Detailed Rationale

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

 

The rating continues to reflect the strong market position of TCL and diversified and improving business risk profile, driven by the data business and, healthy and improving 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 high capital expenditure (capex) requirements for the business and exposure to regulatory and technological changes.

 

Operating revenue grew by 6.4% on-year to ~Rs 18,200 crore in fiscal 2023 while the operating margin declined marginally but remained healthy at around 24.2% Growth was primarily led by the data business, whose share in the overall revenue has been increasing over the past few years. The data segment contributed ~80% to the overall consolidated revenue in fiscal 2023, as compared to ~70% in fiscal 2020.

 

Sharp cost rationalisation measures undertaken during the Covid-19 pandemic aided profitability over the past few years. While some share of the cost reduction is seen coming back, the operating margin should remain healthy over the medium term, driven by better realisations of the data businesses.

 

Financial risk profile too improved significantly over the past few years because of healthy yearly cash accrual, leading to deleveraging. Thus, the net debt to earnings before interest, taxes, depreciation, and amortisation (Ebitda) ratio improved to 1.2 times in fiscal 2023 from 1.6 times in fiscal 2022 and is expected to sustain below 1.5 times over the medium term.

 

CRISIL Ratings also takes note of the potential liability on TCL, with respect to the adjusted gross revenue (AGR) dues. Though 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 5,008.74 crore as contingent liabilities during the quarter ended March 2023, 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 will remain 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 also factored in 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 Tata Communications.

 

Operations of TCL are characterised by healthy diversity across the data business which include cloud, digital collaboration services, security amongst others apart from the core connectivity services. TCL, being an integrated solutions provider with its strategic shift towards a platform-based service provider, is believed to have no direct end-to-end competitor in India or overseas. TCL with its established network, which still has unutilised data traffic carrying capacity is well poised to face any competitive pressures as demand for the cables is expected to increase going further.

 

Improving operating performance, largely aided by data business

Revenue increased significantly to ~Rs 18,200 crore in fiscal 2023 from ~Rs 16,728 crore in fiscal 2022, as the share of data business in the overall business increased significantly and contributed ~80% to the total revenue and over 88-90% to the consolidated Ebitda in the last fiscal. 

 

The Ebitda margin from the data business improved from 13.6% in fiscal 2018 to 24.8% in fiscal 2021 and remained largely stable thereafter. The data business segment will continue to benefit from increasing offtake of data and the strong position of TCL as one of the world’s leading providers of wholesale data, internet protocol and mobile signalling services. Further, the share of digital platform services segment which has a high margin, is expected to increase over the medium term; this will continue to aid the overall Ebitda margin of TCL to sustain at 22-24%.

 

Healthy and improving financial risk profile

The financial risk profile is backed by healthy cash accrual, significant liquidity and improving debt protection metrics. Net debt to Ebitda ratio improved to 1.2 times in fiscal 2023 from 1.6 times in fiscal 2022 owing to strong cash accrual, while the interest coverage ratio continued at ~11-12 times over the past two fiscals. Despite expectation of rise in capital intensity over the medium term, the net debt to Ebitda ratio should remain comfortable below 1.5 times, supported by continued healthy cash accrual. The interest coverage ratio too should remain healthy at 8-10 times over the medium term.

 

Moreover, accumulated losses in the past led to sustained negative networth. However, in fiscal 2023, networth turned positive backed by healthy profit. Same is expected to continue to improve over the medium term.

 

Any sizeable, debt-funded acquisition or capex impacting the financial risk profile will remain a key rating sensitivity factor.

 

Enhanced financial flexibility and support from Tata Sons

Shareholding of Panatone Finvest Ltd (Panatone; ‘CRISIL AAA/Stable/CRISIL A1+’) in TCL had increased to 44.80% from 34.80% following the sale of stake by the Government of India in March 2021 and Tata Sons holds 14.07% in TCL, as on date. Panatone is a wholly owned subsidiary of Tata Sons. Thus, Tata Sons is considered to be the ultimate promoter/parent entity of TCL with its total shareholding in the company at 58.86%. Thus, the financial flexibility of TCL has enhanced with this transaction as it could pave way for equity raise, when required.

 

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

 

Weakness:

Highly capital-intensive nature of operations

The core assets of TCL -- under-sea cables -- require huge capex for layout and replacement and or upgradation at end of life. This also requires continuous maintenance and monitoring as it is susceptible of getting damaged that may result in connectivity loss till it gets repaired. This risk may continue to exist though it gets mitigated by availability of alternate cables for most locations.

 

TCL has already incurred heavy capex in the past for laying cables. Over the next few years, no major capex is expected for laying cable but the company plans to step up its capex for incubation/growth businesses with focus on new age technology solutions providers. Any higher-than-expected capex impacting financial risk profile of the company will continue to remain key 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. Presence in multiple geographies also 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 1,840 crore as on March 31, 2023, and unutilised fund-based limit of Rs 365 crore. Net cash accrual, expected at Rs 3,500-4,000 crore per annum, will more than sufficiently cover yearly debt obligation over the medium term. Capex is expected to be significant at Rs 3,000-3,500 crore per annum in the upcoming fiscals. However, it 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 is exposed to impact on the environment because of electricity requirements for the network infrastructure with increasing data consumption. The telecom companies are also exposed to regulatory and operational risks involved with 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.

 

Key ESG highlights

• TCL has deployed strategies to reduce the carbon footprint in its processes. Over fiscals 2020- 2022, the company reduced greenhouse gas emissions of scope 1 and 2 by 19%. Also, 13% of electricity consumed was from renewable sources. The company reduced its water consumption by 9% in fiscal 2022.
• TCL is committed to ensuring safety and security of its employees. There were no fatalities during the year and the lost time injury frequency rate stood at 0.26. Additionally, the company conducts trainings and ensures learning for its employees.
• The governance structure is characterized by 50% of its board comprising independent directors, split in chairman and CEO positions, healthy investor grievance redressal and extensive disclosures.
• TCL has formed the ESG committee to sharpen its focus towards its ESG agenda.

 

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 sustaining 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.

Any other information: Not applicable