Key Takeaways
- Q4 net profit surged 55% YoY to ₹364.28 cr, driven largely by ₹259 cr of other income.
- Data Services revenue grew 9.4% to ₹5,380 cr, now 87% of total revenue.
- EBITDA margin slipped to 19.84% (‑52 bps YoY) as low‑margin acquisitions dilute results.
- Management targets 23‑25% EBITDA margin by FY28 via high‑margin SaaS‑like offerings.
- Red Sea cable repairs remain a risk; share price fell 6% on results, extending a 12% YTD decline.
You missed Tata Communications' 55% profit surge, and now the market is punishing the stock.
Why Tata Communications' Profit Jump Doesn’t Guarantee Margin Growth
The December‑quarter numbers look impressive at first glance: net profit of ₹364.28 crore, a 55% year‑over‑year rise, and a near‑double increase from the September quarter. Yet the EBITDA margin— the profit metric that strips out interest, taxes, depreciation, and amortisation— fell to 19.84%, down 52 basis points from the previous quarter. The decline stems from two sources:
- Acquisition drag. The recent purchases of Kaleyra and The Switch operate at lower profitability than Tata Communications' core connectivity business, creating an immediate dilutive effect.
- Higher proportion of “other income”. One‑time gains, such as foreign exchange benefits and asset disposals, contributed ₹259 cr of the profit, masking the underlying operating performance.
For a capital‑intensive telecom operator, sustainable margin expansion is far more valuable than a one‑off profit spike. Investors must therefore focus on whether the company can convert its data‑centric growth into higher‑margin recurring revenue.
Data Services Growth: The Engine Powering 87% of Revenue
Data Services—core connectivity, digital platforms, and connected services—generated ₹5,380 cr, a 9.4% rise YoY and the primary driver of total revenue. This segment now accounts for 87% of Tata Communications' topline, reflecting the broader industry shift from voice to data‑heavy offerings. The growth is anchored by three themes:
- Large‑scale data‑centre connectivity. A marquee project linking a new Tata‑group data centre to the company’s fiber backbone added a sizable chunk of revenue.
- Enterprise cloud demand. The firm’s AI‑cloud and GPU‑as‑a‑service offerings are gaining traction among corporates that need high‑performance compute without building their own infrastructure.
- Strategic partnership with TCS. While the $6.5 bn data‑centre rollout is still in early planning, the eventual need for high‑capacity connectivity positions Tata Communications as a preferred supplier.
These trends echo the sector‑wide acceleration of data traffic, where analysts project compound annual growth rates (CAGR) of 12‑15% for connectivity services over the next five years.
Voice Solutions Decline: A Symptom of a Maturing Market
The Voice Solutions segment slipped to ₹373 cr from ₹410 cr YoY, a 9% drop. International and domestic long‑distance voice traffic is in long‑term decline globally, as OTT (over‑the‑top) platforms like WhatsApp and Zoom erode traditional voice revenues. For Tata Communications, this segment now represents less than 6% of total revenue, reinforcing management’s decision to re‑allocate capital toward higher‑margin digital products.
Red Sea Cable Disruption: A Hidden Operational Risk
Repeated outages in the Red Sea undersea cable network have limited capacity and pressured margins. Management admitted the cables are still under repair and may take several months to fully restore. The disruption not only reduces the available bandwidth for high‑value data services but also raises the cost of routing traffic through alternative, more expensive paths. Investors should monitor the repair timeline, as a swift resolution could unlock incremental EBITDA in the next two quarters.
Competitive Landscape: How Tata’s Peers Are Responding
Other Indian telecom infrastructure players—most notably Bharti AirTel’s tower arm and Reliance’s Jio Fiber—are also pivoting toward data‑centric portfolios. Reliance, for instance, has bundled broadband, cloud, and enterprise services to achieve EBITDA margins north of 30% in its digital arm. Tata Communications' ambition to reach 23‑25% margin by FY28 therefore hinges on executing its SaaS‑like product suite faster than rivals can monetize similar offerings.
Investor Playbook: Bull vs. Bear Cases
Bull Case: If the “Digital Fabric” suite launches on schedule and the GPU‑as‑a‑service line captures a meaningful share of enterprise workloads, recurring high‑margin revenue could push EBITDA margins toward the 23‑25% target. Successful completion of the Red Sea repairs would also lift utilization rates, adding ~₹100 cr of EBITDA by FY27. In this scenario, the stock could see a 20‑30% upside over the next 12 months.
Bear Case: Continued margin compression from integration costs, slower adoption of SaaS products, or prolonged cable outages could keep EBITDA margins stagnant. A muted partnership with TCS would limit the upside from new data‑centre connectivity projects, leaving the company vulnerable to price pressure from lower‑cost competitors. Under these conditions, the share could slide another 10‑15% as investors price in earnings volatility.
Bottom line: Tata Communications has a compelling growth narrative on the data side, but the path to margin expansion is fraught with operational and integration risks. Keep a close eye on SaaS product roll‑outs, Red Sea cable restoration, and competitive pricing pressure before committing capital.