Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Tata Communications Limited (TCL). CRISIL Ratings has also withdrawn its rating on Rs 325 crore of commercial paper at the company’s request. This is in line with the CRISIL Ratings policy on withdrawal of ratings.

 

The rating continues to reflect the company’s strong and diverse business risk profile, driven by the data business, healthy financial risk profile aided by strong cash accrual, and strong linkages with the Tata group. These strengths are partially offset by flattish overall revenue due to continuous decline in revenue from the voice segment and exposure to regulatory and technological changes.

 

Revenue dipped marginally to Rs 16,768 crore in fiscal 2022 with operating margin of 24.1% compared to Rs 17,151 crore and 24.8%, respectively, in fiscal 2021. This was on account of continued decline in the voice segment and deferment of project execution because of delay in availability of equipment due to semiconductor chip shortage. The overall revenue is expected to register a high single-digit growth driven by growth in the data business as well as increasing contribution from newer initiatives while the operating margin is expected to remain range-bound at 23-25% over the medium term. The net debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio remained healthy at 1.7 times in fiscal 2022 compared to 1.8 times in fiscal 2021 and is expected to sustain comfortably below 2 times, over the medium term, given healthy accrual.

 

TCL has a potential liability 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 2,235 crore as contingent liabilities regarding 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 with respect to these 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 group support framework to assess linkages with the Tata Group to arrive at the overall rating.

 

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

• Diverse business risk profile, driven by the data business: Operations are characterised by healthy diversity across the data business which include cloud, digital collaboration services apart from the core connectivity services. The overall data business contributed over 77% to the total revenue and over 90% to the consolidated Ebitda, as of the first quarter of fiscal 2023. Revenue dipped marginally to Rs 16,768 crore in fiscal 2022 from Rs 17,151 crore in fiscal 2021 due to continued decline in voice segment as well as deferment of revenue due to semiconductor chip shortage. While the data segment grew only by 1.4% in fiscal 2022, it is expected to show high single-digit revenue growth over the medium term, driven by increasing overall data consumption and newer solutions offered by the company. The consolidated Ebitda margin of TCL remained strong at ~25% for the first quarter of fiscal 2023, driven by the core connectivity business which had a segmental operating margin of 42.5% during the same period. While share of the more profitable data business should increase further, given the declining voice business, overall operating margin is expected to remain at 23-25%, over the medium term, as some cost saving measures undertaken amid the Covid-19 pandemic might get reversed. The data business segment is expected to 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.

 

• Healthy financial risk profile: The financial risk profile is backed by healthy cash accrual, significant cash and bank balance and improving debt protection metrics. Net debt to Ebitda ratio remained healthy at 1.7 times in fiscal 2022 compared to 1.8 times in fiscal 2021. Similarly, adjusted interest coverage ratio increased to over 11.8 times in fiscal 2022 compared to 10.3 times in fiscal 2021. The net debt to Ebitda ratio should remain comfortable below 2 times, over the medium term, supported by continued healthy cash accrual while any significant capital expenditure (capex) will be funded via a mix of internal accrual and debt. Any sizeable, debt-funded acquisition or capex will remain a key monitorable.

 

• Strong linkages with the Tata group: The Tata group’s shareholding in TCL had increased to 58.87% from 48.87% following the sale of stake by the Government of India in March 2021. As TCL is an integral part of the Tata 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:

• Flattish overall revenue due to continuous decline in the voice business segment: Overall revenue remained flattish at Rs 16,500- Rs 17,500 crore for the five fiscals up to 2022, despite growth in the data business. This was due to the declining contribution of the voice segment to the overall revenue, which was Rs 2,286 crore in fiscal 2022 compared to Rs 5,311 crore in fiscal 2018. This is primarily due to a protracted slump on account of intense competition from cheaper voice over Internet protocol (VoIP) to traditional circuit-switch-based voice calling leading to lower demand and realisation in line with industry trends. The company is taking initiatives to add new solutions and revenue streams in the data business where there is higher growth potential to offset decline in the voice segment. This will remain a 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 industry remains susceptible to technological changes. New technology in the telecom industry could necessitate fresh investments or overhaul of the current networks.

Liquidity: Strong

Liquidity was supported by cash and liquid investments of Rs 1,545 crore as on June 30, 2022. Net cash accrual, expected at Rs 3,000-3,500 crore per annum, will more than sufficiently cover yearly debt obligation over the medium term. Capex is expected to be significant at Rs 2,500-3,000 crore in the upcoming fiscals. However, the capex requirement will be funded through a 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. Telcos 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 (GHG) 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 LTIFR ratio 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.

 

Net profit of the company was Rs 545 crore and revenue was Rs 4,545 crore over the quarter ended June 30, 2022, against net profit of Rs 297 crore and revenue of Rs 4,116 crore in the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2022	2022
Revenue	Rs crore	16,768	17,151
Profit after tax (PAT)	Rs crore	1485	1252
PAT margin	%	8.90%	7.30%
Adjusted debt/adjusted networth	Times	NM	NM
Interest coverage	Times	11.9	10.3

NM: Not meaningful

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Commercial Paper*	NA	NA	7-365 Days	25	Simple	CRISIL A1+

*Not yet placed

 

Annexure - Details of rating withdrawn

ISIN	Name of the instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels
NA	Commercial Paper	NA	NA	7-365 Days	325	Simple