Rating Rationale

Strengths
* Diverse business risk profile, backed by growing data business:
Operations are characterised by healthy diversity across data and other non-voice businesses, which comprised ~80% of the overall revenue in fiscal 2020 against ~77% in the previous fiscal. Revenue from these businesses grew by ~8% in fiscal 2020, while the earnings before interest, tax, depreciation, and amortisation (EBITDA) grew at a healthy ~ 13% year-on-year (adjusted for the impact of Ind AS-116). Growth in data segment has helped partially offset the declining revenue from the voice segment. Data business segment is expected to benefit from increasing offtake and TCL's established position as one of the world's leading providers of wholesale data, internet protocol (IP), and mobile signalling services.

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 strong cash and bank balance. Debt/EBITDA ratio improved marginally to 3.26 times in fiscal 2020 from 3.64 times in fiscal 2019. 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 should remain steady over the medium term, supported by the absence of any large, debt-funded capex, and strong 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, 2020, 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 the exit of smaller players. Income from the voice segment fell to ~20% in fiscal 2020 from ~23% in fiscal 2019, owing to lower demand and realisation. Revenue 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 ~11,007 crore as on September 30, 2020. Gearing was negative at 3.5 times in fiscal 2020 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 the National Company Law Tribunal in August 2019, which should pave the way for raising equity in future, if needed.