Rating Rationale

Strengths
* Diverse business risk profile, backed by growing data business:
Operations are characterised by healthy diversity across the data business, which comprised 74% of the overall revenue in fiscal 2019 against 66% in the previous fiscal. Revenue from the data business grew by 10% in fiscal 2019, while the EBITDA (earnings before interest, tax, depreciation, and amortisation) grew at a healthy rate of 17% year-on-year. This segment is expected to benefit from increasing offtake of data and TCL's established position as one of the world's leading providers of wholesale data, IP (internet protocol), and mobile signalling services. Growth in data segment has helped partially offset the declining revenue from the voice segment.

In the voice segment, TCL is competitive, despite the commoditised nature of business. Given the intense competition, consolidation among telecom operators in India, and mature stage of the business where market growth is on a decline, the company is focused on free cash flow generation by targeting profitable traffic and reducing capital expenditure (capex) and operational expenses.

Revenue from the global data business (which includes Traditional Services such as international private line, ethernet services, leased lines and others; Growth & Innovation Services such as unified communications and collaboration, managed hosting, manged security services, Internet of Things, mobile innovation and others) should continue to increase over the medium term, thereby mitigating the impact of decline in volumes and tariff in the highly commoditised wholesale voice segment.

* Improving, yet moderate, financial risk profile:
Financial risk profile is backed by steady cash accrual, above-average debt protection metrics, and adequate cash and bank balance.

Debt/EBITDA ratio improved marginally to 3.64 times in fiscal 2019 from 3.94 times in fiscal 2018. It has improved significantly from 6.5 times in fiscal 2016 led by divestment of TCL's South African subsidiary and data centre business, which led to cash inflow of Rs 3,300 crore. This was used for debt repayment and deconsolidation, thereby improving debt protection metrics.

Financial risk profile will remain steady over the medium term, supported by absence of any large, debt-funded capex, and adequate liquidity. Any sizeable, debt-funded acquisition or capex will remain a key monitorable.

* Financial flexibility enjoyed by being a part of the Tata group:
As on September 30, 2019, the Tata group held 48.87% equity stake in TCL. As the company is an integral part of the group's telecommunications strategy, the latter also has management control. TCL will continue to enjoy significant financial flexibility and should receive need-based support from the group.

Weaknesses
* Exposure to intense competition in the voice segment
Revenue and operating margin from the voice segment have witnessed a protracted slump owing to intense competition from the cheaper voice over Internet protocol (VoIP) to traditional circuit-switch-based voice calling. This was further aggravated in fiscal 2019 due to consolidation in the telecom industry leading to exit of smaller players. Income from the voice segment fell 27% in fiscal 2019 owing to lower demand and realisation. Overall revenue share from this segment dropped to 24% in fiscal 2019 from 32% in fiscal 2018.

Revenue (expected to decline to 10-15% of the total revenue over the medium term) and profitability from the voice segment will continue to shrink due to availability of cheaper substitutes.

* Leveraged capital structure
TCL's capital structure is quite leveraged because of high debt of Rs 9,950 crore at March 31, 2019. Gearing was negative at 4.95 in fiscal 2019 as its networth was negative due to large accumulated losses in the past. The long pending surplus land demerger restricted TCL to raise equity. However, the demerger was approved by National Company Law Tribunal in August 2019, which should pave the way for raising equity in future, if needed.

Liquidity: Adequate
Liquidity of TCL remained adequate, with cash and liquid investments of over Rs 1,450 crore as on March 31, 2019. With continued improvement in profitability, we expect net cash accruals and cash and cash equivalents to remain comfortable at over Rs 4,000 crore in fiscal 2020 as against debt repayment of about Rs 620 crore. Capex is expected to get moderate at Rs 1,500-1,700 crore in fiscal 2020 as TCL has incurred huge capex over past few years. We believe capex requirements will be funded through a mix of internal accruals and external debt.

Rating Sensitivity Factors
Downward Factor
* Large debt funded capex/ investment leading to debt to EBITDA above 5 times.
* Decline in revenue and profitability impacting cash accruals.