(TCOM IN, Mkt Cap USD5.6b, CMP INR1605, TP INR1450, 10% Downside, Neutral)

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TCOM witnessed a healthy recovery in its data business with 4% QoQ growth in revenue (in line). This growth was primarily driven by a significant 7% QoQ increase in data usage. EBITDA declined 1% QoQ (5% miss) due to the significant impact on its voice business, while the data segment remained a key driver for the company’s overall positive performance. Data EBITDA grew 5% QoQ (6% adjusted for Switch Acquisition).
We have revised down revenue/EBITDA CAGR by 3% to 11%/7% over FY23-25E, due to weak voice business; however, we maintain our data EBITDA estimate. The next few quarters might present some challenges for earnings as there could be margin dilution. However, it is encouraging to note that the management is making growth-oriented opex investments. We reiterate our Neutral rating on the stock and would monitor its growth trajectory.

Data segment growth inches up; FCF yield declines

Consolidated revenue grew 4% QoQ to INR47.7b (in line) in 1QFY24, led by 7% QoQ growth in data segment. Adjusted for Switch revenue of INR968m, revenue grew 2% QoQ and data revenue grew 4% QoQ.
EBITDA declined 1% QoQ to INR10.2b (5% miss), with 120bp QoQ drop in margin to 21.5% (140bp miss). The decline was primarily due to a sharp 32% decrease in voice EBITDA. Adjusted for Switch loss of INR104m, EBITDA came in flat QoQ, while Data EBITDA saw a strong 6% QoQ growth.
‘Other income’ grew 3x QoQ to INR1.9b (2x beat), led by interest on income tax, which led to 46% QoQ growth in PBT to INR5b (9% beat). Adjusted for Switch loss of INR215.6m, PBT grew 52% QoQ to INR5.3b.
Adj. PAT after minority increased 17% QoQ to INR3.8b (7% beat), aided by an increase in ‘other income’.
Gross debt decreased 2% QoQ to INR74b and net debt increased 5% QoQ to INR60b. The net debt-to-EBITDA ratio stood at 1.5x vs. 1.4x in FY23.
TCOM reported FCF of INR1.8b, down 70% QoQ (vs. INR25.4b in FY23) due to a 40% QoQ decline in OCF and an 8% QoQ increase in cash capex. FCF yields stood at 2% (on an annualized basis) for 1QFY24 vs. 7% for FY23.
The company reported RoCE of 26.3% in 1QFY24 vs. 28.3% in FY23.

Key takeaways from the management interaction

Margins may remain soft in the short term (1-2 years), below its 23-25% EBITDA margin guidance. This is primarily due to the recent acquisition and ongoing investments made by the company in pursuing growth opportunities.
Strong pipeline with good product traction is likely to drive steady growth.
Core connectivity expects to grow at low to mid-single digit. DPS will contribute 50% of the data business.
The company continues to focus on healthier balance sheet with +25% ROCE. It may be diluted by some significant investments, but there is long-term room for growth.

Valuation and view

We have factored a revenue/EBITDA CAGR of 11%/7% over FY23-25E, marginal 3% cut in consolidated EBITDA. This reduction is due to a limited recovery in voice EBITDA, but our estimate for Data EBITDA remains intact.
The board has approved the proposal for a fundraise through the issuance of NCD in a private placement up to INR18b (<24% of the total loans). This may be required due to the Kaleyra acquisition, which needed to bridge the ambitious growth targets of INR 280b by FY27 in digital portfolio. TCOM’s strong FCF of INR20b-25b annually, despite an increase in capex, could allow it to scout for growth opportunities with a healthy ROCE target of over 20%. We maintain our Neutral rating with a revised TP of INR1,450, due to improved growth visibility, led by the acquisitions made (assigned 9x/3x EBITDA to the Data/Voice business). Sustained improvement in earnings growth visibility will be vital for valuation rerating.

(TCOM IN, Mkt Cap USD5.6b, CMP INR1605, TP INR1450, 10% Downside, Neutral)

Click here to access detailed report

TCOM witnessed a healthy recovery in its data business with 4% QoQ growth in revenue (in line). This growth was primarily driven by a significant 7% QoQ increase in data usage. EBITDA declined 1% QoQ (5% miss) due to the significant impact on its voice business, while the data segment remained a key driver for the company’s overall positive performance. Data EBITDA grew 5% QoQ (6% adjusted for Switch Acquisition).
We have revised down revenue/EBITDA CAGR by 3% to 11%/7% over FY23-25E, due to weak voice business; however, we maintain our data EBITDA estimate. The next few quarters might present some challenges for earnings as there could be margin dilution. However, it is encouraging to note that the management is making growth-oriented opex investments. We reiterate our Neutral rating on the stock and would monitor its growth trajectory.

Data segment growth inches up; FCF yield declines

Consolidated revenue grew 4% QoQ to INR47.7b (in line) in 1QFY24, led by 7% QoQ growth in data segment. Adjusted for Switch revenue of INR968m, revenue grew 2% QoQ and data revenue grew 4% QoQ.
EBITDA declined 1% QoQ to INR10.2b (5% miss), with 120bp QoQ drop in margin to 21.5% (140bp miss). The decline was primarily due to a sharp 32% decrease in voice EBITDA. Adjusted for Switch loss of INR104m, EBITDA came in flat QoQ, while Data EBITDA saw a strong 6% QoQ growth.
‘Other income’ grew 3x QoQ to INR1.9b (2x beat), led by interest on income tax, which led to 46% QoQ growth in PBT to INR5b (9% beat). Adjusted for Switch loss of INR215.6m, PBT grew 52% QoQ to INR5.3b.
Adj. PAT after minority increased 17% QoQ to INR3.8b (7% beat), aided by an increase in ‘other income’.
Gross debt decreased 2% QoQ to INR74b and net debt increased 5% QoQ to INR60b. The net debt-to-EBITDA ratio stood at 1.5x vs. 1.4x in FY23.
TCOM reported FCF of INR1.8b, down 70% QoQ (vs. INR25.4b in FY23) due to a 40% QoQ decline in OCF and an 8% QoQ increase in cash capex. FCF yields stood at 2% (on an annualized basis) for 1QFY24 vs. 7% for FY23.
The company reported RoCE of 26.3% in 1QFY24 vs. 28.3% in FY23.

Key takeaways from the management interaction

Margins may remain soft in the short term (1-2 years), below its 23-25% EBITDA margin guidance. This is primarily due to the recent acquisition and ongoing investments made by the company in pursuing growth opportunities.
Strong pipeline with good product traction is likely to drive steady growth.
Core connectivity expects to grow at low to mid-single digit. DPS will contribute 50% of the data business.
The company continues to focus on healthier balance sheet with +25% ROCE. It may be diluted by some significant investments, but there is long-term room for growth.

Valuation and view

We have factored a revenue/EBITDA CAGR of 11%/7% over FY23-25E, marginal 3% cut in consolidated EBITDA. This reduction is due to a limited recovery in voice EBITDA, but our estimate for Data EBITDA remains intact.
The board has approved the proposal for a fundraise through the issuance of NCD in a private placement up to INR18b (<24% of the total loans). This may be required due to the Kaleyra acquisition, which needed to bridge the ambitious growth targets of INR 280b by FY27 in digital portfolio. TCOM’s strong FCF of INR20b-25b annually, despite an increase in capex, could allow it to scout for growth opportunities with a healthy ROCE target of over 20%. We maintain our Neutral rating with a revised TP of INR1,450, due to improved growth visibility, led by the acquisitions made (assigned 9x/3x EBITDA to the Data/Voice business). Sustained improvement in earnings growth visibility will be vital for valuation rerating.