Tata Communications Ltd

NSE:TATACOMM

Earnings Call Analysis

Revenue Jump and Strategic Acquisitions Shine

The company's reported revenues surged by 24.4% year-on-year due to strategic acquisitions and emphasis on digital services, which now constitute 45% of the data business. With an aspiration to reach a 50% threshold, the firm is transitioning into a CommTech leader. EBITDA margins, however, dipped slightly to 20.1% compared to 20.8% in the previous quarter, largely impacted by a shift in revenue mix towards the expanding digital portfolio. Meanwhile, Kaleyra's first quarter post-acquisition turned EBITDA positive unexpectedly soon, and the core connectivity business marked a 4.3% year-on-year revenue growth.

Tata Communications Surpasses Revenue Milestones with Strong Year-on-Year Growth

Tata Communications, in its Q3 FY '24 earnings call, conveyed a momentous achievement, having surpassed INR 5,000 crores in consolidated revenues for the first time, marking an impressive 24.4% year-on-year surge. This performance showcases the company's robust expansion and the successful execution of its growth strategies.

Strategic Focus on Digital Services as a Growth Driver

Digital services now constitute 45% of Tata Communications' data business, aligning with its objective of reaching a 50% threshold and becoming a prominent CommTech player. This strategic shift signifies the company's ambition to evolve its revenue mix and capitalize on the growing demand for digital solutions.

Data Revenues Witness Notable Increase

The earnings call highlighted a steep 28.5% year-on-year growth in data revenues, reaching INR 4,618 crores. This segment experienced a 15.6% rise compared to the previous quarter, indicating strong demand and the company's ability to innovate and address market needs.

Diligence in Reporting Standards Underlines Commitment to Governance

Tata Communications maintains a commitment to transparency and high governance standards, as demonstrated by reporting both underlying and reported financial numbers. This approach provides stakeholders with a clear and comprehensive view of the company's performance.

Operational Efficiency and Integration Strengthen Profitability

Operational improvement efforts have yielded an 11.7% quarter-on-quarter EBITDA growth. The integration of Kaleyra and strategic consolidation within the company's business units are pivotal moves towards enhancing profitability and simplifying the customer engagement approach, potentially accelerating the path to EBITDA breakeven for the Switch unit.

Segmental Performance Reflects a Diverse and Growing Portfolio

The company's core connectivity business remains robust with a 4.3% year-on-year revenue increase. Meanwhile, the digital portfolio boomed with a 78.2% annual growth rate, thanks in part to the integration of Kaleyra's financials. Furthermore, cloud hosting and security revenues advanced by 12.5%, and even though the incubation portfolio had a flat quarter, the business continues to explore and grow in new segments, showcasing the company's innovation drive.

Market Positioning and Future Confidence

Tata Communications' concept of 'digital fabric' has gained recognition, especially in international markets. The company's continuous investments and enhancements in both organic and inorganic aspects underscore its conviction in seizing larger market opportunities and driving future growth.

Earnings Call Transcript 2024-Q3

[Chirag Jain, executive]

Good evening, everyone, and welcome to the Tata Communications Earnings Conference Call for Q3 FY '24. We are joined today by our MD and CEO, Mr. Amur Lakshminarayanan; our CFO, Mr. Kabir Ahmed Shakir; and our Head for IR, Mr. Rajiv Sharma.

The results for the quarter ended 31st December 2023 have been announced today afternoon, and the quarterly data pack is available on our website. I trust you would have had the chance to look through the key highlights. We will commence today's call with comments from Lakshmi, who will share his thoughts on the business and long-term outlook, followed by Kabir, who will share his thoughts 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 may be forward-looking in nature and was reviewed 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 request Lakshmi to share his views. Over to you, Lakshmi.

[Amur Lakshminarayanan, executive]

Thanks, Chirag. Welcome to all of you for the third quarter FY '24 earnings call. This being the first call for the year, I want to wish you all a very Happy New Year. We're very pleased to share that our reported revenues grew by 24.4% year-on-year. Our reported EBITDA is up by 5.3% year-on-year and 11.7% Q-on-Q. Our adjusted PAT, excluding exceptionals, was up 13.9% Q-on-Q. Further, we're very happy to report that our quarterly revenue crosses the INR 5,000 crore mark, and our data revenues crossed the INR 4,000 crore mark, coming in at INR 4,618 crores and was up 15.6% Q-o-Q and 28.5% year-on-year.

Digital services are now 45% of the total data business. This is in line with our aspiration to get it to 50%, which will position us firmly as a leading CommTech player. This is an important milestone from where we started 3 years back. Our underlying data revenue growth at 6.6% year-on-year was affected by the macro conditions. Our YTD reported revenue growth was at 15.1% on a consolidated basis. Our YTD reported data revenues are up 20.1% and up by 10.2% from an underlying perspective.

As part of our financial disclosures, we are reporting both underlying and reported numbers in line with our commitment to the highest standards of financial disclosure and governance. That said, it is important to recognize that Switch and Kaleyra are being run as an integrated business, for example, Switch and our media is led by 1 business leader. We've already improved to a structure for Kaleyra, DIGO and InstaCC where they are in 1 customer interaction suite unit and led by 1 business leader. Customer opportunities will be looked at holistically as opposed to looking at it from an individual product lens.

Coming to profitability. Our efforts have enabled us to report 11.7% growth in Q-on-Q EBITDA this quarter, and I'm encouraged to share that we have been able to fast track the cost synergies of our Kaleyra acquisition. For Switch, the EBITDA losses have narrowed down further, and we hope to accelerate on our path to EBITDA breakeven. This quarter, the EBITDA margins came in at 20.1% versus 20.8% the previous quarter. The drop in margins is primarily due to the change in revenue mix as the revenue share of digital portfolio keeps increasing.

On the subsidiary review, which I talked about last quarter, we are making good progress. We mutually agreed to exit a large contract in TCTS, which was not profitable, and we will share more on the review as we progress.

Now coming to our segmental performance. Our core connectivity business revenues grew by 4.3% year-on-year to remain relevant and to be the partner of choice for our customers. We continue to enhance our customers' experience by enabling our customers to consume the services digitally. Our digital portfolio revenues stood at INR 2,099 crores, growing strongly at 78.2% year-on-year and 44.1% Q-on-Q, aided by consolidation of the Kaleyra financials.

Underlying digital revenues grew by 11.4% year-on-year this quarter. YTD underlying growth is at 18.3%. From a YTD perspective, except for incubation, all segments have grown mostly above 20%. Next-gen connectivity, in particular, is up 43.6% YTD, and collab, which was a drag until last financial year is up 10.2% on a YTD basis.

Our underlying collaboration portfolio grew by 4.4% year-on-year and 3.1% Q-on-Q. The growth is on the back of robust traction in our customer interaction suite, which has offset a seasonal decline in the usage-based revenues this quarter. With the joint capabilities of both Kaleyra and DIGO, it helps us to position as a formidable player. We remain committed to building an intelligent, contextual multichannel communication solution and creating a customer category of CIS to help us scale growth. We recently enabled Singapore Airlines to transform the airlines communications and collaboration tools to enhance employee productivity and boost user experience. This new transformative initiative delivered on Tata Communications' GlobalRapide platform will help the airline create new benchmarks in customer experiences.

Our next-gen connectivity offerings revenue declined by 1% Q-on-Q and up by 37.9% year-on-year. Our new offerings like Managed WiFi, IZO Multi Cloud Connect, Flex SD-WAN and SASE continue to gain traction with enterprises. The case in point is with JLR, where we further strengthened our partnership by deploying our digital fabric comprising of our agile infrastructure, platforms and managed services that will help integrate JLR systems workforce, suppliers, stakeholders and customers across the globe, delivering a seamless flow of data to enrich key aspects of their business ecosystem.

Our cloud hosting and security revenues improved by 12.5% year-on-year. Our IZO private cloud encompassing both Infrastructure as a Service and Platform as a Service grew well above the teens. Our media revenues, including revenues from Switch were sequentially up by 0.6% Q-on-Q and 110.3% year-on-year. Excluding Switch, media revenues were up 6.5% year-on-year. Combining capabilities of Switch and our MES business, we are very well positioned to capture the incremental opportunities both in global and regional sports video market and with a key focus on increasing wallet share from the existing customer base.

Moving to our incubation portfolio. We witnessed a flat quarter. Muted growth this quarter is on the back of a large customer implementation we delivered in the same period last year internationally. Our new business continues to grow as we strengthen the segments we operate in, while exploring newer revenues. We also continued to stabilize the international opportunities and design wins in the IoT segment to propel this portfolio forward.

To summarize, we believe that our digital fabric is a powerful concept, which enterprises, especially in the international markets are beginning to realize. We are confident about the larger opportunity. And with this strong conviction, we will continue to improve and derive value of these organic and inorganic investments and continuously augment our capabilities. With this, I'll request Kabir to share the financial highlights.

[Kabir Shakir, executive]

Thank you, Lakshmi. Good evening, everyone. Let me take this opportunity to discuss the highlights of our financial performance for the quarter. This has been a historic quarter for us as we surpassed the benchmark of INR 5,000 crores in our consolidated revenues for the first time ever. Our data revenues continued their healthy growth momentum despite the macroeconomic uncertainties amidst a challenging demand environment. Our reported revenue for the quarter stood at INR 5,633 crores, improving by 24.4% year-on-year. and 15.6% on a sequential basis. Normalizing for ForEx, our consolidated revenues grew by 22.6% year-on-year and 15.1% quarter-on-quarter.

Data revenue for the quarter stood at INR 4,618 crores, growing at 28.5% year-on-year and 15.6% on a sequential basis. The underlying data growth stood at 6.6% year-on-year. Revenue growth for our digital portfolio stood at 78.2% year-on-year and 44.1% quarter-on-quarter, driven by the consolidation of the Kaleyra acquisition.

Moving to margins. Reported EBITDA margins for the quarter came in at 20.1% and the underlying EBITDA margins were at 21.7%. Our core business margins, excluding subsidiaries were at 23.6%. Our absolute EBITDA stood at INR 1,134 crores, improving by 11.7% quarter-on-quarter and 5.3% year-on-year, aided by a strong focus on driving profitable growth from organic and inorganic investments.

I'm delighted to share that we continue to succeed with our Fit to Grow strategy with Kaleyra turning EBITDA positive ahead of our expectations in the first quarter of consolidation itself and Switch too making good progress towards EBITDA breakeven. We believe there is room to drive more value from both organic and inorganic investments we've been making, and we see multiple levers to achieve this.

Net debt stood at INR 9,310 crores and net debt-to-EBITDA at 2.2x, ROCE for the quarter at 21%. Our increased debt levels and sequential decline in ROCE is driven by Kaleyra acquisition. Cash CapEx for the quarter stood at INR 630 crores, and the ramp-up is attributed to payments coming up from CapEx projects committed in the prior year as suggested previously.

The free cash flow for the quarter is at INR 77 crores. These financial KPIs are very much in line with our expectations. PAT for the quarter stood at INR 45 crores, driven by a one-off provision of INR 206.6 crores pertaining to a recent Apex Court judgment regarding the treatment of license fee being capital in nature and not revenue expenditure for the purpose of computation of taxable income. Though the company is not a party to the above judgment as a matter of prudence the company has assessed and taken the aforesaid provisions.

Moving to subsidiaries. Our payment business today has more than 95% of the current quarterly revenues coming from the franchisee model. We have 4,600 plus franchisee ATMs and only 128 company-owned ATMs, which -- with this reversal being achieved in just 24 months, resulting in the business being EBITDA positive. TCTSL revenues improved by 10.7% year-on-year due to improving customer engagement and better pricing.

We have mutually agreed to exit a large contract in TCTS, which was not profitable, and this will improve the overall business health. Secondly, we have reported revenues from the Campaign Registry. The integration hub that allows us to register messaging campaigns as part of our subsidiaries, and it is being separately managed as a subsidiary as well. This is a business which is part of our recent Kaleyra acquisition. Over the last few years, we are focused on changing the texture of the business to significantly improve the customer relevance quotient and drive sustainable and profitable growth. Our final strategy of Fit to Compete and Fit to Grow allowed us with the elbow room to invest in inorganic capabilities to improve and strengthen our CommTech positioning.

To sum up, we will continue to invest in building long-term capabilities, which will help us cement our nodes and our long-term ability to consistently create value for our shareholders. I will now ask Chirag to open the forum for Q&A.

[Chirag Jain, executive]

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

[Sanjesh Jain, analyst]

A couple of questions. First of all, congratulations on a successful integration and probably a much better performance from the acquisition. So let me start with that. Can you help us understand what are the synergic benefit we had where last quarter, Kaleyra was a negative minus 5% EBITDA margin and this quarter we have achieved a positive PAT, which is a significant improvement in the performance of the Kaleyra. So one, what are the synergy benefits? And number two, what is the underlying growth in Kaleyra for this quarter?

[Kabir Shakir, executive]

Yes. Let me take the first part, and I'll come to the growth in a bit. Firstly, let me just say integration is complete. We are far from it. We have just started that journey, Sanjesh. So there are 3 components to any acquisition, and the most important one is integration. We have a project management team in place and which is tracking various milestones in the integration. So that's on track. Then we have revenue synergies and we have cost synergies.

What as Lakshmi mentioned and I alluded further, the cost synergies, we have actually fast-tracked it. We had enough window available for us even the pre-close itself to understand what are the levers to just say it was an SEC-regulated and NYSC listed company. So alongside came a lot of costs with that kind of a regulated structure. So obviously, we were to delist within 10 days of the close, we closed 6th of October, we delisted from NYSE, and there were multiple other low-hanging fruits from a cost perspective, which we were quick to take it out.

So I would say that's definitely 1 lever which we have fast tracked. And therefore, we have now seen that the CIS portion of Kaleyra has turned EBITDA positive as a result. We continue to have the focus, I would say, on the business to drive the revenue synergies. And of course, it is the synergy of growth, the combined portfolio of DIGO, InstaCC and Kaleyra, forming part of the new category that we are putting called CIS, which is what is going to drive the entire thing and we are quite, I would say, energized by that.

[Amur Lakshminarayanan, executive]

Sanjesh, let me add. I think 1 quarter would be too soon to call a success. I think the teams are extremely focused. We are very excited about the talent that we have of the combined teams. And as Kabir mentioned, we are going through this with a very disciplined execution, right? So this whole integration will take time, extracting all the cost synergies, driving all the revenues synergies, getting all the products and platforms together. We will further invest in making the product more intelligent by adding AI and other capabilities. So we have some ways to go, but we are very pleased with the beginning that we have made.

[Sanjesh Jain, analyst]

Great. And on the revenue growth -- sorry, revenue growth in Kaleyra for this quarter?

[Amur Lakshminarayanan, executive]

Again, 1 quarter, Sanjesh, it's too soon to call out any quarterly trends and so on and so forth.

[Sanjesh Jain, analyst]

Fair enough. Now how has been the Switch experience? Because there, I can see there is a INR 25 crore reduction quarter-on-quarter on the losses, last quarter was INR 37-odd crores, and we have brought it down to INR 12 crores. Is it again a combination of cost and revenue or it is just cost as of now? Because revenue tends to look like a flattish quarter-on-quarter, where we had a cricket event also in India, I thought that should have benefited us.

[Amur Lakshminarayanan, executive]

Yes. I think media overall -- okay, let me add on the Switch, again, we are going through the execution on both the cost and the revenue synergies, and as you pointed out, the losses are narrowing, and we will soon be breaking even that and there on moving forward. From a revenue standpoint, there are multiple things that play as well as the media business is concerned. And Switch, we have to invest more on the front end which we will be doing.

So there were some one-off revenues, what they called as occasional use revenues and that was a long tail. We are consciously looking at the long tail to see, should we be having the long tail or focused on larger properties and larger contracts and the business is going through that transformation and aligning to what our media business has been doing.

On a year-on-year basis, the overall media revenues you would see last year, we had a World Cup, which gave us a boost, and that's a once in a 4-year event. Otherwise, there's nothing particular to call out on the revenue front as far as the media is concerned.

[Sanjesh Jain, analyst]

Fair enough. Just one last question on the acquisition. We have earlier guided that double digits in margins in Kaleyra is what we are targeting. With this initial start do you think that's possible in, say, next 18 months to 24 months?

[Amur Lakshminarayanan, executive]

Yes. I think we mentioned that Sanjesh, that we want to be breakeven in the short term, and we said in the medium term, we would want to get to the -- and that's what we will be doing. So I think -- we will execute and we'll let you know as we progress, but we will -- I can understand 1 quarter is too soon to call out many things. We did say that, that's our direction of travel, and that is what we would be doing.

[Sanjesh Jain, analyst]

Sorry, my follow-up question on the core business or the underlying business. There -- it has -- we have seen this quarter a material deceleration in the revenue growth, 11% growth in the digital versus YTD, 18%. If I remove this quarter, we were upwards of 20%. What has led to the sudden deceleration in the growth? And how does our order book looks like for remainder of this year and next year?

[Amur Lakshminarayanan, executive]

Yes. So again, I will take more a YTD perspective in this Sanjesh. We have been saying that, yes, there is a deceleration in the digital. But that's -- one is largely attributable to the macro. I think last quarter also, you asked the same question, right, in terms of deceleration and I think I answered the same thing. The macro conditions are still not very favorable.

So if you look at other companies in the same domain, I think they've called out kind of similar kind of slowdown. The positives that I'm going to look at is with our expanded portfolio, our levels of participation in larger opportunities continuous to increase. Our funnel is therefore healthy, and taken to close is I called out last 2 quarters, not just last quarter, the last 2 quarters. I think it continues to be longer than normal.

So I think those are the conditions that we are in. But overall, given the macro conditions, I think our growth is still very creditable, and we are quite pleased with what we have delivered. Of course, we can be doing more as and when the conditions improve. We are definitely positioned to deliver.

[Sanjesh Jain, analyst]

So any more color on the order book, how do you see it growing because we were growing at double digit earlier. Are we still doing that because we have invested significantly on the industry, particularly on the international market, product expansion. So this should have significantly expanded our reach as well as the wallet share. I thought it should help us in the winters right now.

[Amur Lakshminarayanan, executive]

It is improving. So our international growth is quite good. I wouldn't say all the regions in international geographies are firing. I think certainly, there are certain markets which are firing very well, and we are seeing a good double digit. One of the markets has delivered upwards of 20%. One of them is just shade below 20%. But all regions are yet to fire. But those investments will pay dividends. And as I called out, with our expanded portfolio, our levels of conversation and engagement with customers are definitely improving.

[Sanjesh Jain, analyst]

One last question probably on the balance sheet side before I come back in the queue. The cash conversion appears to be quite weak Kabir for last 2 quarters, and that is driving net debt higher than our acquisition cost. Is there anything changed in we are seeing in the cash conversion, along with the decision-making getting slower in the deal? Are we also seeing a delayed payment from the customer side?

[Kabir Shakir, executive]

Sanjesh, I'm acutely aware of that. There is no cause for concern there. We did have in the past a lot of tax refunds that the team meticulously went ahead and then collected. So obviously, after a point that indeed dries up. So there is very little left to steam out there. So that is one. Working capital, there were indeed challenges in the previous quarter, not this quarter. This quarter is slightly better although we could have done a little more than -- better than what we should have. Our CapEx is going up, if you recall. Last year, when our approved CapEx was higher, the cash CapEx was actually lower because of delayed deliveries and better payment terms that the supply chain firms had negotiated. All of that catch-up is happening in these quarters now, where the cash CapEx is actually higher than the approved CapEx. So I would say a combination of all of these things, which is why we are seeing the impact on the free cash flow.

[Sanjesh Jain, analyst]

Kabir, actually, there is a lot of disturbance in the background. I'm sorry, I couldn't hear anything. But I will take it from Rajiv off the record, but I think there's a problem with the audio system.

[Kabir Shakir, executive]

I mean not at this side, Sanjesh, I don't know if anybody else, maybe will ask the next question, and figure out if that is a problem.

[Amur Lakshminarayanan, executive]

Sorry. Our teams listening remotely are saying that they have a good quality. So we will check anyway. Why don't you pick it up, Sanjesh with Rajiv separately.

[Chirag Jain, executive]

The next question is from the line of Santosh Sinha from Emkay Global.

[Santosh Sinha, analyst]

Sir, one regarding trade receivables. So what we have seen is that there has been a marked increase from -- in the credit receivable to INR 2 billion from INR 1.7 billion in last quarter from one of the customers. So what is the plan of the company actually to recover this receivable? And what is the way forward for this? And second question is regarding the slowdown in growth in terms of incubation in particular. So there has been -- incubation was down 2% year-on-year basis. So what is the key reason for that?

[Kabir Shakir, executive]

Let me take the receivables question first. It is nothing to worry. It's just the consolidation of Kaleyra. When we actually added the Kaleyra financials to us, we've obviously added all the P&L item and the balance sheet items as well. So the addition of Kaleyra when you add together sees the absolute increase in receivables. The days outstanding, which we track as a KPI is completely under control Santosh.

[Amur Lakshminarayanan, executive]

Yes. On the incubation, Santosh, I think I had mentioned there is one portfolio which got affected because of a large contract that we had last year in the international region in IoT. That project was delivered, and that saw a bump up in revenue. So Q-on-Q basis, we are seeing that. But other than that move, which is a major part of the incubation on a YTD basis, we are seeing good growth.

[Santosh Sinha, analyst]

Our next question is regarding core connectivity, but there also, we have seen some moderation, means in this quarter, 4.3% year-on-year growth versus 7% last year. And also, it's actually a decline of 0.7% quarter-on-quarter. So what has led to this core connectivity and how we can see this in the long term?

[Amur Lakshminarayanan, executive]

See core connectivity, we've always called out in the long term, it will be a low mid single digit to mid-single digits is what we've called out. I think last year and a couple of years there was a lot of investment by the cloud providers, the major cloud providers and other CSPs, which helped to drive the core connectivity. Within our Enterprise segment, the core connectivity is still holding up. But yes, that is what it is. So -- and at 4.3% is still I would say, better than what we see for the medium term we had anticipated the core connectivity to grow at.

[Santosh Sinha, analyst]

One last question regarding the margin outlook in the long term. So since this quarter, it's better than -- the margin is better than what we were expecting. How should we see that in the long term, overall, the margins going forward? Is there a lot of synergy benefit that will come through? Or there will be -- going forward, the synergy benefit will not be as strong as we have seen in this quarter. How should we look at it in terms of long-term margins?

[Amur Lakshminarayanan, executive]

Let me remind our long-term ambition is to stay in the 23% to 25% EBITDA margin range. With the acquisitions that we've done in Switch and in Kaleyra, mathematically, one can do what that impact was. We are slightly -- just 1 quarter, we are slightly better than what it would have been because we have accelerated some cost synergies.

Having said that, our guidance that in the medium term, we will get back to the 23% to 25% range, not just the EBITDA margin, I would say, ROCE, net debt, all the financial KPI ranges, we'll get back to that steady state in the medium term, and we are absolutely on course to get there. So I have nothing further to add than reiterate that the only goal post for us on a steady state long-term basis is the 23 to 25 range.

[Chirag Jain, executive]

the next question is from the end of Gautam Rathi from Chanakya Investments.

[Unknown Analyst]

Just wanted to understand a couple of things. Firstly, just new probing again. I know you've answered a lot on the growth. But Lakshmi, if you just go back last quarter, one of the things you had said was the slower growth that we saw last quarter was partially because of the slowdown in order booking that we had seen in the H2 of last year. And we had seen much better order booking in the first half.

So is it that some of these orders have been delayed because of the current environment? Or how should we read it? Because if my understanding is right, the orders were in the bag and it should have given us much better growth. So is it slower execution of those orders? Or is it churn or what has caused this slow growth?

[Amur Lakshminarayanan, executive]

So I think I mentioned related to last year, H1, we had a good and H2 had slowed down in the order booking, slowing down of the revenues. And subsequently, related to the H2, we were seeing good funnel and conversion, but it was not at the same levels of the hedge fund last year, Gautam where it was improving. So I think the conditions are still the same. Our funnel still looks healthy. Our funnel additions and our participation levels are increasing. But I would say the overall order booking has not grown so much that you can call out special, right?

So I think the called out last time and even this time in my commentary is that our participation levels are increasing and improving. And -- but the decisions are slower, sometimes in the funnel, we shelve the opportunities because the customers are taking too long to make a decision, and we are flushing that out of the funnel and starting all over again. But despite that, our funnel looks quite healthy.

So I think that only tells me that our relevance to our customers are increasing and our participation is increasing, but the conversion is taking time. Having said that, compared to internationally, we have seen growth, which is a good indication for us. And relative to 2 years ago, when we saw what our digital portfolio overall was doing, I think, last year, we did well, and we continue to do well this year. So this is only a reference point compared to what it was 2 years ago. But looking at our ambition, our ambition is much greater, and we have to do more, and we want to do more. And as and when the macro conditions improve, we will be well positioned to do it.

[Unknown Analyst]

And Lakshmi, the slightly better order booking in H1 versus a muted order booking in H2. I'm just trying to understand, are we on a trajectory where have we hit the bottom in terms of revenue growth? Or we could see more pain if the environment remains the way we are today, right? I'm just trying to understand more color on how should we think of trajectory. Are we still in uncertain territories? Or have we passed the worst is behind us in a way.

[Amur Lakshminarayanan, executive]

It's difficult to say, Gautam. I would think -- and if you're referring to our Q-on-Q growth narrative this quarter. And that's why I added the YTD growth. If you look at the YTD growth parameters, they are quite decent. So I would read more into the YTD growth and extrapolate as it was to looking at Q-on-Q or even a Y-on-Y because there are some aberrations in last Q3 to this. So all those things I would ask you to look at. If I look at the YTD numbers, while the growth is slower, it is still much better than what the market condition -- despite the market conditions we're doing, that is very creditable is what I would say.

[Unknown Analyst]

And sorry to persist on this, but is it fair to estimate that going forward, expect YTD to continue to happen on a much more sustainable basis? Because there is a very sharp deceleration that has happened in the 3 quarters, right? 2 out of 4 growth services have reported negative Q-o-Q quarter this time. And I can understand this can happen sometimes. But is it the right way to think about it, YTD is the right way, then we can think of it that way going forward?

[Amur Lakshminarayanan, executive]

I would think YTD is the right way to look at it. Because of various things we have a number of things happened. From overall commentary point of view, we are going to be doubling down on our efforts to -- for marketing and sales and all of that. So while at the same time being prudent on cost and driving all cost synergies. And even in our organic business, there's a lot of cost synergy activities that we have carried out even this quarter.

So we will manage all of that prudently. But on sales and marketing, we will be doubling down because we see that we are participating in more opportunities. In fact, in international, our presence is so small that we are not participating in all the opportunities that we could be and should be participating, that's because of lack of footprint. So we have to do more.

[Unknown Analyst]

Perfect. And Lakshmi, this JLR deal, if you could give some color that, in our mind, it looks like this is the first digital transformation deal that you've really called out, right, where you are -- your new-gen network services kind of a win kind of a deal where you're doing it at a global scale. So have we won similar deals or are there similar deals in the pipeline which you're looking at? And is our understanding right that it is one of those large transformational deals, where -- which could be a big growth driver for us going forward?

[Amur Lakshminarayanan, executive]

Yes. I think there are multiple large deals that we have, Gautam. Sometimes those deals are largely -- I mean, the -- in the course of last year in one of the major European customers, we have displaced an incumbent. Similarly, in APAC, one of the large banks we displaced an incumbent with our IZO Internet.

I think the reason why we called out the JLR as while being a large deal, it encompasses a larger part of our digital infrastructure because we already do connected vehicles for them. And this will entail all the network underlay plus the overlay and the security that goes with that. And therefore, we have called out this deal. But there are -- I mean, these are the type of deals that we are going to market with in the international regions.

[Unknown Analyst]

And the campaign registry business, which is -- which has been a real standout and a surprise for us. Is it fair to assume that this is like a steady state revenue, which could only grow going forward on a quarterly basis? Or is there any seasonality that we should be aware of?

[Kabir Shakir, executive]

Well, look, I'll explain, this is basically a business which I think Kaleyra has done quite -- they're quite proud of building this business in the U.S. So currently, it's just a U.S.-centric business. There are, of course -- they're looking at how they want to grow. After a point in time, it is all then led to the number of campaigns that are then run in that country and the growth is linked to that. But it's a robust business, which validates and ensures that it reduces spam for both the operators and the users and the campaign runners as well so that they bring sanctity into the entire network. So they're doing, I would say, pretty well, and we are tracking them.

[Unknown Analyst]

Kabir, just wanted to understand, this is what we've clocked this quarter, it is more or less a steady state number, right? It is not driven by any specific one-offs or it's not like this Q4 is a -- Q3 is a very strong quarter for them and seasonality. And I just wanted to get some color because is it fair to assume that 120 x 4 is more like an annual revenue for them?

[Kabir Shakir, executive]

Look, again, one quarter don't derive anything out of that. But yes, it's -- if I were to say, like any other business, it is driven by usage and the number of campaigns that are run in that particular quarter. So I really do not have the underlying data of what were the historical campaigns that were actually run in that country and how much share we have, and therefore, so. I would resist from giving you a very straight answer of x 4 that you asked so -- but because the underlying nature of the business is dependent on the number of campaigns its run. It has a fixed fee and then a variable fee linked into it, that's how the pricing model actually works.

[Unknown Analyst]

Fair. And is it fair to assume that right now, it's a U.S.-centric business, but you will try to take this business to multiple countries.

[Kabir Shakir, executive]

Look, it all has a lot of investment linked to that. So yes, one can go, and it's not that easy to replicate the same business in other geographies because mobile network operators, their systems, processes are different, regulation is different. So it's very easy to say. Otherwise, a lot of people would have already done it by now. Plus it comes with a huge investment bill as well. So end of the day, they will stand in line like many other projects in front of us, and the resource allocation will be done on the ROI that particular business case generates. So I'm not going to slam dunk and say, yes, we're going to expand to 5 countries because that decision has not been taken.

[Unknown Analyst]

That's very fair. That's very fair. And that's happy to hear that you're going to be looking at it that way. That's great. Just 2 more questions. The one-off that was INR 185 crores, is that it? Have we accounted for everything? Or is there something more to come in that? I could not fully understand what exactly it was. So it just looks like there was some license fee that was asked for and you paid for the entire thing along with interest, right? Is that fair?

[Kabir Shakir, executive]

That's not what it is. There was a recent Supreme Court judgment of a large telecom operator that came in October. And although it doesn't pertain to us, as we have been prudent to actually take that provision. Basically, in a nutshell, the Supreme Court judgment says that the license fee payable is not revenue in nature for the purpose of computation of taxable income, and it's actually capital in nature and should be amortized over the license period.

So what it basically does is it just creates a timing difference. So instead of -- and we have done it for the past 10 years, and prudently taken that provision. So there is no shortfall of tax, a small amount of shortfall of taxes because of the difference in the effective tax rate in the various years that you actually see.

But otherwise, it's just the interest component of having if at all that comes to us, then that will be the impact. Going forward, until there's a resolution to this, there will get true up of the interest that will happen. So to that extent, you will in subsequent quarters see true-up of the interest.

[Unknown Analyst]

Okay. Perfect. And then last thing is AGR, right? Is there any update on that? Anything that we should be -- is there any chance of that liability coming up anytime soon for payment?

[Kabir Shakir, executive]

If it comes up we wouldn't have recorded into contingent liability. Whatever updates are there in AGR, we are reflecting that in our accounts. If you see in the last 4, 6 quarters, there has been a lot of activity that's been -- the DoT has looked at our numbers, we have recommended to them that there were errors on the face of it. And that's the reason why you see numbers going a little down, in fact, this quarter is because the department looked at the obvious errors and revised their show-cause notices. We still maintain our standard. This is not applicable to us. This is subjudice, and therefore, whenever it comes up, we'll take it. But till the time it is subjudice what at least we did not want is not have wrong numbers into the show-cause notices and demand notices. So that we have been working, I would say, closely with the DoT to ensure that they put in the right numbers and we agree the principal in which they put so that we know what principals we could contest when this comes up in the court.

[Chirag Jain, executive]

The next question is from the line of Baria Nomanic from 91 Investments.

The next question is from the line of Mr. Vinit Manek from Karma Capital.

[Vinit Manek, analyst]

So most of my questions have already been answered. But Lakshmi, just one question to you regarding AI. So anything on that development are we doing? And do you expect any material business coming in for us in the next 6 to 12 months based on the developments because we have been going through a few reports and news articles saying that a lot of activities happening on the telecom side of the business also. So any material advantages are we seeing? And are we building on such capabilities?

[Amur Lakshminarayanan, executive]

Yes. We are building on capabilities Vinit. I think this was part of our strategy 3 years ago, starting from training people. So we trained over 1,000 people in the company. We already are seeing AI deployed in some of our processes and products, which we have taken to market. And we also are examining because this whole AI, especially after the ChatGPT, the Gen-AI has become quite popular with enterprises. So we anticipate that this is going to require a lot of computing power. And therefore, we will enhance our cloud capabilities, the IZO cloud capability that we already have and enhance it with AI capabilities.

[Vinit Manek, analyst]

Okay. Okay. Got it. And just one bookkeeping question to Kabir is that we have seen a significant Q-o-Q increase of around absolute INR 50 crores in the interest cost. So is this something that the peak that we can expect? Or is it a steady state run rate that we can expect going forward? Or -- and is there any one-off ForEx component or something in the interest cost? Because versus the net debt increase, the interest cost seems to be much higher.

[Kabir Shakir, executive]

Well, we have assumed the net debt of Kaleyra as you all know. We paid about $100 million for the equity and whatever was the debt of Kaleyra we have assumed. And so therefore, that impact will come through. At the moment, we had -- the Kaleyra bondholders had a change of controlled clause. So when the bonds -- when the change of control happened 30 days from that, they could exercise and they've exercised and the entire $200 million of bond was repaid. We have, therefore, used our short-term facilities to cover that. And hopefully, we will recycle that with a more medium to long-term instrument.

So what you see as of now in this quarter is just that addition and that interest cost as a result of that. Associated with that as well is the Fed rates that you actually see that have been increasing even in the last quarter also that the increase has happened. So that's why the benchmark rate has gone up. We have a certain portion of our debt, which is hedged, but there's a certain portion that is actually open. And that's in line with our interest rate management and hedging policy.

So whatever you see is the residual bit is as a result of that increase in this cost as well. I can't comment whether that will remain the same or not because of the refinancing that we will do, hopefully, at a lower cost on the $200 million plus any other financing requirement that we will have or any other cash flow changes that we will do, which may -- we will reduce it, so our ambition, as I said, is to operate under 2x, and hopefully, we should get to that metric faster than the EBITDA and the ROCE metric. So therefore, if that comes faster down, then the interest cost also should reflect that. But these are all very dynamic things with a lot of moving parts. So I can't give you an handle on that on the interest cost per se, but those are the drivers for this current quarter.

[Chirag Jain, executive]

The next question is from Arvind Chetty from Dymon Asia Capital.

[Unknown Analyst]

Assuming that you've reported Kaleyra revenues in the collaboration and CCaaS vertical. My calculation suggests that Kaleyra revenues on a Y-o-Y basis for this quarter has sort of declined significantly from what they reported in December'22 quarter. Is that a fair calculation?

[Kabir Shakir, executive]

No, it is not the right way of calculating because what you see in publicly reported, including the campaign registry business, which we have culled out and reported as part of our segmental performance. So it will be difficult for you to do an apples on apples comparison that way. Our collaboration portfolio includes CIS, other aspects of DIGO and InstaCC as well. So let me assure you it has not declined.

[Unknown Analyst]

And on the reported basis, in terms of EBITDA margin since the integration, fair level of integration has been done, is it fair to assume that on a reported basis, the margins will see sequential improvement from here on?

[Kabir Shakir, executive]

Let me reiterate. I don't think either Lakshmi or I said the integration is done. We just started on the integration, and we will keep a laser focus on doing the integration well, I mean, for me doing that well is not important. And then going on time and be ahead of time is the next thing that we look at.

What we have highlighted in this particular quarter is one aspect of the integration, which is the cost synergies that have been fast tracked, right? And therefore, we have a line of sight and a trajectory on the EBITDA improvement, which we have said that in the near to short term, we will do breakeven. It has happened in the first quarter itself. So we are happy about that.

But in the medium term is when we will actually get it to the double-digit EBITDA margin profile, and we will stay focused on that. And the reason why I'm reiterating that is there are investments that need to be made as we do the integration in the product organization, in the infrastructure and the platforms that combined portfolio needs. We don't want to it rob that off and not achieve the revenue potential and the capability that the entire CIS platform has got, if we myopically get driven only by the EBITDA and profitability. Not to say that there is no focus there, but clearly, we need to balance both of them together.

[Chirag Jain, executive]

The next question is line of Vibhor Singhal from Nuvama.

[Unknown Analyst]

Yes. A couple of questions from my side. So one question is for Lakshmi. Lakshmi, many of the IT services vendors that have reported results this quarter, they have talked about some green shoots appearing in the overall U.S. macro. Your sister concern mentioned about BFSI, what we know a larger corporate mentioned about the insurance industry spending. Now I know there is a huge -- I mean, difference between the kind of clients and the work that we do. But when you mentioned that we have the growth in this quarter and the overall macro environment has been tepid. Do you -- are we also seeing some kind of conversations with the clients, which are kind of hinting towards maybe things improving? Maybe if not in terms of the time line, but directionally things improving for that expense going into 2024?

[Amur Lakshminarayanan, executive]

Yes. I think I will definitely say overall as all macro parameters have shown, the U.S. market is definitely an improved condition. From our customer and our perspective, we are seeing funnels developing there. And as I said, in our case, it's very different, right. In different markets, we have to invest and increase our footprint. In the U.S., we have to do more, and which is what we will be doing. But overall, the commentary that you heard is accurate. And I would not want to pick out because our international presence in many markets are fairly small. And anything is a big upside for us. So truly speaking, other than the slowness in decision, the macro shouldn't be affecting us too much.

[Unknown Analyst]

Right. So apart from the delayed decision-making part, which continues to be at this point of time may be same as it was a quarter ago. Other than that, the matter shouldn't be too much of a problem for us.

[Kabir Shakir, executive]

No, it shouldn't be.

[Unknown Analyst]

Got it. Got it. Just 1 last question for Kabir. Kabir, I think you just mentioned about the interest expense going up because of the short-term loans that we have taken for the acquisitions. So I think it's still clearly visible in the numbers as well. So I mean at this point of time, I mean, the average cost of debt if say is -- report is around 6.5%, 6.3%. What is the target that you're looking at in terms of refinancing? Where do we eventually want this average cost of debt to hover around on a sustainable business model?

[Kabir Shakir, executive]

Vibhor, if you actually look at, we have a debt equity structure that is defined for us, an optimal WACC, and that's the reason why we talked about debt-to-EBITDA being under 2x. So that's optimal WACC level that I would like to operate under. And I'm trying to answer the question by giving you the contours of approach rather than pointing that because the context and the numbers and this might change, and therefore, the number might change. And that's the reason why it's important that we marry to the principal, right?

So we are we are committed to an optimal WACC. I also want to stay committed to an investment-grade kind of ratings. Therefore, our coverage and service ratios need to fall within that ambit as well. And we have a hedging policy, which looks at giving certainly to near-term P&L, and therefore, hedging a large portion of that. So currently, about, I would say, 60% of our current loan book is hedged. And finally, in terms of refinancing that you actually mentioned, when we did the NCD issuance back in August, although our requirement was in U.S. dollars, we did borrow because there was an arbitrage that was available in the Indian market.

So we borrowed in Indian market and did a cross-currency swap and the landed cost of that was much cheaper than doing it directly in dollars. So the treasury team constantly scans the market, is in constant conversations with our banking partners, to look at the right opportunities where we will actually do that. So that's the reason why when we did not have certainty whether the Kaleyra bondholders were indeed tender all their bonds. So we just established a line of credit in early December when the bonds came up for repayment.

And now we will examine what is the right structure, right market, right currency for us to be able to do the medium- to long-term funding to replace this short term, in line with our treasury policies that -- which I just explained about. So those are the contours with which we will operate, not just this, but I would say there are several other BAU that we have in terms of funding BAU, CapEx, monetization activities that we do.

Organic cash flow generated by the business and everything put together. So that's the whole cash projection and cash analysis with which we review this almost, I would say, hedging strategy is reviewed on a weekly basis with the dynamic market situation that we have. But all of the other things are reviewed almost on a monthly basis.

[Unknown Analyst]

Got it. Got it. Just one small bookkeeping thing. I'm sorry if I missed that. I think you mentioned that, has all the debt related to the Kaleyra acquisition is in our books already? Or there is some still pending among that might come in the next couple of -- next quarter or so?

[Kabir Shakir, executive]

No, no, the entire thing is in our books. So the full balance sheet has been consolidated, and complete balance sheet has been taken. So the full thing is already reflected in our results.

[Chirag Jain, executive]

In the interest of time, we will have one more question as a last question from Sanjesh.

[Sanjesh Jain, analyst]

Yes. One, on the employee side, I wanted to understand. You did, Lakshmi the initial comment that you want to repurpose the employees from both Switch as well as the Kaleyra to cross-sell the Tata Communication product. So is that agreed by the employees and -- what are the areas of focus for us through those employees to target in the U.S. market? What are the key areas of focus that will drive that? And will they work along with the put on the sales, we have increased? How will that organization structure work?

[Amur Lakshminarayanan, executive]

Sanjesh, too soon to announce externally the new structure that we will put in place, Sanjesh, but as I mentioned in my commentary, they are all working under 1 business leader, right? So Switch, for example, the sales teams are completely integrated. They take the offerings in a joint way. Both the teams are working together to bring the power of both companies.

Similarly, in Kaleyra, we are looking at sales teams to operate as 1 as opposed to 2 different teams. And as we speak, the training for the teams have started on the various offerings within the CIS portfolio. For example, InstaCC is a portfolio that Kaleyra does not have. So the sales teams are being trained on that. And that's what they will take to market.

Whether the Kaleyra teams will take the overall Tatacom offerings, they are not capable of doing that, but they will work in an integrated fashion with our regional teams to look at what are the common accounts, which are the accounts where Tatacom is present or not and vice versa, which will be -- which is what we called out as sales synergies, which we will start looking at, and that activity has already started.

[Sanjesh Jain, analyst]

So we will have both vertical and horizontal structure because this appears to be more vertical, while I thought we were moving out of vertical to a more horizontal solution, let's say kind of an organization structure. There is a change in that, right?

[Amur Lakshminarayanan, executive]

No, no, not really. So even within the Telecom portfolio, if you look at -- we had what we call as the product sales specialists. So if you look at InstaCC and DIGO, in the markets where we are operating, both in India and APAC, for example, we had a sales specialist team who will focus only on InstaCC and DIGO for instance, right? They will work hand-in-hand with the account teams and regional teams because they are the specialists in that portfolio.

Now the account teams are charged with understanding the customer context and they will position the overall digital fabric, whether it's the network, whether it's security, whether all the portfolio that we have. But once the opportunities are qualified, these sales specialists will go in to support the account teams to take the opportunities forward and close it. So in terms of Kaleyra -- so Kaleyra would be the sales specialist for the CIS portfolio. So it's not any different from the philosophy that we've been operating in.

[Sanjesh Jain, analyst]

So that 2 layer of structure will continue, and that's what we are implementing for the new coming companies as well.

[Amur Lakshminarayanan, executive]

Yes. Yes. Yes. .

[Sanjesh Jain, analyst]

This also means that in an upcoming year, our employee inflation will be lower than what we had historically, right, because we are getting a very talented foot on street through these 2 acquisitions. Will that be a fair assumption?

[Amur Lakshminarayanan, executive]

No. Why do you -- see, I think each of the -- if you look at Kaleyra's existing business, that has to grow. So they come with that talent to sell that portfolio of CIS, right? So they will support. Whereas the sales team, which covers a larger set of accounts and hunting for new logos, we need to continue to invest as we grow. So I don't think this would make up for the future growth, if you will.

[Chirag Jain, executive]

I'll now request Lakshmi to share his closing comments.

[Amur Lakshminarayanan, executive]

I think we answered a lot of questions. I think the -- my top of mind is we're crossing the INR 5,000 crore mark and crossing the INR 4,000 crore mark on the data business is truly a milestone that we are all very proud of. I think we are very proud of the activities of integration that is going on, and we will execute all of this in a very disciplined manner to deliver on our ambitions of doubling our revenues and achieving all the other financial KPIs. I think this sets up us very well. Thank you.

[Chirag Jain, executive]

Thank you, Lakshmi. This brings us to the end of the investor call. In case of any queries, please write to [e-mail]. The recording will be available on our website in the next 24 hours. May please disconnect now. Thank you.