Tata Communications Limited (TATACOMM) Earnings Call Transcript & Summary

Ladies and gentlemen, good evening, and welcome to the Tata Communications Limited Q2 FY '27 Earnings Conference Call. The results for the quarter ending 30th September 2026 have been announced and the data pack is available on our website. [Operator Instructions] And this conference is being recorded. We have with us today from the management team, Mr. Ganesh Lakshminarayanan, MD and CEO; Mr. Siddhartha Mundra, CFO; Mr. Rajiv Sharma, Head of Investor Relations; and Mr. Sudeshna Patnaik, DGM, Investor Relations. We will begin the call with opening remarks from MD and CEO, Mr. Ganesh, followed by CFO, Mr. Siddhartha, on the company's business and financial performance. Post that, we will open the floor for questions for the management. In the event the management line drops, we request participants to stay connected while we reconnect them to the meeting. Some of the statements made in today's call may be forward-looking in nature and are subject to the risks and uncertainties. The company does not undertake to update these forward-looking statements publicly. I now hand the call over to Ganesh. Over to you, sir.

Thank you. Thanks, Inba. Thank you. Good evening, everyone, and thanks for joining us today. It's been 6 months now, exactly 6 months since I took over as the CEO and MD. And in my last call, I had shared with you the best advice I got as I took this job is to: first, build the team; second, lay out a simple plan in the organization for everyone to align; and third, start executing the plan with discipline. So Inba, if you could show the first slide, please. So I'm very happy to say that the full team is in place now. We finally have the full team with Narottam Sharma, who has joined us as the Chief Transformation Officer since our last investor call. Narottam will lead our enterprise-wide transformation agenda and ensure that Tata Communications is future ready. He brings more than two decades of experience in the large-scale digital transformation, and he most recently served as the CIO at Jubilant Networks. With this, I'm very happy that the team is fully in place. Inba, if you go to the second slide. I think the next important thing was to roll out a plan which is consistent internally, externally everybody can align to. As you could see from the slide, we have shared that we'll take care of our customers, we'll take care of our employees and focus our energy on absolute EBITDA growth. And my single largest focus in the last 6 months has been profitable growth. And I'm very happy to share our EBITDA has crossed INR 1,400 crores and the EBITDA growth is about 21.2%. This is the highest year-on-year EBITDA growth ever achieved since the recent M&As. The other one I'm personally happy about is our profitability of the digital portfolio has improved significantly. The digital portfolio reported EBITDA margin of negative 3.6% versus negative 6.9% in the previous quarter. Our losses have become less than half of what was in Q1. With this, we are very close to EBITDA breakeven for the overall digital portfolio. Growth has been strong, too. Order book for this quarter has been robust double-digit growth. Our customer wins this quarter has been almost across all regions and segments. In U.K. and APAC, we are winning strong with financial services. In Americas, we are winning strong with new clouds and hyperscalers is driving the momentum. India market is witnessing a big uptick in the cloud portfolio. And GCC customers, as they continue to expand their operations, we are helping them in setting up their new locations, and we are getting repeat business from the GCC customers as well. We are also particularly encouraged that the growing proportion of our recent wins are from AI-led demand. As enterprises focus on scaling AI, customers are increasingly taking partners that can securely deploy AI, connect it to the enterprise context and translate enterprise intelligence into business outcomes. In AI, after meeting close to 200-odd customers, I'm very confident that the days of technology forward experiments, which resulted in high cost and no ROI is definitely coming to an end. Our customers are executing new business models with clear ROI and full control over the cost. We believe that this shift represents a significant opportunity and reinforces our conviction that AI-enabled customer journeys will become an important growth driver for the company. Inba, if you could go to the next slide. Now I really wanted to share with you our unified stack for AI. I think the 3 things you really need to make enterprise AI work is: First, a trusted AI foundation, an enterprise context layer, which can take the enterprise data and turn it into intelligence and an execution layer that enables enterprises to operationalize the intelligence towards workflows at scale. Our hardware, the first layer, is truly sovereign by design. We provide enterprises with a secure governed AI foundations that enables them to deploy AI confidently. It allows them to meet security, compliance and data residency requirements. Once they are confident that the enterprise data is secure, the next step is to turning that data into intelligence. Through our Commotion acquisition, we have the capability to create an enterprise-wide intelligence layer that connects their enterprise data, the workflows, the relationships and institutional knowledge. This gives the AI system the context required to make smarter decisions and operate within clearly defined ground and If data is not transformed intelligence, there is only hallucination. And all that intelligence, if it doesn't transform into actions, it's like having the smartest and highest paid employee in your company with no real output. I think with Commotion, we transformed this enterprise context into action by rapidly deploying AI applications and agents across voice, messaging and digital channels. By connecting organizational knowledge with execution, our customers are automating workflows, which enhances customer and employee experience and accelerating business outcomes. This capability is enabling our interaction business to evolve from delivering a channel-based solution to orchestrating AI-powered journeys. Our real moat lies in building that connectivity tissue between enterprise knowledge and enterprise execution. A lot of this sounds like theory, but let me bring it to life with two significant wins we have had this quarter. Are we on the right slide? Okay. One of our notable AI-led wins this quarter was with Tata Consumer. Tata Consumer, as you know, is a big FMCG company. There are a lot of people who go on the beat. We have enabled their field sales teams through Sales Sathi, an AI-powered assistant that delivers personalized guidance, recommendations and battle cards through multilingual voice interactions. We were not selected for our ability for voice AI, but we have ability to combine deep communications integration with frontline teams. Our ability to create a customer-owned enterprise contact layer, the ontology layer, which is badly needed by AI. And this layer allows Tata Consumer to keep complete control over business knowledge and insights. It's their ontology, it's secure. It's their property. And our Action layer, which is a voice AI assistant, has a strong support for all Indian languages. We are seeing similar trend in customer experience transformation. You might say that Tata Consumer is our sister company, but we are seeing similar success with HDFC ERGO. Our voice AI agents are now live within customer journeys at HDFC ERGO General Insurance, who is India's leading private sector general insurance. They currently support policy servicing in multiple Indian languages with more languages planned soon. This deployment underscores our platform's ability to operate effectively in a highly regulated environment that demands stringent compliance and governance standards. These engagements illustrate the growing demand for AI systems that do more than just generating insights. These are models. These are business problems, which are purely ROI-backed solutions, which we are enabling with our unified AI stack, which combines the hardware layer, the intelligence layer and the action layer. And demand for our AI offerings remains robust and diversified. During the quarter, we secured a multimillion dollar engagement with a leading global NEO cloud provider to deliver multi-terabyte connectivity for the interconnection of large-scale CPU clusters supporting their AI data center build-out in India. This win highlights our ability to enable the high-performance infrastructure that powers next-generation AI workloads and it further strengthens our position within the evolving AI ecosystem. The demand for DC-DC connectivity remains robust during the quarter. It's driven by accelerating AI infrastructure deployments. In India, with over 80,000 kilometers of terrestrial fiber and 30,000 kilometers of metro fiber and connectivity across 118 data centers, we have established a strong foundation to capture this growing opportunity. While we continue to invest in expanding our capabilities, we remain focused on disciplined execution, remain focused on scaling capacity in line with customer demand and leveraging anchor customer-led expansion opportunities to ensure efficient capital deployment. Our investments, focus on profitability and success with the unified AI stack is really setting the path for future growth. The most important and interesting part is the color of this growth. The color of the growth is changing for us. It's creating new opportunities. It is driving profitability. While execution remains the key, we are very excited about what is coming next for us. With that, let me hand it over to Sid, who will take you through the amazing financial performance in Q2.

Thank you, Ganesh. Let me start with the quarter performance. The Q2 FY '27 consolidated revenue came in at INR 6,688 crores, up 9.6% Y-o-Y. Data revenue for the quarter came in at INR 5,810 crores, growth of 12.2% Y-o-Y. Digital portfolio revenue is up by 18.6% on a Y-o-Y basis. Digital revenue growth was broad-based, led by Interaction, next-gen connectivity and the IoT platform. The top line has certain ForEx impacts accruing from a strengthening dollar. Normalizing for the same, data revenue saw a growth of about 6% on a Y-o-Y basis. The digital portfolio growth at constant currency was healthy double digits. I'm happy to report that EBITDA for the quarter came in at INR 1,422 crores, up 21.2% on a Y-o-Y basis. For the first half, the EBITDA growth on a Y-o-Y basis stood at 14.8%. EBITDA margins for the quarter came in at 21.3%. The improvement in profitability is driven by a significant reduction in losses across the digital portfolio. Our digital portfolio reported an EBITDA margin of minus 3.6%. As Ganesh mentioned, we are making steady progress towards breakeven for the digital portfolio. PAT after minority interest for this quarter stood at INR 341 crores, up by 86% on a Y-o-Y basis. I'm pleased to share that we have reached an in-principle agreement with the Canada Revenue Agency on settling a long-standing tax matter in our Canada subsidiary. The corresponding contingent liability as on 31st of March 2026 stood at INR 1,658 crores. The terms of settlement are currently under finalization, and we will make necessary disclosures in due course. FCF for the quarter was INR 212 crores, a sharp improvement from a negative FCF in the previous quarter. Our EBITDA to operating cash flow conversion improved to 72%, demonstrating our focus in driving agility while maintaining disciplined capital and working capital management. Cash CapEx trended up this quarter, reflecting investments in our undersea cable assets and DC to DC network expansion. These investments are aligned with long-term demand opportunities. At the same time, we remain disciplined in our capital allocation with a strong focus on capital efficiency and sustaining healthy portfolio level ROCE. We ended the quarter with net debt of INR 11,197 crores. Net debt-to-EBITDA stood at 2.17x. The net debt to EBITDA has held steady despite dividend payments this quarter. ROCE came in at 15.9%, up by 71 basis points on a Y-o-Y basis, driven by our focus on capital efficiency. Overall, we are pleased with the progress we are making on digital portfolio, margin expansion and remain committed to driving the portfolio breakeven. We are encouraged by the improvements delivered across our financial metrics, an outcome of focused execution and increasing operating leverage. More importantly, I'm encouraged to see the uplift in order book this quarter. With that, we can open the floor for questions.

[Operator Instructions] We take the first question from Balaji Subramanian of IIFL.

Am I audible?

Yes.

Congrats on a great set of numbers. Probably after a long time, you have delivered strong revenue growth in digital accompanied by significant margin expansion. So my first question is a bit on the high level. So you used to talk about certain revenue growth numbers and EBITDA margin targets. Can we have some color on with the progress that you have recently achieved, how should one look at these going forward? After this, I will have a quick follow-up.

Thanks, Balaji. Thank you very much. I think since I have taken over the last 3 calls, Sid and I have completely emphasized our exclusive focus on profitable growth, expanding the EBITDA, bringing the operating leverage. We are on track with that commitment. We are seeing good progress in our EBITDA expansion. We have seen 15% EBITDA growth in first half of FY '27. And we are seeing significant growth in the areas where we want to see growth. We are seeing growth in next-gen connectivity, which is growing up by almost 27%. Our digital portfolio as a whole has grown 18%. We are maniacally focused on getting the right quality of growth. You also see that the EBITDA to OCF conversion is improving. Our ROCE is improving. We are definitely on the right track. The second thing I would point out is the recent wins we have highlighted, the color of our growth is different. We are winning with our unified AI stack. We are winning in big network expansion of new cloud operators and AI software companies. I think this year, we will absolutely deliver what we have promised. We are focused on delivering what we have promised. We will come back to you in the investor call in February and talk about the longer-term growth, which is ahead of us. With the performance in H1, we are entering H2 with a lot of confidence and momentum. There are opportunities across network, opportunities across cloud and infrastructure and the Interaction Fabric, which you see have all gained significant amount of traction in H1. We are confident of growth ahead. But more importantly, I would want to emphasize that we are delivering on the commitment we made to you in the beginning of the year that we'll focus on profitable growth in this year. We have delivered 15% EBITDA growth in first half of FY '27, good quality profitability showing up in our cash. So we will absolutely be looking forward to the investor call where we can outline the growth opportunities ahead of us.

Thanks, Ganesh, for the in-depth answer. My other question was on the margin expansion itself in digital portfolio to be more specific. So I can see that a significant part of the margin expansion has come from the improvement in the NR to GR ratio. And that is despite the fact that the contribution of collaboration and CPaaS is at an all-time high, which is typically a lower margin business. So is it fair to say that the contribution margin in the other parts of digital portfolio, they are all seeing a meaningful uptick considering that some of these newer products and platforms that you have recently launched come with superior margins. So will that be a fair statement to make?

That's a fair callout. I think, as I said, the quality of our growth is changing. I have called out that the important driver of profitability is the change in sales contribution margin, which is the NR minus all the costs associated with that sale. And that's showing up in our execution. Our sales team is focused on delivering profitable growth. The AI-led platform wins like Commotion I talked about in Tata Consumer and -- our platform level revenues, which comes with higher profitability, recurring revenues, almost like SaaS businesses. So that is why you are seeing the shift in the NR to GR, and that's what is resulting in our EBITDA improvement in the digital business. I have said that we want to look at our business as platforms, infrastructure and services and solutions, the three buckets. And we want to see a healthy mix of these three types of revenues. And what you're seeing in the digital portfolio is the beginning of that execution. You are seeing that the growth is coming from the right products with higher profitability. And that's what is helping us to improve the profitability of the EBITDA of the digital business.

Our next question is from Sanjesh Jain of ICICI Securities.

First on the order book, Ganesh, you said that this quarter, we have seen a double-digit order book growth. I think this is 2.5 years of double-digit order book growth. And if you look at data business adjusted for currency, the growth is around 6%. That's what I think Siddhartha said. So when should we see this constant currency growth of double digit in data business now that order book has been quite strong? And some color on the order book in this quarter will be helpful. That's my first question, Ganesh.

Thank you. Even in the order book, Sanjesh, our focus is how do we get more recurring businesses, more high profitability businesses as part of our future revenue. Order book is basically the future revenue once you implement it convert to revenue. And we think we got the best quarter in Q2, and we're hoping that there will be more better quarters in the future, but I think Q2 has been great. A lot of our order book has come from recurring business. A higher share of our business has come from recurring, higher share of our business has come from the network product. And we are watching constant currency numbers very, very closely. Our focus is going to be constant currency growth. You see that even in constant currency terms, our EBITDA has been around 10% on a year-to-year basis. So I think we are focused on constant currency metrics as well. We have also invested in undersea cable in DC to DC connectivity. We are seeing some significant demand in the core connectivity business coming up. I think -- let's wait one more quarter, you will definitely see -- I'm hoping that we will continue our focus on profitable growth and network growth, which we have seen in the order book should convert to revenue, and we are definitely looking for better future on the network business.

Just to add a little more color on the order book. The order book is very well diversified, and we have had wins all across. So there are no large wins which are part of this order book. This is several wins across several businesses. The other aspect is that some of these wins have come against very strong credible competition. And this gives us even more confidence of our -- the strength of our products and our ability to continue this in the future.

Great. Great. I think that's good news. So we should expect this converting into revenue in the coming years, right?

Correct.

Got it. Second, Ganesh, you have given us the good detail on unified AI stack that we are building. But just to understand in the entire Tata Comm's revenue, both in core connectivity and digital [Technical Difficulty]

Sanjesh, we can't hear you.

Mr. Sanjesh Jain, are you still there? I think we've lost the connection for Mr. Sanjesh Jain. [Operator Instructions] We'll take the next question from Vibhor Singhal of Nuvama Equities.

Congrats to the entire management team for a wonderful performance. Finally, especially on the margins part. So, just two questions from my side and then I have one question for Siddhartha as well. You talked about the unified AI stack basically the strategy that we are kind of following, which kind of combines our GPU infrastructure along with the capabilities that promotion brings in. So just to get a bit of more color on this, you mentioned a couple of projects also that you won with Tata Consumers and all. So are these kind of applications which are -- are they restricted to our, let's say, the sub-verticals of, let's say, the next-gen connectivity, CPaaS, media and cloud? Or are we actually moving beyond these application -- these are offerings that we used to provide to the customers? And does that open up a completely new different field of business that we can actually envisage and that can grow much strongly on those parts? So any color on basically where these deals are coming for what is the kind of work that we are doing, that would be really helpful.

A very, very interesting question asking. I think what you are seeing is to scale enterprise AI, a company like Tata Consumer, a company like HDFC ERGO, needs multiple layers of technology stack, and we bring all of that. And what we have been able to do in both of these situations and other customer situations is that we've been able to stitch together the solutions, which are customer outcome-based. So let's just take this example of Tata Consumer, right? If you want to see what all goes into making that solution, right? First, you need a hardware layer. That's a basic thing you need. That is where you need to run the intelligence, you need to run the model, so we have that. Hardware layer alone is not enough. You really need an ability to securely bring enterprise data, which we have, which is a security fabric we have. On top of that, you need the capability to convert enterprise data into intelligence, which is the oncology layer, which is what commercial brings. We have that. Now that's not enough. Now you need to convert that intelligence into action. And for that action to happen, you need a voice AI capability, which we have that from commercial. And there is something even more simpler. To make the voice calls happen, you need the ability to have countrywide voice calling capability with our own phone numbers together, with a robust voice network we want to provide. We have that. And we have to do this securely, right? We can't do this over Internet. We have to do this over MPLS because voice calls are not allowed public Internet. We have that capability. Now if you look at this, to make a real high ROI enterprise use case happen, you need all the stack. And Tata Comm has always had this stack. We have built this stack with our acquisition, with our GPUs investments. What we are doing now is really putting that together to create unique solutions for our customers. You take HDFC ERGO. To make a CCL happen, you need a contact center software. We have it in our portfolio. We have our own contact center software as part of our interaction fabric. You really need voice AI agents. You need ability to connect enterprise data on secure high-performance network. You need the ability to make phone calls happen both inbound and outbound. And we have the ability to give them customers the phone numbers they need, unique phone numbers they need for their end consumers to call them. Again, voice Fabric, Security Fabric, CPU hardware fabric, network fabric, intelligence fabric. All of that is needed to make a solution like that. And Tata Comm, we do have it. For a customer like HDFC ERGO or Tata Consumer, they don't have to go to multiple people. They don't have to go to an ontology software company. They don't have to go to a CRM company. They don't have to go to -- to put that together, to go to five different people. And now we have built that in one simple stack. I think that's the power of what we have in Tata Comm and it's beginning to resonate in the market. We will see more solutions like this offered by Tata Comm, that is our hope.

Got it. Got it. Thank you so much for the very detailed answer, Ganesh sir. But it actually opens up two more questions from my side, if I may. So is it fair to say that a deal like HDFC ERGO or a Tata Consumer deal, the revenue that would be accruing from that deal would actually be spread across different parts. It would -- some part would be going to the voice business, some part to, let's say, the IoT business and would be spread across different segments.

Fair point. I think you should think of ourselves as putting this multiple fabrics together to stitch a nice suit. And I think the fabric makers will get their proportion, but the suit is what the customer wears.

Got it. Got it. Got it. And you also mentioned the voice part quite a few number of times. Now does that mean that the voice business of Tata Comm, which kind of we had been just -- I mean, ignoring and we kind of assume that this would die its own natural debt. Is there a possibility of some revival or there is some plan or strategy that you're working on that this voice business could also basically start seeing more traction, given, as you mentioned, that you can probably not make WhatsApp calls because of data security reasons.

I think it's too early to say, Vibhor. I think voice is becoming the execution layer for AI agents more and more and more. I think with AI agents almost acting as coworkers in multiple different parts of the company, I think there is a resurgence in voice calling. I think the constraint of human agents managing call centers are going away. AI agents are available in plenty. So the service levels are improving in customer service. They are able to make a lot of calls because they're not humans making the calls, but AI agents taking the call. So there's definitely improvement in that voice part of the business. But it's too early to say whether it's material or not.

Got it. Got it. Just one last piece from my side, and then I just have one more question for Siddhartha. On the media business, I think in this quarter also, while we saw some uptick on a Q-on-Q basis, I think on a Y-o-Y basis, it still remains quite a bit of soft. So any color on that as to what exactly is here? And when do you think we could see it supporting the growth, which is very strong in the other divisions?

I think the media business has done really well this quarter in terms of profitability. We're making all the right bets. We are bringing more synergies between the media business and the network business. I think media business is very cyclical. It depends on the big events. For example, media has a big Olympics coming up next year. So we are getting ready to provide support for the LA Olympics. There has been some events which were in Middle East, which got canceled because of the challenges. But we are very, very bullish on the media business. I think we have the right capabilities. We have capabilities across production, playout and distribution. And if we combine that with an amazing network backbone we have globally, we think that we can capture a bigger share of the growing digital distribution of this media. So we are very bullish. Sid, do you want to talk on it?

Yes. So the media business, in addition to what Ganesh mentioned, from a cost perspective, we have undertaken a lot of initiatives to bring down the overall cost structure in the media business. That -- some of that has already started playing out. Some of that will start playing out in the coming quarters. There's greater interaction. Integration that's also happening between the various business units in terms of our network buying that happens on the back end and a lot of consolidation opportunities and cost optimization opportunities that we see there as well. So both from an NR perspective and from an LOB contribution margin perspective, we see there are a lot of positive growth drivers in the coming quarters.

Got it. In fact, that was going to be my next question for Siddhartha. So Siddhartha, on the margins, a very strong performance in the digital portfolio. We are finally moving towards a breakeven and possibly reaching the positive side very soon. As you mentioned, media business was one of the segments in which we pulled up our socks and has improved the profitability. Any other of the digital verticals where you saw the maximum traction and most improvement in margins than the other verticals?

All across So our MO business also has seen substantial improvement in profitability, and we continue to be very strong and focused on that vertical. We are seeing margin uptick opportunities across all the verticals.

Got it. And the final question from my side. If I back out the digital margins, which we have provided for the quarter from the data margins, the implied margin for the core connectivity business comes out to almost 44.8%, around 45%, a very healthy margin indeed. So do you believe that margin is sustainable at these levels?

So what we have achieved as of now for the quarter and in the coming quarters, we believe that, that should be achievable. there are no one-offs or there are no such events that are impacting our Q2 performance...

Our next question is from Avnish Tiwari of Vaikarya.

Am I audible?

Yes.

The first question I have on this AI layer you have, so Commotion for AI. If you can just talk about what's the revenue model? And what is -- if you have -- if you would like to disclose how many clients or how many accounts you have seen this uptick either attached to existing offering or a stand-alone offering or a bundled deal, whichever way like how many clients have taken it up?