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Edited Transcript of TATACOMM.NSE earnings conference call or presentation 23-Jan-20 9:00am GMT

Q3 2020 Tata Communications Ltd Earnings Call

MUMBAI MAHARASHTRA Jan 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Tata Communications Ltd earnings conference call or presentation Thursday, January 23, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Amur Swaminathan Lakshminarayanan

Tata Communications Limited - MD, CEO & Director

* Pratibha K. Advani

Tata Communications Limited - CFO

* Vipul Garg

Tata Communications Limited - Head of IR

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Conference Call Participants

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* Aliasgar Shakir

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Bharat Sheth

Quest Investment Advisors Pvt Ltd. - Head of Equities

* Narottam Garg;Chanakya Capital;Analyst

* Prabir Adhikary;RCML Securities;Analyst

* Riddhesh Gandhi;Discovery Capital;Analyst

* Sanjesh Jain

ICICI Securities Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Tata Communications Limited Q3 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Vipul Garg, Head of Investor Relations at Tata Communications. Thank you, and over to you, sir.

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Vipul Garg, Tata Communications Limited - Head of IR [2]

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Thank you, Denise. Good afternoon, everyone, and welcome to Tata Communications Earnings Conference Call. We are joined today by our MD and CEO, Mr. Amur S. Lakshminarayanan; and our CFO, Ms. Pratibha Advani. The results for the quarter ended December 31, 2019, have been announced yesterday, and the quarterly fact sheet is now available on our website. I trust you would have had the chance to look through the key highlights. We will commence today's call with comments from Lakshmi who will share his thoughts on the strategic imperatives followed by Pratibha who will share detailed views on the financial progress. At the end of management's remarks, you will have an opportunity to get your queries addressed.

Before we get started, I would like to remind everyone that some of the statements made or discussed on the conference call today may be forward looking in nature and must be viewed in conjunction with the risks and uncertainties we face. A detailed statement and explanation of these risks are included in our annual filings, which you can locate on our website, www.tatacommunications.com. The company does not undertake to update these forward-looking statements publicly.

With that, I would like to invite Lakshmi to share his views. Over to you, Lakshmi.

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [3]

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Thank you, Vipul, and good afternoon, good morning, everyone. Data services continue to grow for us. The quarter that we saw also, we had good data business growth in revenues and profitability, whereas some customer-specific issues and 2 major transitions in our transformation business has impacted our margin. Our focus on enterprise segment is showing results, and we are witnessing strong growth in enterprise business, both in India and internationally.

From a market point of view, the digital transformation is in full force. Digital, as we say it, is a combination of data applications and connectivity. And for a successful digital journey, connectivity is a very key component. We are witnessing proliferation of data and connectivity, driven by enterprises increasingly adopting cloud and the mobile-first strategy.

Corporations today can harness the true power of Internet and hybrid networks like our IZO platform to offer seamless, secure and reliable access to data and applications to employees, suppliers and end customers with ease. At Tata Communications, we see ourselves as crucial component of this emergent economy, uniquely positioned to leverage on the digital trends.

Our funnel and pipeline buildup is steadily improving, and customer conversations are moving from stand-alone products to customized solutions catering to business needs. I want to call out on IZO platform and InstaCC. These solutions are at the heart of customer experience transformation, and we are witnessing robust growth in their funnel. InstaCC is our global cloud-based platform for contact centers, enabling a digital ecosystem, and we recently made a big customer live on this platform, thus enabling the digital journey. I've spoken about Visteon last quarter, and I'm happy to announce that we received the best supplier recognition for a seamless delivery of fully managed SD-WAN in this quarter.

Traditional services, which were affected last year due to operator consolidation, have now stabilized, and we are witnessing strong growth in India business. Profitability in this business continues to be robust.

Growth services continue to perform well. The quarter revenue growth was less as Q3 is a seasonally weak quarter due to lower usage-based revenue due to holidays in December. We have a healthy funnel and order book, and we expect growth to pick up in the next quarter. We are witnessing significant operating leverage in this portfolio, which is evident from positive swing in EBITDA.

In the last few months, I have had a deeper look at our innovation services, and I'm really excited about the opportunity that lies ahead. Some of these solutions are cutting edge. Take the example of NetFoundry. It enables customers to instantly and securely connect applications across any set of edges and clouds without the constraints of VPNs, custom hardware and private circuits, giving the customer a total control of the network. For enterprises, it offers agility, security and a significant performance when they operate fully on the Internet, on the cloud.

As the world moves towards cloud-native technologies, there is a huge potential for growth in NetFoundry. We have proven use cases and a very compelling proposition, and we are still in the early stages of customer and market adoption, and we should view this in a longer time horizon.

While Pratibha will talk about financial results in detail, I just want to highlight key numbers and reiterate that our financial performance is on the right track. Consolidated revenue came in at INR 4,229 crores and declined 1% on both year-on-year and Q-on-Q basis. Q3 of last year had a onetime benefit due to AFA. On a normalized basis, revenue grew by 1.2% year-on-year.

Consolidated EBITDA for this quarter was INR 760.8 crores, witnessing a decline of 8.7% Q-on-Q and 9.7% year-on-year. If you normalize for AFA, however, the benefit and the exceptional expense in Q3 of last year, EBITDA has grown by 20.3% year-on-year.

Data business continues to perform well. Reported revenue grew by 0.6% year-on-year (sic) [quarter-on-quarter] and 2.8% year-on-year. On a normalized basis, revenue grew by 5.7% year-on-year.

We have been driving efficiency and productivity across the organization and this has helped us in achieving higher profitability. Normalized EBITDA has grown by 28.2% year-on-year with significant margin expansion.

Our business continues to benefit from improvement in the product mix, customer profile and deeper customer engagement. We aspire to scale profitably and continue to improve our returns and create stakeholder value.

With that, I would request Pratibha to talk about the financial highlights to you.

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Pratibha K. Advani, Tata Communications Limited - CFO [4]

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Thank you, Lakshmi, for sharing your thoughts. A very good afternoon to all of you. Thank you once again for joining us on our Q3 FY '20 earnings conference call. I will be taking you through the commentary on our financial performance.

Data business has achieved stable growth this quarter, with growth services driving growth and profitability. Reported consolidated revenue declined by 1%, both sequentially and Y-on-Y coming in at INR 4,229 crores, as Lakshmi mentioned earlier. You would recall that in Q3 of last year, we had a onetime access facilitation benefit in both revenue and cost. While revenue benefit was INR 91 crores, cost benefit was INR 257 crores. We also had onetime exceptional expense in that quarter of INR 138 crores. Overall, there was a favorable impact on EBITDA of INR 210 crores in Q3 last year. All these adjustments were made in data segment. It would only be appropriate for us to look at normalized numbers for year-on-year comparisons.

Consolidated normalized revenue for Q3 FY '19, and this is just to jog your memory back, was INR 4,178 crores and normalized EBITDA would be INR 632.6 crores versus reported revenue of INR 4,269 crores and EBITDA of INR 843 crores in Q3 last year. You can also find the details in the investor fact sheet of last year.

Normalized for above adjustment, revenue has grown by 1.2% year-on-year. We have achieved stable growth despite Q3 being a seasonally weak quarter and a continuing decline in voice business by 14.3% year-on-year.

EBITDA for the quarter came in at INR 760.8 crores, with margins coming in at 18%. EBITDA declined by 9.7% year-on-year. On a normalized basis, EBITDA grew by 20.3% year-on-year due to strong profitability in data business, and this was, of course, partially aided by IndAS benefit. On a Q-on-Q basis, EBITDA declined by 8.7% primarily due to decline in voice business and the onetime impact of TCTSL and the transition cost also.

PAT for the quarter was INR 58.5 crores as compared to INR 53.9 crores in the previous quarter.

Moving on to our segment performance. Data business saw steady growth during the quarter and now contributes 81% to revenue and 94% to EBITDA. Revenue came in at INR 3,420 crores, witnessing a growth of 2.8% year-on-year and 0.6% sequential growth quarter-on-quarter. On a normalized basis, revenue grew by 5.7% year-on-year.

Enterprise customers are driving growth, both in India and international geographies. India enterprise segment has grown by 11% and international has grown by 9% year-on-year. EBITDA for the quarter came in at INR 713.6 crores, with margins coming in at 20.9%. EBITDA has declined by 6.9% year-on-year and sequentially by 5.2%. We will obviously have to normalize it for the access facilitation charge of Q2 last year. And after normalization, EBITDA has grown by 28.2%, with margin expansion of 370 basis points year-on-year. This margin expansion has come on the back of continued focus on productivity, strong profitability in growth services and IndAS benefit. Growth services now contributes 7% overall EBITDA. Growth and innovation services will continue to be our growth drivers going forward.

Moving to the performance of our traditional portfolio. After a period of pressure, this portfolio has stabilized. Q3 revenue at INR 2,159 crores, showing a growth of 0.1% year-on-year and a sequential decline of 0.1% too. On a normalized basis, revenue grew by 4.5% year-on-year. EBITDA came in at INR 812.8 crores, witnessing a decline of 4.6% year-on-year and a sequential decline of 0.5%, with margin coming in at 37.6%. On a normalized basis, EBITDA grew by 26.5% year-on-year, with a margin expansion of 650 basis points. Margins had improved due to continued focus on productivity and partly aided by IndAS 116.

Moving to growth services. Q3 revenue came in at INR 784.8 crores, witnessing a growth of 7.5% year-on-year and 1.7% sequential growth. Within this portfolio, IZO has grown by 64.2% year-on-year, our global hosted contact center has grown by 40.9%, security services have grown by 30.4% and hosting by 21.5%.

EBITDA for the quarter came in at INR 51.1 crores as compared to a loss of INR 32.7 crores in the same quarter last year. We have seen a significant positive swing in EBITDA in the last 9 months of this financial year. This portfolio-generated EBITDA of INR 100 crores as compared to a loss of INR 93 crores in the same period last year. EBITDA margin for the quarter came in at 6.5% and has expanded by 200 basis points quarter-on-quarter.

Moving to our transformation services business. Overall financial performance for the business has been muted, although revenue for the quarter came in at INR 327.6 crores, witnessing a growth of 10.1% year-on-year and 1.2% Q-on-Q. As Lakshmi mentioned, customer-specific issues and transition of new contracts have led to a negative EBITDA of INR 45.6 crores for the quarter.

The performance of our payment solutions business. We continue to focus on profitability in this business. Revenue for the quarter came in at INR 87.4 crores and witnessed a decline of 2.3% year-on-year and growth of 2.8% Q-on-Q. Y-o-Y decline in revenue is due to lower number of ATMs, which is in line with our strategy to exit some unprofitable locations. We continue to improve our margins by focusing on efficiency and productivity.

EBITDA came in at INR 23.7 crores and grew by 144.5% year-on-year and 23.8% Q-on-Q, with margins coming in at 27.1%. Margins have expanded by 460 basis points Q-on-Q. Our strategy of focusing on profitability is working well, and we are selectively deploying ATMs at profitable locations. Total ATM count at the end of Q3 was 12,278, a reduction of 784 ATMs in the last 1 year.

Moving on to the voice business. In line with industry trend, this portfolio continues to decline. Revenue for the quarter came in at INR 808.9 crores, declining by 14.3% year-on-year and 7.5% sequentially. Volumes continue to decline while price remained stable.

EBITDA for the quarter came in at INR 47.2 crores and witnessed a decline of 37.8% year-on-year and 41.9% sequentially, with margins at 5.8%. In last few quarters, we have been getting benefits from profitable destination mix, which was not there this quarter, which has led to a decline in margins. As I mentioned earlier, in long term, we expect margins to be in the range of 6.5% to 7%.

CapEx for Q3 came in at USD 68.7 million as compared to USD 64.7 million in Q2. We continue to be judicious in our CapEx spend and our endeavor to keep the full year spend within the range of USD 200 million to USD 225 million.

Net debt at the end of the quarter was USD 1.25 billion, a decrease of $5 million as compared to last quarter. Our average cost of borrowing for the quarter was at 3.55%, which has marginally come down by 22 basis points in comparison to Q2, primarily due to movement of average LIBOR from 2.2% in Q2 to 1.93% in Q3.

Net debt-to-EBITDA is at 2.9x as compared to 3.4x in same quarter last year. Return on capital employed for rolling last 4 quarters is at 10.4% as compared to 7% for the same period last year.

In conclusion, the outlook for business continues to be positive, and our best-in-class bespoke solutions that enable customers to digitally transform are a key differentiator, providing businesses an ability to innovate, transform and grow. The enterprise business continues to grow at a healthy pace of 10% year-on-year, and we expect growth and profitability to accelerate further in coming quarters while keeping a close eye on our costs.

This brings to -- an end to management commentary, and I would now request the moderator to open the forum for Q&A. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We take the first question from the line of Sanjesh Jain from ICICI Securities.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [2]

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A couple of questions from my side. One on the growth services. It has been growing like 20% for us this year earlier -- in the earlier quarters, and a year or 2 before, we were growing at 30%. Our order book also looked healthy. So I just wanted to understand the reasons behind slowdown in the growth services. And how should we see this growth services growth coming in, say, from next quarter onwards and in next 2 years?

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Pratibha K. Advani, Tata Communications Limited - CFO [3]

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Thank you, Sanjesh, for the question. Sanjesh, I really won't say that growth services is slowing down. You would agree with us that there would be a base effect. And between 2018 to now, we almost added INR 100 million of revenue. And I think what's going well with that business is that we are now starting to see operating leverage and that has what has led to significant margin expansion. I did share the numbers with you of how some of the products in that portfolio are growing. So you do have to bear in mind that a larger base, you can't expect the same 30 -- 25% to 30% growth. I'm going to also request Lakshmi to share his thoughts.

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [4]

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See, on the growth service, obviously, has multiple products and solutions there. And obviously, the overall Unified Communications is a large piece. But if you see the core network-related transformation that we offer, the IZO platforms, those have shown fairly good growth and is continuing to show good growth. And those are the ones, in my opinion, will scale much larger as the enterprises look to transform and as they move to cloud. So I think there is a good prospect for us to continue to drive growth in these services.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [5]

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One probably follow-up question on that. What would be the potential market size for IZO product? And how much can we get out of it? I just wanted to understand how big this product can be for us because I've seen the UCC, which has now matured and which was earlier giving us a lot of growth has suddenly looked like it's mature and the growth has almost muted there. So I think a lot of it need to be now compensated with, say, products like IZO, security services, GSCC and video. So just wanted to understand because we have been talking so bullish on IZO. So I just wanted to understand your thought how large this product can be for us? And what is the opportunity size for this product?

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [6]

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Yes. So I think, first, on the Unified Communications part. I mean, in the Unified, the overall collaboration space, we have in effect communication where we offer both Cisco, Microsoft solutions as well as the GSEP. But -- while it's -- this year has shown a fairly muted growth in that portfolio. We think that is still good opportunity. As especially enterprises are moving towards Microsoft teams and pushing all that PBX to cloud, there is still opportunity in that portfolio.

Coming to the IZO part, I believe in the world of enterprises, particularly if we see, enterprises are still on their cloud journey and the cloud migration. And as they move to cloud, they are looking at rearchitecting their networks to see how to reach the cloud as well as multiple clouds where we have to rearchitect that. They also have their suppliers and their customers getting to access the application through the Internet and the branch-to-branch connectivity or a manufacturing hub to the main offices and so on. So the entire network space is bound to be rearchitected in the coming years. Added to that, the traffic that this network carry is also bound to grow. And what we have in our portfolio of solutions in the IZO is essentially, obviously, starting from the whole software defined and how do you ensure the enterprise will have the flexibility and the agility to shift between Internet and the MPLS. And the hybrid cloud is what we have. And of course, we have the IZO Internet brand, which is a very unique offering in the market, which gives more deterministic performance over the Internet. So I think the whole market size can be viewed upwards of about $4 billion. And this whole market is going through the transformation as well, as they rearchitect the network with -- and the customers moving to cloud and moving to the mobile-first strategy of enterprises.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [7]

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Okay. So out of this $4 billion market size, how much is the addressable market for us in terms of geographical or in terms of verticals?

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [8]

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Yes. So this is the addressable market. I mean, if you look at the entire market, the entire enterprise network is the total market. What we are talking about is an addressable market.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [9]

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Addressable. So the $4 billion is our addressable market, which is fairly big for our size, right?

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [10]

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Right. So mind you, but this will be the MPLS and other network as well as on top of it, Internet. In the international, the movement to the Internet from the MPLS is increasing. And whereas in India, it is still pretty much MPLS and the Internet is still not very reliable. So the characteristics in different markets are slightly different. But the interesting thing is that enterprises are having to rearchitect as they move to cloud because their old network architecture will simply not give them either the performance or the agility and security that they look for.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [11]

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My follow-up is on innovation services. We had won a few there, but it looks like the revenues are not at being recognized or the execution has not yet been started. How should we see this entire innovation services? And how the revenues here will look like in coming quarters because it's been quite muted for last 2 quarters now, on a very, very low base?

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Pratibha K. Advani, Tata Communications Limited - CFO [12]

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Sanjesh, the way I would put this and this is something that we have been talking that, we did anticipate a faster take-off in the products, but I think it's taking a little more time. It's a very interesting portfolio, as Lakshmi mentioned. There are a lot of opportunities. But I think for us to penetrate into the customer ecosystem is taking a little longer. I would continue to look at growth at current levels right now because this is still a portfolio that we are assessing and investing in. So that's the way I would look at showing the growth in your model.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [13]

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But just 1 on this, Pratibha, because I understand we have won some contracts also, right? The execution has not been started or it was just proof of concept or how was it?

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Pratibha K. Advani, Tata Communications Limited - CFO [14]

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Actually, we have started. So if you recall, we won a large contract in MOVE. The execution on that has started, but the revenue recognition has not happened. So we are still in the investment mode in those contracts. And hopefully, from next year, you should start to see some more traction in top line.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [15]

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Okay. That's helpful. One last question from my side. On the free cash flow perspective, when should we see a meaningful free cash flow generation, which helps us in organically deleveraging? Should that be the focus for us in FY '21? And how much should deleveraging are we looking at doing through our internal accruals in FY '21?

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Pratibha K. Advani, Tata Communications Limited - CFO [16]

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Sanjesh, most definitely, all our efforts and endeavor are to deleverage ourselves. We would like to be ideally in the 2.2 to 2.5x range. However, I'll be candid here for us to make a commitment at this point will not be correct given the lot of external factors that are presently at play.

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Sanjesh Jain, ICICI Securities Limited, Research Division - Research Analyst [17]

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Sorry, I got 1 more question. Just on this enterprise part, we said India has grown 11% for us Y-o-Y. Has the competition intensity been fair there because we understand, Reliance Jio has also started the services and growth in enterprise look really amazing. So how should we see here in terms of competitive intensity shaping up in this part of the business?

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [18]

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So we -- obviously, we are coming across competition in some of the accounts. But I think we are quite confident of serving the enterprises because enterprises do require a lot more contextual understanding of them and how we architect and deliver the solution at enterprise-grade with SLAs. So while there is competition, we are quite confident of keeping and improving our market share.

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Pratibha K. Advani, Tata Communications Limited - CFO [19]

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Just to add to what Lakshmi has said, we are really looking at large enterprises. These large enterprises are our customers. And for them, SLAs, the quality of service and the relationship matters. Also, it's important to mention that given the breadth of our portfolio, I think it will still be some time before we'll see a dent on our growth in the enterprise segment.

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Operator [20]

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We take the next question from the line of Prabir Adhikary from RCML Securities.

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Prabir Adhikary;RCML Securities;Analyst, [21]

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I have 2 questions. One is, I guess this 5G whenever this will get implemented, your company is expected to get a lot of benefit out of it. So my question -- my point is -- my question is, when -- are you seeing this 5G implementation in India to start? And by when this develop a significant growth in your data business pertaining to 5G? And another question I have. So what is the status or what is hemisphere? Is there a delay going on in listing this stock?

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [22]

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Yes. On 5G, to be honest, we are evaluating the full impact. I think in India, by the time the auction comes and people implement it, it could be some time. But with 5G, the last mile access will definitely improve. And therefore, the growth of and the stability of the Internet services will grow. And with that, we believe we can also bring and introduce our IZO Internet WAN solutions in India. It will become more applicable. So we generally see this as a fairly positive move in the coming years. And I think I mentioned about NetFoundry. I think it will have a greater play when the Internet becomes a lot more reliable and people move to more cloud and cloud-native technologies. That's my answer on 5G.

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Prabir Adhikary;RCML Securities;Analyst, [23]

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On HPIL, the government is taking steps to a lot HPIL shares to all eligible shareholders. We have provided them the list of shareholders. It has taken longer than anticipated due to admin issues that governments sent. We are expecting allotment in the next month. And I guess, listing thereafter should happen after 2 months of allotment.

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Operator [24]

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(Operator Instructions) We'll take the next question from the line of Bharat Sheth from Quest Investment.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [25]

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So Lakshmi, on this innovation services, so can you give some sense and color on the kind of a funnel? And how much TCV we have won? And how do we see this piece in over a couple of years? I mean, honestly, so there is a little longer than the expected ramp-up. So full color can you give? And when really, we think that can really break even this business?

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [26]

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Yes. Bharat, I think on the innovation services, I think I made a brief comment. We -- from a longer-term perspective, we are in the process of looking at our strategy across all portfolios, our customer segments and markets and so on. So you need to wait for a little while before I precisely come. But on the specific things on innovation services, there are multiple products within that. I think MOVE is something that we have had a big, large success, and we need to now put our heads down, implement and ensure that it can -- that product and the solution can be delivered for this large OEM, auto OEM. And then we look to scale thereafter. And I think it's very scalable proposition in the long term.

Similarly, NetFoundry, as I mentioned, it is an AppWAN, fairly innovative, and I'm very excited about that product. And again, as customers move to cloud-first and begin to use a lot more Internet, this will become a lot more bigger and scalable. Some of the customers that we have already implemented in the overseas locations. The feedback from these customers have been extremely positive because they've seen the performance in many cases go up 10x. They are seeing that because it's a 0 trust security, the implementation of security is extremely easy as well as it brings a lot more agility and manageability of the entire network because it's an application WAN. So I am excited about the product. But if you ask me -- and I believe we need to give it more time before it can really scale.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [27]

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Okay. And what kind of -- I mean for -- whether MOVE as well as the NetFoundry a market opportunity or potential that we look over -- is emerging?

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [28]

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No. As I said, we are working through the overall strategy. And as I said, I'm evaluating all the portfolios, and we probably -- you need to wait a little longer for me to answer this question in terms of potential in some of the innovation services, but MOVE clearly has a much bigger potential, and we can really quantify because all the OEMs, any products that are going to be moving across national borders, and I mean, the auto OEM is one example that automotives are going across boundaries, and MOVE is very relevant from an IoT context or any other logistics providers where the IoT will be relevant. And MOVE has another use case where we call it SIM CONNECT, essentially airlines, many airlines are customers today. As their crew members are going into different countries, they carry iPads and devices, carrying our eSIM of the MOVE product. And at least 3 or 4 airlines have already implemented that. So from a use cases point of view, there is high receptivity. And we believe also MOVE overall, both on the SIM CONNECT as well as on the IoT Connect has a fairly large market potential and in double-digit billions, I would say.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [29]

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Okay. And in your initial remark, you made a comment on this transformation services. There was 2 major transitions: one is transformation is in the services, I mean transition; and one related to large accounts. And despite we have added, I mean, almost 1,000 headcounts during 9 months, but the top line looks muted. So can you give some more color and what kind of opportunity?

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Pratibha K. Advani, Tata Communications Limited - CFO [30]

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Bharat, as Lakshmi mentioned that we are transitioning 2 contracts. So obviously, we have to hire people ahead before you start to see the revenue. And despite that, I just want to highlight that the revenues are growing by 10% year-on-year. So while there has been -- the profitability has been muted, the top line is still growing well.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [31]

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But I think this kind of headcount that we have added, vis-à-vis, I mean, top line, so when do we really see, I mean, sustainable kind of an EBITDA and a growth for this business where we -- once upon on a time, we had a very high hope of growing in high double-digit and high double-digit EBITDA margin also. So can you give -- where do we stand there, I mean?

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Pratibha K. Advani, Tata Communications Limited - CFO [32]

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So those aspirations are very much there. The fact that we are winning large contracts, both in India and internationally, is testimony to our services. I also would like to remind you that this is really a services business, right? And as I mentioned that when I transition, I have to hire people 2, 3 months in advance. They need to be trained. We transition that business. And it's only after that, that revenue starts to come in. There is always a lag between the time that we recognize cost and when revenue starts to come in.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [33]

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Fair, Pratibha, but when do we expect -- I mean, that now -- I mean, since -- 9 months since I told you, we have already added 25 additional headcount. So when do we expect that to really -- I mean, really start kicking in?

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Pratibha K. Advani, Tata Communications Limited - CFO [34]

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Bharat (foreign language), I had mentioned in my last call, expected by Q1, Q2 next year.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [35]

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Okay. So still further, I mean, 3 quarters away, correct? Is that fair understanding?

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Pratibha K. Advani, Tata Communications Limited - CFO [36]

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No. I mean, I said Q1, Q2 next year.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [37]

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So there is -- okay. So maybe 1 or 2 quarters?

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Pratibha K. Advani, Tata Communications Limited - CFO [38]

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Yes, that's right.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [39]

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And this growth service, you said that on large base, I mean, our growth is almost 16%. So what kind of a sustainable growth and EBITDA, I mean, are we looking in next year, I mean? Some kind of color, if you can say.

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Pratibha K. Advani, Tata Communications Limited - CFO [40]

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See, we don't give guidance, Bharat (foreign language), you know that. But as Lakshmi mentioned, we are optimistic on this portfolio. It is delivering results and that itself should be suffice that this portfolio will grow. We will start to see operating leverage. We've actually started to see that operating leverage and margin expansion should continue.

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Operator [41]

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(Operator Instructions) Next question is from the line of Riddhesh Gandhi from Discovery Capital.

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Riddhesh Gandhi;Discovery Capital;Analyst, [42]

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Congratulations on your numbers. Just had a question on your innovation services. As you guys had actually initially committed, you have actually become profitable on growth services. Any guidance with regards to actually how long innovation services losses are expected to continue because it's a reasonably meaningful number?

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Pratibha K. Advani, Tata Communications Limited - CFO [43]

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Riddhesh, we are putting our strategy together and give us some time to come back to you.

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Riddhesh Gandhi;Discovery Capital;Analyst, [44]

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Got it. And so is the aspiration to, in this strategy, rationalize the investments, which we expect to be highly profitable and give us actually attractive return in the future and kind of stop those, which are effectively actually bleeding? So is there a rationalization exercise which we're going through? Because, obviously, we've sort of made a number of investments across the board. I am sure a few are healthy and a few aren't all the while, but are we still looking to rationalize? How we deploy our capital going ahead?

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [45]

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Yes. I think you need to give us some more time. I am evaluating all the product portfolios to look at, both the scalability as well as the margin, the logic for margin expansion, the possibility of doing that and what we would get. But particularly on the innovation side, as I mentioned, I am quite excited about some of these products. And as I said, some of them will take time and some of them, I don't want that to be measured on a quarterly basis to see how it is being done. So we will come back to you when we look at all the products and a broader view on our overall strategy in a quarter or so.

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Riddhesh Gandhi;Discovery Capital;Analyst, [46]

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Sure. And the other question was with regards to the real estate, which remains in Tata Communication. Is there any plans or any strategy, I mean, revolving around the monetization of those assets? Is there any update on that?

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Pratibha K. Advani, Tata Communications Limited - CFO [47]

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Riddhesh, again, this was a question that came last time. The entire process of surplus land is still not over. We still need some time, but we are working on a strategy. And once we are ready, we'll be only happy to share it with all of you, but you have to give us some time.

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Riddhesh Gandhi;Discovery Capital;Analyst, [48]

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But by time are we like -- are we are looking at it actually 6 to 9 months, a year, 18 months? I mean, how long should we be...

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Pratibha K. Advani, Tata Communications Limited - CFO [49]

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I can't give you a commitment right now because the physical possession of handing it over to the government has still not been initiated. So it's difficult for me to give you any kind of time line.

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Riddhesh Gandhi;Discovery Capital;Analyst, [50]

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Got it. And then lastly, as we look at actually free cash flow, I mean, EBITDA has grown reasonably over the last actually few quarters. Just wanted to get a view on how we should be thinking about the free cash flow generated by the business? Are we all -- are we still in an investment mode where we're going to continue to invest the free cash flow into actually the newer products and service offerings?

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [51]

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Yes. I think it sort of goes back to my earlier answer on. Currently, we are in the mode of evaluating all the products for scalability on revenue and margins. And that would clearly dictate. Obviously, product is one, but the underlying network where we have one of the strongest networks in terms of how it is engineered and delivered in India as well as our subsea cables are fairly strong foundations of that. And we continue to make CapEx investments to make sure that, that remains solid. So our investments would be on the core network as well as the products that will ride on top. And we'll have to come back on that. But my sense is that we will continue to invest. Which products, where it is, is what we are looking at.

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Pratibha K. Advani, Tata Communications Limited - CFO [52]

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And the only point I want to add is that our free cash flow year-on-year has also been growing by 25%, 26%. So it is trending in the right direction.

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Operator [53]

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We take the next question from the line of Narottam Garg from Chanakya Capital.

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Narottam Garg;Chanakya Capital;Analyst, [54]

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Yes. This question is for Lakshmi. So you have been in -- as you like complete 6 months and you're looking at the entire portfolio and all the initiatives at the company, would it be fair to assume that as we exit quarter 4, you would be able to give us more color and a more definite plan of how these things shape up for the company as you go forward?

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [55]

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Yes, definitely. I hope to do that. It's coming up to just more than 3 months since I started. So I should be in a position to do that in another 3 months.

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Operator [56]

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Next question is from the line of Aliasgar from Motilal Oswal Securities.

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Aliasgar Shakir, Motilal Oswal Securities Limited, Research Division - Research Analyst [57]

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I have a follow-up on the same innovation and growth services profitability. I just want to understand how should we see the trend of this profitability going forward? Should we assume there are a lot of heavy lifting in terms of your cost structure have been done, and therefore, incrementally, as you grow your revenue, we should see incremental EBITDA margin significantly higher? I'm coming from the point of view that if I see the growth services in this quarter, actually, absolute amount addition is quite low. But I mean, given that the base of growth services EBITDA is very low, we've seen actually that doubling near about. So I'm just thinking about the growth services, firstly, how the profitability trend should be and cost structure should be?

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Pratibha K. Advani, Tata Communications Limited - CFO [58]

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Ali, as you rightly pointed out that while our top line has grown, but EBITDA has grown substantially sequentially. And this is because of the operating leverage that we are now getting on the portfolio, and this trend will only continue.

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Aliasgar Shakir, Motilal Oswal Securities Limited, Research Division - Research Analyst [59]

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So would you be able to share some outlook in terms of your profitability trend in terms of what could be your incremental margins on your revenue? Just any broad range or probably help us out with understanding in terms of 2-year out, what kind of profitability we can expect from this business, considering the kind of growth that you have already given, the 15%, 20% growth that you are expecting for growth services or rather the existing base?

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Pratibha K. Advani, Tata Communications Limited - CFO [60]

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Ali, we don't give guidance. So I wouldn't be able to help you with data points there. But as Lakshmi mentioned, we are continuing to see good funnel growth in this portfolio and it has been growing both the top line as well as the EBITDA has been growing well.

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Aliasgar Shakir, Motilal Oswal Securities Limited, Research Division - Research Analyst [61]

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Okay. I'm not looking for guidance, but just any thoughts around, should I expect the cost structure to sort of not grow very significantly from your -- you've done with your heavy lifting, so it should be more inflationary and then your incremental margin, therefore, should be completely driven by what kind of growth you are doing in this segment?

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Pratibha K. Advani, Tata Communications Limited - CFO [62]

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I mentioned earlier, you will see operating leverage to continue. Also, if I look at my direct cost line, now that's dependent on the kind of contracts and wins that we have and consequently, the investment that we need to make. But yes, you'll definitely see in our operating costs the leverage to continue.

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Aliasgar Shakir, Motilal Oswal Securities Limited, Research Division - Research Analyst [63]

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Okay. And similar point on even your innovation business, how should we see the losses over here. I mean, I understand that given that the scale is too small over here, it would take some time before it could turn around. But again, over year, do we have any such gap in terms of the amount we are willing to spend? Or maybe at what base you think this segment could break even or your cost structure should break even? Just overall, in terms of the portfolio, how it should behave as you grow?

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Pratibha K. Advani, Tata Communications Limited - CFO [64]

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Lakshmi -- I mean, Ali, as Lakshmi mentioned earlier, we are putting our strategy together. And we will come back to you directionally how we want to grow and how we see this portfolio panning out.

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Aliasgar Shakir, Motilal Oswal Securities Limited, Research Division - Research Analyst [65]

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Okay. Just last question is on TTSL. I think earlier, we were waiting for the deal with Bharti regulatory approvals to come for that before we could decide on the deal with TTSL. Now that it is concluded, any update you can share over there?

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Pratibha K. Advani, Tata Communications Limited - CFO [66]

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It's status quo as for now.

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Operator [67]

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Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for closing comments.

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Amur Swaminathan Lakshminarayanan, Tata Communications Limited - MD, CEO & Director [68]

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Thanks, everyone. And I just wanted to summarize. I see the fundamentals to be quite strong. I see the market opportunities as I speak to customers to be quite good. And we have a set of products, and as I said, I'm evaluating, and we are confident of scaling that, but we will come back with more color and light on this in the coming few weeks and months. Thank you.

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Operator [69]

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Thank you. On behalf of Tata Communications, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.