Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Tata Communications Ltd (TCL).

 

The rating reaffirmation factors in the continued strong market position of TCL, its diversified and healthy business risk profile, robust financial risk profile aided by strong cash accrual and healthy liquidity, and enhanced financial flexibility arising from the ultimate parent, Tata Sons Pvt Ltd (Tata Sons; ‘CRISIL AAA/Stable/CRISIL A1+’). These strengths are partially offset by the large capital expenditure (capex) requirement for the business and susceptibility to regulatory and technological changes.

 

Operating revenue grew ~20% on-year to ~Rs 20,969 crore in fiscal 2024, led by both organic growth and a series of acquisitions by the company. The growth was driven by the data business, which has been increasing its revenue share over the past few years — the segment contributed ~81% to the consolidated revenue in fiscal 2024, compared with ~70% in fiscal 2020. Operating profit and operating margin declined to ~Rs 4,230 crore and ~20.2%, respectively, in fiscal 2024 from ~Rs 4,380 crore and ~24.5%, respectively, in fiscal 2023 on account of integration costs, changes in the product mix, increasing input cost amid continued supply chain issues, and higher employee expenses. Operating margin is expected to augment and remain healthy over the medium term, owing to synergies arising from acquisitions. That said, TCL is exposed to risks related to integration of large acquisitions.

 

The financial risk profile moderated in fiscal 2024 but remained healthy. Net leverage increased to 2.5 times against CRISIL Ratings expectation of 2 times, largely on account of debt-funded acquisitions and increase in working capital intensity. CRISIL Ratings expects the leverage to improve to around 2 times by the end of fiscal 2025 owing to revenue growth and enhanced profitability. TCL plans capex of Rs 3,000-3,500 crore annually over the medium term, including for acquisitions with focus on new-age technology solutions providers and maintenance capex for undersea cables. The capex is expected to be funded through a prudent mix of internal accrual and debt such that the net debt to Ebitda (earnings before interest, tax, depreciation and amortisation) ratio remains below 2.5 times.

 

CRISIL Ratings has taken note of the potential liability on TCL, with respect to the adjusted gross revenue (AGR) dues. While TCL believes it has a case to defend, it made a payment of Rs 379.5 crore to the Department of Telecommunications (DoT) under protest in fiscal 2021. The company also reported Rs 7,751 crore as contingent liabilities during the quarter ended March 2024, with respect to the AGR dues related to its national long distance and international long-distance licenses, for which appeals are pending and remain sub judice. Furthermore, on March 31, 2021, DoT issued a notification to amend the internet service provider (ISP) licenses granted in 2002 and 2007. This amendment was challenged in the Telecom Disputes Settlement and Appellate Tribunal by two ISPs, and an interim stay was granted to all similarly placed license holders. CRISIL Ratings will continue to monitor the developments around these sub judice matters and any material deviation in the total liabilities of TCL will be a key rating sensitivity factor.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of TCL and its operating subsidiaries and associates. CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support available to TCL from its ultimate parent, Tata Sons.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong market position with global presence and diversified business profile: TCL owns the world's largest submarine fibre network — more than 500,000 kilometre (km) of subsea fibre — and more than 210,000 km of terrestrial fibre. Over 70% of the world's telecommunication (telecom) companies use the networks of TCL to bring their mobile services to customers. Around 80% cloud giants are connected to their businesses through TCL and over 25% of the global internet routes are on the networks of the company.

 

The operations of TCL are diversified across the data business, and include cloud, digital collaboration and security services, apart from the core connectivity services. TCL, being an integrated solutions provider and with its strategic shift to being a platform-based service provider, is believed to have no direct end-to-end competitor in India or overseas. TCL has an established network, with unutilised data traffic carrying capacity, which will help the company face any competitive pressures as demand for the cables is expected to increase.

 

• Healthy operating performance, largely aided by data business: Revenue increased to ~Rs 20,969 crore in fiscal 2024 from ~Rs 17,902 crore in fiscal 2023 on account of large acquisitions by TCL during the year. Excluding acquisitions, revenue was Rs 18,855 crore, with the steady decline in voice segment offset by growth in the data segment. The share of the data business has increased significantly over the years and was ~82% of total revenue and ~88% of the consolidated Ebitda in fiscal 2024.

 

Operating profit and operating margin declined to ~Rs 4,230 crore and ~20.2%, respectively, in fiscal 2024 from ~Rs 4,380 crore and ~24.5%, respectively, in fiscal 2023 on account of integration costs, changes in the product mix, increasing input costs amid continued supply chain issues, and higher employee expenses. The margin is expected to improve to 21-22% and remain healthy over the medium term owing to synergies from the acquisitions. That said, TCL is exposed to inherent risks related to integration of the large acquisitions.

 

• Healthy and improving financial risk profile: The financial risk profile is backed by healthy cash accrual, significant liquidity and comfortable debt protection metrics. The financial risk profile moderated in fiscal 2024 but remained healthy. Net leverage increased to 2.5 times as on March 31, 2024, against CRISIL Ratings expectation of 2 times, largely on account of debt-funded acquisitions and increased working capital intensity. Consequently, interest coverage ratio fell to 7 times in fiscal 2024 from ~11 times in fiscal 2023 but remained healthy. Despite the expected high capital intensity over the medium term, the net debt to Ebitda ratio should remain comfortable below 2 times, supported by continued healthy cash accrual. The interest coverage ratio should remain healthy, too, at 8-10 times over the medium term. Any sizeable, debt-funded acquisition or capex impacting the financial risk profile will remain a key rating sensitivity factor.

 

• Strong linkages with Tata Sons and healthy financial flexibility: Shareholding of Panatone Finvest Ltd (Panatone; ‘CRISIL AAA/Stable/CRISIL A1+’) in TCL stands at 44.80% while Tata Sons holds 14.07%. Panatone is a wholly owned subsidiary of Tata Sons. Thus, Tata Sons is the ultimate promoter/parent entity of TCL with its total shareholding in the company at 58.86%. Accordingly, the financial flexibility of TCL has improved with this transaction as it could pave the way for raising equity when required.

 

Moreover, Tata Sons holds management control in TCL and views TCL as an integral part of its telecom strategy. Given the healthy cash accrual expected over the medium term, no major support will be required by TCL from Tata Sons. Nevertheless, TCL will continue to receive need-based support from Tata Sons.

 

Weaknesses:

• Capital-intensive operations: The core assets of TCL — under-sea cables — require huge capex for layout and replacement or upgrade at the end of life. This requires continuous maintenance and monitoring as the cables are susceptible to damage that may result in connectivity loss till repair. This risk may persist though it is mitigated by availability of alternative cables for most locations.

 

TCL has already undertaken large capex for laying the cables. Over the next few years, no fresh capex is expected for laying cables, other than maintenance capex, but the company plans to step up capex for incubation/growth businesses with focus on new age technology solutions providers. Larger-than-expected capex impacting the company’s financial risk profile will remain monitorable.

 

• Exposure to regulatory and technological risks: Regulatory and policy changes have played a central role in defining the risk characteristics of the telecom sector in India. The sector is extremely dynamic structurally, and therefore, the risks pertaining to regulatory intervention will persist. Moreover, presence in multiple geographies exposes TCL to international regulatory risks. The telecom sector remains susceptible to technological changes too as newer technologies could necessitate sizeable fresh investments or overhaul of the current networks.

Liquidity: Strong

Liquidity was supported by cash and liquid investments of ~Rs 842 crore and unutilised fund-based limit of ~Rs 500 crore as on March 31, 2024. Net cash accrual, expected at Rs 4,000-4,500 crore per annum, will be more than sufficient to cover yearly interest and amortising principal obligations over the medium term. TCL has principal bullet repayment of $200 million in December 2024, which is likely to be refinanced. Strong parentage and strong financial risk profile should help the company refinance at favourable terms. Capex is expected to be significant at Rs 3,000-3,500 crore per annum but will be funded through a prudent mix of debt and internal accrual.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes the ESG profile of TCL supports its already strong credit risk profile.

 

The telecom sector has an impact on the environment because of the electricity requirement for network infrastructure with increasing data consumption. Telecom companies are also exposed to regulatory and operational risks involved in handling data. Moreover, the systemic importance of telecom services to society and the economy underscores the importance of resilient and accessible network to the widest number of users. TCL has continuously focused on mitigating its environmental and social risks.

 

ESG highlights

• TCL plans to achieve carbon neutrality by 2030 and net zero emission by 2035. Its scope 1 and 2 emissions and energy consumption intensity reduced by ~16% and ~6%, respectively, on-year in fiscal 2023.
• The company’s gender diversity (22%) is high and it reported a low attrition rate compared with peers. It reported zero fatalities in fiscal 2023.
• The company follows a Zero harm philosophy focused on safety in the workplace and has conducted 361 safety standards audits in this regard.
• The company’s governance profile is characterised by 50% of its board comprising of independent directors and ~17% being women directors, split in chairman and CEO positions, majority independent board level ESG committee, high attendance of independence directors in the board and committee meetings, and extensive financial disclosures.
• The company has published its Sustainability Linked Loan Framework (SLL) and the first SLL loan (USD 250 million) under the framework was closed in April 2024. All future long -term loans (refinancing as well as new) will be as per the SLL framework.

 

There is growing importance of ESG among investors and the commitment of TCL to ESG principles will play a key role in enhancing investor confidence.

Rating sensitivity factors

Downward factors

• Large, debt-funded capex/investment or crystallisation of contingent liabilities, leading to net debt to Ebitda above 4 times
• Decline in revenue and profitability impacting cash accrual

About the Company

Incorporated in 1986, TCL is a leading global communications company that offers voice, data and value-added services to enterprises, carriers and retail consumers. It is among the world’s largest providers of wholesale international voice services and operates one of the biggest global submarine cable networks.

Key Financial Indicators

Particulars	Unit	2024	2023
Revenue	Rs crore	20,969	17,902
Profit after tax (PAT)	Rs crore	970	1,801
PAT margin	%	4.60%	10.10%
Adjusted debt/adjusted networth	Times	NM	NM
Interest coverage	Times	7.04	10.66

Note: These are CRISIL Ratings adjusted figures.

NM: Not meaningful because adjusted networth is negative on account of intangible assets.

Any other information: Not Applicable