Detailed Narrative
Q2 FY26 Financial Performance Overview
Tata Communications reported Q2 FY26 revenues of INR 6,100 crore, marking a 2.3% QoQ and 6.5% YoY growth. EBITDA stood at INR 1,174 crore, growing 3.2% QoQ and 3.9% YoY, with EBITDA margin improving by 17 basis points QoQ to 19.2%. Despite these gains, PAT declined 27% YoY to INR 183 crore, and net debt increased to INR 11,315 crore, pushing the net debt-to-EBITDA ratio to 2.45x. Free Cash Flow (FCF) turned positive at INR 216 crore, driven by improved working capital and higher EBITDA.
Digital Services and Strategic Bets Drive Growth
Digital revenues were a key growth driver, reaching INR 2,542 crore with a 1.3% QoQ and 14.9% YoY increase, contributing significantly to the overall performance. Nextgen Connectivity and Media segments showed robust growth of nearly 30% YoY, while Cloud and Security Fabric revenues grew 13.1% YoY. The company's strategic bets, including the new Voice AI platform and AI Cloud, are gaining traction and are expected to contribute at least 10% of incremental digital revenues this year, with a long-term target of INR 10,000 crore by 2030 from these five bets.
Core Connectivity Challenges and Mitigation Efforts
Core Connectivity revenue grew modestly at 0.6% QoQ and 0.9% YoY to INR 2,637 crore. This segment was impacted by subsea cable cuts in the Red Sea, disrupting internet and data traffic, with effects expected to continue into Q3 FY26. However, strong demand in India's data center connectivity helped mitigate some of these disruptions, and the company is actively exploring international DC-DC propositions to expand its reach.
TCR Margin Restructuring and STT Investment Impact
The EBITDA margin for TCR (Kaleyra) saw a sharp sequential decline from ~75% to 44.1% in Q2 FY26. This was attributed to a one-time📎 incentive payment of INR 89 crore to management for building the business, with future TCR margins expected to stabilize in the low to mid-50s. Additionally, continued investments in STT to maintain its 26% stake, while strategically important, negatively impacted ROCE, which stood at 15.1%, alongside Forex volatility.
Capital Allocation and Asset Monetization
Cash CapEx for the quarter was INR 506 crore, a reduction of INR 127 crore from Q1, with the company maintaining a CapEx to sales target of 11-12% for the near term. In terms of asset monetization, a small land parcel in Kolkata was sold for INR 85 crore, yielding a gain of INR 77 crore, which was declared in the results. The company has plans to monetize other large land parcels in the coming years, following related party guidelines if within the group.
Revised Long-Term Guidance and Strategic Alignment
Management reiterated its commitment to the long-term FY23 guidance but noted revised timelines. While data revenue doubling is now expected by FY28 (shifted from FY27), targets for net debt-to-EBITDA below 2x, ROCE improvement, and EBITDA margin expansion are expected to follow in sequence, with net debt reduction anticipated faster than ROCE and margins. These strategic actions, including STT investments, are guided by long-term value creation rather than short-term KPI fluctuations.
Order Book Dynamics and Future Outlook
The overall order book remained flat QoQ, primarily due to headwinds in the service provider segment, despite a double-digit QoQ growth in the enterprise order book and healthy double-digit growth in the international order book. The company's funnel remains robust, with 60% attributed to digital services. Management anticipates an acceleration in order booking in H2 FY26, driven by past bookings and back-ended revenues from strategic deals.