Rating Rationale

Strengths
* Diverse business risk profile, backed by growing data business:
TCL's business risk profile is marked by healthy diversity across its data and voice businesses. Data business comprises 66% of its overall revenues in fiscal 2018, as compared to 59% in the previous fiscal. The declining revenues and cash generation from the voice business is being offset by the improving performance of the data business.

In fiscal 2018, data segment witnessed revenue growth of around 6%. Operating profitability of the data business declined to 18% in fiscal 2018 from 18.8% in fiscal 2017, due to investments in new services, which are yet to pick up, and higher spend on sales force and marketing. The data segment is expected to benefit from increasing off-take of data and established position as one of the world's leading wholesale providers of data, IP (Internet protocol), and mobile signalling services.

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

CRISIL believes proportion of revenue from the global data business should continue to increase over the medium term, 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, moderate debt protection metrics, and adequate cash and bank balances.

Debt/ EBITDA [earnings before interest, taxes, depreciation and amortisation] marginally weakened to 3.94 times in fiscal 2018 vis-a-vis 3.7 times in fiscal 2017. However, debt/ EBITDA has improved from 6.5 times in fiscal 2016, due to the divestment of its South African subsidiary and data centre business, leading to cash inflow of around Rs 3300 crore. Usage of cash inflows for debt reduction as well as deconsolidation has led to improvement in debt protection metrics. TCL continues to have adequate liquidity, with cash and bank balances of over Rs 1480 crore as on March 31, 2018. However, tangible networth was negative at -Rs. 1081 crore as on March 31, 2018, due to write-down of investments and prior losses.

CRISIL believes TCL will maintain the financial risk profile over the medium term, supported by absence of any large debt-funded capex plans, and adequate liquidity. Any large debt funded acquisitions or capex will remain a key monitorable.

* Financial flexibility enjoyed by being a part of the Tata group: As on September 30, 2018, the Tata group held 48.87% equity stake in TCL. As TCL is an integral part of the group's telecommunications strategy, the group also has management control over the company. CRISIL believes the company would continue to enjoy significant financial flexibility, being a part of the Tata group and receive need-based support.

Weakness
* Limitations on raising equity capital: Government of India (GoI) holds a 26.12% stake in TCL and intends to maintain the holding until a demerger of land measuring 773.13 acre takes place, as was agreed to at the time of the divestment of the erstwhile Videsh Sanchar Nigam Ltd (VSNL). The transaction for the transfer of land has received NCLT approval and is pending approval from MCA (Ministry of Corporate Affairs). Till the transfer of land, it is highly unlikely that TCL will be able to raise equity capital and hence will have to rely on debt to finance any major acquisitions, which it shall be unable to fund through its internal accruals.

* Intense competition in the voice segment: Revenue and margins from the voice segment had been witnessing a protracted slump owing to intense competition from cheaper voice over Internet protocol (VoIP) to traditional circuit-switch-based voice calling. The weakness in the voice segment was further aggravated during fiscal 2018 by ongoing consolidation in the telecom industry in India. The voice revenue fell 21% in fiscal 2018, owing to lower demand and realisation. The gross revenue per minute from the voice segment declined 15% in fiscal 2018. The overall revenue share from voice segment dropped 32% in fiscal 2018 from 38% in fiscal 2017.

CRISIL believes revenue and profitability from the voice segment will continue to shrink due to availability of cheaper substitutes. CRISIL expects the share of revenue from the voice segment to further decline to 20-23% over the medium term.