part of our guidance range in the year.

And in the first 2 quarters, we had the benefit on the market shift that came in the voice business, which, again, I talked about last quarter as well. So to that extent, our consolidated EBITDA actually had a benefit and a bump-up, and the erosion got delayed a little bit. In the first 2 quarters, we did not have.

That's -- so we benefited from that, which also was transparently shared with all of you in the last quarter call as well. So that's how I would sum up, Ali, with all the drivers for -- not just for you, but for everybody in the call as well who may have further questions on.

[Amur Lakshminarayanan, executive]

Let me just expand on one element of it. I think Kabir talked about, and I -- in my opening remarks said that all these are planned investments. And I emphasize that a lot of sales and marketing investments are going in international geographies.

And we had said that as part of our strategy because the -- while we are a market leader in the segments that we choose to operate in the B2B segment in India, in international markets, it's a huge market. And our market share, that is still not what it can be potentially.

So I've been saying that the network is a $1.5 billion market in India, whereas it's a $145 million market in the international market, right? So we are -- there is much more upside to be had with the right products, the right solutions, which we are investing in.

I think we have to invest in the right sales and marketing capabilities in those regions, which is what we have begun to do and which is also why we are beginning to see some of the results come through.

So those investments, in our opinion, have to be done, and we will stay invested in both those aspects of sales and marketing as well as in further enhancing our product and platform capabilities.

[Aliasgar Shakir, analyst]

Got it. This is very, very detailed and only point that I wanted to just clarify, so I understand these are planned investments. But given that we are adding a lot of resource, we should expect the growth to inch up in the near term with whatever new funnel of, I mean, order book that we are seeing?

[Amur Lakshminarayanan, executive]

No. I think these resources did not materialize just this quarter. We've been talking about this for the last 3, 4 quarters. And gradually, the people have come in. And with that is what you see the results.

[Kabir Shakir, executive]

And it is already -- Ali, it's already visible in the last 2 quarters. Last 2 quarters is when we've started touching our double-digit growth ambition. And double-digit growth ambition is what we will continue to push for.

So this investment has already started seeing benefits and fruits in the last 2 quarters. And as Lakshmi said, we are committed to it, and we will stay on course.

[Aliasgar Shakir, analyst]

Just a second question on the 5G investment that the other 2 telcos have made, and they've been quite vocal in basically their offerings in the enterprise side. We have not spend on spectrum. But of course, our offerings are well understood.

So do you think the competition with -- from these 2 telcos will increase? Or are you seeing anything on the ground? Or do you think their capabilities can increase with this spectrum? I mean, your thoughts there.

[Amur Lakshminarayanan, executive]

No. So our strategy with respect to 5G is very, very focused on the private network that they can enable for enterprises. We have built our capabilities quite strongly to be able to compete in that space.

We announced the launch of our lab and our stack of solutions on 5G a quarter ago. It's in Pune. We have had several customers use the lab as a service to trial the use cases. And we're also taking these capabilities to the international market where we are addressing in this space.

So we are just not focused on 5G. We have a pedigree with our IoT fabric solution. And we want to offer those truly as an IoT fabric, regardless of the technology, whether it's [ Alora ], whether it's WiFi 6, unlicensed LTE or 5G or, in future 6G, we will have an Industrial Connectivity as a Service and IoT fabric capabilities that we have built.

And we are already selling that capability in multiple forms with various customers. And with 5G, whenever the -- we are waiting for DOT to sort of announce the -- are firming up what they have announced in terms of the opening up for the enterprises to set up these captive networks. And we are all set to go when that happens.

And as I said, this capability is not just for India, but you're also talking to international customers to take and deploy this capability.

[Aliasgar Shakir, analyst]

And are we seeing intensity from the competition also growing?

[Amur Lakshminarayanan, executive]

Yes, of course. I mean, they have invested in spectrum. They are -- I mean, in every sphere, there is varied competition, right? So even in our -- if you talk about DIGO as a product that we launched, yes, there are competitors. If we talk about MOVE, there are competitors.

So I think that is not the concern. I think we are very focused on our customers understanding what they seek and want. We want to be a lot more technology-agnostic, OEM-agnostic solution.

Our MOVE solution is intended to make our customers more M&O agnostic, if you will, right? So we are not an M&O player with mobility spectrum, even on the 4G or 3G or 2G for that matter. And MOVE still delivers a connectivity management solution for our customers.

So we come at it from a different angle. I'm sure there will be competition in all the spaces. But we are quite confident of what we are building and to be able to deliver value to the customers.

[Chirag Jain, executive]

Thank you, Ali. The next question is from the line of Mr. Vinit Manek from Karma Capital.

[Vinit Manek, analyst]

Clearly answered this question, but just wanted to check one thing with you that on the increased interest cost quarter-on-quarter, there wasn't any element of ForEx -- change in the ForEx that might be impacting it to us because our payments would be presumably -- and the interest payments would be in terms of the U.S. dollar. So was there any impact of that available during this quarter or maybe in the last 2 quarters?

[Kabir Shakir, executive]

It's very -- first of all, you're absolutely right. It's dollars, so there is hardly anything. And there is a very minor impact at all. So it's -- I would rather say there's hardly any impact from ForEx on the interest cost.

[Vinit Manek, analyst]

Okay. And any other line item has been impacted because of the change in the foreign exchange happening about that? Or...

[Kabir Shakir, executive]

I did mention in my speech that our revenue has been positively impacted, like it's been there for the couple of quarters with a strengthening dollar. Revenues is more material. The profit is also positively impacted, but not that much material.

Our foreign currency translation reserve and the network, all of those in the balance sheet does get impacted because of ForEx movements.

[Vinit Manek, analyst]

Yes. But no major impact on the income statement side largely, except the revenue, which is a positive effect.

[Kabir Shakir, executive]

Yes, yes.

[Chirag Jain, executive]

Thanks, Vinit. The next question is from the line of [ Mr. Neil Nadkarni ] from Dalal & Broacha.

[Kabir Shakir, executive]

Looks like Neil has dropped off.

[Chirag Jain, executive]

Looks like Neil has dropped off. Sanjesh Jain from ICICI Securities, you may join the queue again.

Sanjesh, are you there?

[Sanjesh Jain, analyst]

Yes. Sorry, I couldn't find that unmute button. Apologies. I hope you can hear me now.

[Amur Lakshminarayanan, executive]

Yes, Sanjesh, we can.

[Sanjesh Jain, analyst]

Yes. Just one follow-up on the revenue side, which we spoke earlier. Considering the sales funnel as well as the order book we see today, are we reasonably confident in terms of growing 20% CAGR for the next few years? It's not a guidance, just wanted to understand. Is it possible for us to grow at a 20% CAGR in the DPS portfolio or you see any challenges for that?

[Amur Lakshminarayanan, executive]

Okay. So your question is on the digital portfolio?

[Sanjesh Jain, analyst]

Right.

[Amur Lakshminarayanan, executive]

I think it is possible. I think in order for our full data revenues to grow consistently at double digits, we need to have our digital portfolio. And sometimes, I mix up digital portfolio and I include the incubation there together. It has to grow at that level. So that's clearly our mission, and that's definitely possible, and that's what we would be aiming for and targeting to do.

[Sanjesh Jain, analyst]

No. But is our order book and sales funnel as it is building gives that confidence that it is quite attributable?

[Amur Lakshminarayanan, executive]

I mean, that gets close to the guidance then. All I would say is, and that's what I've been saying, Sanjesh, that we are investing in all these places, these products and platforms, and they are getting stronger.

Yes, there is a good momentum in terms of the funnel buildup. And I think I also mentioned that if you look at the color of the funnel, there is more in DPS in the funnel than in the core connectivity. So the mix is already positive there.

So I think that's the best color I can give. I think we have to execute on those. And definitely, we will aim to push the DPS growth to that higher trajectory.

[Sanjesh Jain, analyst]

A small request. It would be great if we can call out order book, so that gives us the confidence and visibility in terms of how the revenue is stacking up. We did this in between. But again, I think we pulled it out, but this is a number request from our side, if you can now include that, that would be very helpful.

[Amur Lakshminarayanan, executive]

So we'll try and look at whatever indicators that are helpful to you. I think we pulled it out 3 years ago because the -- one is the color of the business had a lot more of usage. And when we talked about order book, one assumes a certain degree of usage and say that's the order book, but the usages are never sort of guaranteed. And either it comes off or it doesn't come, and there were a lot of fluctuations as a result.

In the last 2, 3 years, we have been trying internally to work out the algorithms that we can get right. So the predictability on the usage based contracts, we can get it right. I would say we still haven't got it absolutely right. So anything that we give could be misleading as well.

So we hear you. I think we would give it out at the right time. We understand the reason why you're asking as well. So we will start to give at the right time. We're beginning to give more and better color through words. But as figures, we will start to do that whenever the time...

[Chirag Jain, executive]

Thank you, Sanjesh. We will take one last question from the line of [ Mr. Neil Nadkarni ].

[Unknown Analyst]

My question is again on the margins. So sorry to bother you on that. But what I get from the call is we have done material investments on improving our funnel, our sales mix, et cetera.

And so is it fair to assume that we are -- that this is the bottom end of the margins, while we have indicated that we want the margins to be between 23% and 25%? But is it fair to assume that from here on, the margins should improve going forward? Primarily, because the thinking goes that if the top -- the funnel is looking better, if the execution is going to be better, and the operating leverage should kick in.

And given the business model, it should kick in a very big way. So is it fair to assume that the margins from here on should actually start improving?

[Kabir Shakir, executive]

Well, I would say 23% to 25%. And I've been saying that consistently for the last 2.5 years now. And there will be times when we will be at the lower end. There will be times we will be at higher end. And because of COVID, because of lots of other, I would say, tailwinds that we actually got, we've been operating at the higher end of the range.

For us, going outside of this higher end will be irresponsible because then we will be choking the right investments to make and setting high bars, especially in digital platforms and services areas where you need to allow for experimentation, you need to allow for POCs to come through and then identify the use cases.

So we do have a [ 1330 ] approach for our innovation programs internally. And these need that right level of support at every place. So I cannot answer the question in yes or no, whether this is the bottom or whether this will go up. 23%, 25% is the range. Our endeavor will be -- and if, for example, in 1 quarter it goes below 23%, I am not going to sweat myself because we have made a right investment decision for our products. And these markers are good markers for us to guide us to how to run the business. But if these markers go away for a quarter, for the right business reasons, I think we are not worried as management. And you, as investors, should not be worried either.

[Amur Lakshminarayanan, executive]

So to your other point, Neil, a lot of -- while we are seeing the growth in each of the portfolio, whether it's the Connected Solutions or in collaboration with DIGO or even GlobalRapide, these are only getting started now.

So I think the -- and they are a mix of a platform, plus platform as a services play. So I think it will be -- we have to continue to invest. And we are upgrading these products and launching. So GlobalRapide, we're launching a GlobalRapide 2.0 with a new set of tools and services capability.

So each one of them have a different profile and trajectory. We are continuing to enhance these products and do that. So I think for a while longer, I think we would be continuing to invest. And it's not of the scale where -- when you talked about the operating leverage should be kicked in, in a big way, these are multiple products at varying degrees of investments, with a combination of product and with a combination of services play attached to that as well.

[Kabir Shakir, executive]

And I would also look -- I encourage you to look at holistically the business in totality, look at the operating performance of the business, not just its EBITDA, but look at PAT, look at free cash flow, look at our ROCE, look at our reducing debt.

Despite the increase in the interest cost that a couple of you have asked, our PAT has actually gone up, right? So with all of those levers, these are all giving us the elbow room, the headroom to actually make the right investments in the business.

So after a point in time, one shouldn't get fixated about numbers in the middle and do what is the right economic value that actually drives. And frankly, that has been the guiding force in the last 2 years for this particular company to change the trajectory and get on to this particular path.

And I fundamentally believe and Lakshmi and my other colleagues in the GMC are completely committed to this rationale, and that's how we're actually driving the business and, we believe, drives long-term value to all stakeholders in the business.

[Chirag Jain, executive]

I would now request Lakshmi to share his closing comments.

[Amur Lakshminarayanan, executive]

Thank you, everyone. I think we are very, very delighted in the progress that we are making in the overall strategy execution. We are making good progress in the platforms to -- in the shift. And many of these products are beginning to get good traction in the market.

And as I said, we will continue to stay invested in both the talent and building the talent to help us shift to the digital play and also invest in the products and platforms.

And the most encouraging thing is the kind of conversations that we are able to have with our customers is really encouraging to see. So thank you very much for all patient hearing. Thank you very much.

[Chirag Jain, executive]

Thank you, Lakshmi. For any follow-up questions, you may kindly write to [e-mail]. This brings us to the end of the management call. The recording will be available on our website in the next 24 hours. You may please disconnect now. Thank you.