Tata Comm — Q2 FY26 earnings call

Sanjesh, our order book is, as we go into larger deals, they are a little bit lumpy in nature. In the last year, we saw good order booking in Q1 and Q2 on the back of some of the larger deals. And we did call out Q3, Q4 was partly macro where we said the order book had gone to more of a steady-state situation rather than the increase that we saw in Q1. This year, definitely, the order booking is much better than the H2 of last year. But compared to the Q1, Q2 of last year, it's somewhat low. But again, as I called out in my commentary, the enterprise space order booking is still quite robust. The service provider segment is somewhat static. And the OTT side of the order booking is anyway a bit lumpy.

Analyst questioned the flat overall order book, and management explained the lumpiness of deals and segment-wise performance, indicating H2 acceleration.

Asked by Sanjesh Jain

No. So even last year, I called out some of the order booking, the time to revenue varies. We did call out a good Q4 on the back of some of the deals that we won in Q1 of last year. And again, I pointed out some of the deals, especially in the media, we said it will play out in Q2, especially the World Athletics order that we called out last year itself. And another order, which we called out with a hyperscaler last year will only play out in fag end of this year. So the time to revenue of some of these order bookings is quite varied and it's very difficult to give a consistent view of the conversion of revenue and time taken to revenue because it depends on the product portfolio and the customer, which is we have been very explicit about calling this out and mentioning that. So I don't think I would read much into that conversion and the reason. This quarter, in terms of our overall digital revenues, if you see digital revenues have grown. There have been some delays that has got pushed out to the next quarter. But having said that, the Nextgen Connectivity and the Media has grown 30% YoY. And we see that some of the pushed out ones will play out in H2. So that is how I would look at the conversion from order booking that we talked about to the revenue.

Analyst questioned why digital services growth was lower than expected, and management clarified the variability in time-to-revenue for different deals and expected H2 acceleration.

Asked by Sanjesh Jain

Yeah. No, we don't separate out cloud and security. Both portfolios together have grown in the mid-teens YoY. Having said that, it is lower than the growth that we have had in the past, and there are many reasons. I think some of the attrition that we had last year, which I called out a couple of customer-specific things, that has contributed to some of the slowdown. But having said that, our order booking, specifically on the cloud, this quarter has increased YoY in mid-teens, and we see a good pipeline for the next quarter for conversion as well. Specifically, on the Al Cloud, we have won some marquee deals, which is what I called out. I think our performance of GPU and our ability to service that with very high uptime and reliable solution is playing very well. So these will take some more time. I'm still bullish and gung-ho about the cloud and security. In the security space, we continue to win large SOC deals. We continue to win the network security deals. Internationally, I called out one of our existing customers in Europe where we expanded our security footprint for them. And we are also further investing in the security space.

Analyst questioned the relatively lower growth in Cloud/Security given the large market opportunity, and management explained past headwinds and current strong order booking/pipeline.

Asked by Sanjesh Jain

Yeah. I mean thanks for that. Let me explain what has happened in TCR. Since we acquired Kaleyra, TCR as a business has done exceedingly well, both in terms of growth and profitability. This quarter, the management of Tata Comm along with the Board of TCR, we decided to incentivise the management for almost having created a solid business out of literally nothing. Plus we're also now looking at how we can take TCR, which is predominantly U.S.-based, to more international markets. And therefore, we have crafted an incentive comp structure for the management team which aligns with the growth ambitions that they will actually deliver. So this quarter contains a onetime incentive payment to the management. But going forward also, I mean, we have structured in such a way that the management will get compensated on a variable pay basis directly in relation to the value that they will generate for TCR. So in any case, we were not expecting it to continue in the 70s. Any which way with this revised comp structure, the EBITDAs will come down, with onetime hit it is at 44. I would more stabilise this business in the low to mid-50s, is what I actually see this business on a steady-state basis after taking into account this revised comp structure that we have offered to the management of the company.

Analyst questioned the sharp drop in TCR EBITDA margin, and management clarified it was due to a one-time incentive payment, with future margins expected to stabilize in the low to mid-50s.

Asked by Sanjesh Jain

I mean I know the questions that Aditya asked on, I know we have an ambition of ROCE. And if we invest in STT, it dilutes our ROCE. But we believe that strategically, that's the right thing to do for us to maintain our stake and it's the investment in the right space. So we're not getting swayed by short-term KPI things, while we are married to what we have said as the right markers for us to run the business, but we will not shy away from taking the right actions, even though in the short term they may be different to the markers that we have told the market.

Analyst questioned the impact of STT investment on ROCE, and management explained the strategic rationale for maintaining the stake despite short-term KPI dilution.

Asked by Vibhor Singhal

No. We mentioned that our ambition got shifted by a year from a data doubling point of view. The other three elements have their own time line with net debt-to-EBITDA coming to the under 2x range faster, ROCE followed within a year and EBITDA margins a year after. That's what we had said that we are working towards. Again, I will repeat, Vibhor. These are the right contours with which we do a strategic planning for our business. Now there are elements which are sometimes outside our control like the entire external environment in terms of interest rates and Forex, which like, for example, this quarter, we did not expect our net debt went up by INR 222 crore because of the Forex volatility that we've actually seen. We almost touched 90 as well, so we went to whatever 89.70 or something of that sort so. So we do have those external variables with which we are operating, which has an impact. Plus we are taking certain actions, which we do believe, I don't know if those will give the result to me within the FY27 time frame, if they give me the result within the FY27 time frame, we will hit the ball out of the park by that time. But each of the set of the actions, I mean, I would say the STT investment alone is almost 220 basis points of my ROCE, if that was not there per se. So we will not do anything wrong from terms of overall value creation for our shareholders because of these metrics.

Analyst questioned the commitment to prior FY27 targets given current performance, and management clarified shifted timelines for different metrics and external/internal impacts.

Asked by Vibhor Singhal

We are doing that independently anyway, Sumangal. Even this quarter, we had a small parcel of land in Kolkata that we actually sold, so ₹85 crore sale, gain on that is about ₹77 crore. We've declared it in our results. There are a few big land parcels that we have. And we have plans of monetising them in the next few years. If that happens to be within a group company, that will be within the ambit of related party guidelines. But we will maximise our value. We maximise that already with Ambattur, which we sold a few quarters ago. And I think the shareholders have positively benefited from the big gain that we actually got from that land parcel. So that is a separate parallel track that is running.

Analyst asked about land monetization, and management confirmed ongoing independent efforts, citing a recent sale and plans for larger parcels, benefiting shareholders.

Asked by Sumangal Nevatia

Yes. I mean Sanjesh, so you will see at least for this immediate benefit come through in the next few quarters itself. When we in the Investor Day talked about improving our Digital portfolio margin profile, I said it's made up of a few things. We are holding our leaders leading these businesses accountable for certain outcomes. Yes, we want growth, I mean, growth, growth and growth is the most important priority. But for some reasons, growths are getting pushed out, we are also saying get ourselves into a right operating model, so which is then scalable with that particular growth, that we are not carrying the cost too long until the growth actually comes.

Analyst inquired about the timeline for staff optimization benefits, and management indicated visibility in the next few quarters as part of rightsizing for scalable growth.

Asked by Sanjesh Jain