| Tata Communications Limited | ||
| Rating Reaffirmed | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Tata Communications Limited (TCL).
The rating continues to reflect the company’s strong and diverse business risk profile, backed by growing revenue from the data segment; healthy and improving financial risk profile aided by increasing cash accrual; and financial flexibility from being a part of the Tata group. These strengths are partially offset by continuous decline in revenue from the voice segment and exposure to regulatory and technological changes.
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 has 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 Internet Service Provider (ISP) licenses granted in 2002 and 2007. This amendment was challenged in Telecom Disputes Settlement and Appellate Tribunal by two ISPs, and an interim stay was granted to all similarly placed license holders. While TCL believes it has strong arguments in the underlying case before the Supreme Court, it has made a provision of ~Rs 33 crore over the quarter ended June 2021 for the license fee on revenue from pure internet services from April 1, 2021. However, CRISIL Ratings understands that the potential liability in this regard is not material.
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 and has factored in its group support framework 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, backed by growing data business Operations are characterised by healthy diversity across the data business, which contributes over 75% to the total revenue and over 95% to the consolidated earnings before interest, taxes, depreciation and amortisation (Ebitda) as of the first quarter of fiscal 2022. The consolidated Ebitda of TCL grew sharply by ~29% on-year in fiscal 2021, led by growth in data business and cost rationalisation measures undertaken by the company. During the fiscal, Ebitda margin improved by ~500 basis points on-year to ~25%. Furthermore, in the first quarter of fiscal 2022, Ebitda margin remained healthy at ~24% despite flat revenue on a sequential basis. 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. Growth in the data segment has helped partially offset the decline in revenue from the voice segment.
Healthy and improving financial risk profile Financial risk profile is backed by healthy cash accrual, significant cash and bank balance and improving debt protection metrics. Debt/Ebitda ratio improved sharply to 2.3 times in fiscal 2021 from 3.3 times and 3.6 times in fiscals 2020 and 2019, respectively. Similarly, adjusted interest coverage ratio increased to over 10 times in fiscal 2021 from ~7 times in fiscal 2020. The financial risk profile is expected to further improve over the medium term, supported by continued healthy cash accrual and absence of any large, debt-funded capital expenditure (capex). Any sizeable, debt-funded acquisition or capex will remain a key monitorable.
Financial flexibility from being a part of the Tata group The Tata group’s shareholding in TCL 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 Continuous decline in the voice business segment Revenue and operating margin from the voice business segment have witnessed a protracted slump on account of intense competition from the cheaper voice over Internet protocol (VoIP) to traditional circuit-switch-based voice calling. Contribution of the voice segment to the overall revenue halved to 16% in fiscal 2021 from 32% in fiscal 2018 as a result of lower demand and realisation. Revenue and profitability from the voice segment are expected to continue to shrink because of availability of cheaper substitutes.
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 of TCL remained strong, supported by cash and liquid investments of Rs 1,460 crore as on June 30, 2021. Net cash accrual, expected at Rs 3,000-3,500 crore per annum, will more than sufficiently cover yearly debt repayment obligations over the medium term. Capex is expected to remain moderate at Rs 1,800-2,200 crore in the ongoing fiscal and is expected to increase in the next fiscal. However, the capex requirement will be funded largely through internal accrual. |
Rating Sensitivity Factors Downward factors
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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 297 crore and revenue was Rs 4,116 crore over the quarter ended June 30, 2021, against net profit of Rs 258 crore and revenue of Rs 4,418 crore in the corresponding period of the previous fiscal. |
Key Financial Indicators - Consolidated Financials
NM: Not meaningful |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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