Tata Communications’ second buyout of the year gets thumbs up from analysts

Tata Communications’ proposed buyout of US-based Kaleyra for $100 million is expected to give its CPaaS (Communications Platform as a Service) business a fillip. In terms of the numbers, Kaleyra has a gross debt of $225 million and a net debt of $150 million.

This marks the second buyout for Tata Communications, positioned as a global digital ecosystem enabler, during the year. In May, it completed a deal to acquire The Switch Enterprises, a New York-headquartered company, giving it a bigger play in immersive video experiences. A report put out by Emkay Research after the Kaleyra deal said it was a positive in the long run, although it might impact margins in the short-term. “The acquisition will help Tata Communications in getting a better foothold in the US and European (Italy) markets, make further inroads in BFSI, retail and digital commerce industries plus form teams with expertise in technology, engineering and R&D. It will also the company fulfil its ambition of doubling data revenue over FY23-27 (Rs 28,000 crore FY27), as it would add around 15% to its existing revenue,” it said.

According to Deven Choksey, Promoter and MD of KRChoksey Group, a wealth management firm, the acquisition story of the company makes sense. “They have been making buyouts where there is a clear strategic rationale and that is a smart thing to do. In fact, that is why its growth part is playing out well,” he says. In that context, Emkay’s report states the deal will reduce the EBITDA margin for FY25 to 21-22 per cent, assuming Kaleyra operates at 0-7 per cent.”

The way Tata Communications has gone about its business, thinks Choksey, is to build a portfolio of services. “That is largely through acquisitions. That said, it is important to absorb those new companies well, else it will be a challenge,” he explains. Tata Communications has been helped by a favourable business environment and as Choksey puts it, there is no challenge with respect to demand. “They are in a supply-driven situation and all existing capacity is being absorbed. When that does not happen, it can pose a bit of a challenge.”