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We interacted with Tata Communications (Tcom) to get its views on voice and data businesses. Company expects wholesale voice (95% ILD) growth of mid to high single digit though it has grown at 12-13% outpacing industry run rate. In wholestataale voice, the focus is more on free cash flows rather than EBIDTA margins (which are likely to be 8-8.5% on average) with FY13 FCF of US$120mn. On the data side, historically the business has grown at 15% which can be the trend line along with 20% margin. Notably, if one adjusts for the new initiatives (like ATMs), data margins have much higher potential. Neotel has turned around at EBIT level since Q4 FY13 and Tcom remains in discussion with Vodacom to sell its entire stake in the South African arm; if successful, the deal would remove a key overhang on consolidated profitability. Capex intensity is set to decline as large cable builds are behind which would support cash flows. We tweak our estimates and base on an improved outlook upgrade the stock to BUY with revised 9-12mth target of Rs340.
Healthy data revenue traction; see margin at ~20% with scope for upside
Tcoms data business has grown at ~17% cagr over past three years and we believe the revenue run rate of 15% appears sustainable given range of products deployed along with launch of new services like ATMs. Although company guided for 20% EBIDTA, there are sufficient levers available to increase margin if one considers that newly launched services are making EBIDTA losses.
Upgrade to BUY on improved outlook
We turn positive on Tcom as data business is set to drive EBIDTA margin over next few years while lower capex intensity would bolster cash flows. While data leads growth, wholesale voice would chug along at steady run rate and generate robust free cash flows. We value Tcom on a sum of parts (core+land+TTSL stake) basis and upgrade the stock to BUY with revised 9-12mth target of Rs340.
| Y/e 31 Mar (Rs m)|| FY12|| FY13|| FY14E|| FY15E|
| Revenues|| 141,961|| 172,130|| 198,163|| 226,650|
| yoy growth (%)|| 19.0|| 21.3|| 15.1|| 14.4|
| Operating profit|| 17,915|| 20,597|| 27,545|| 32,864|
| OPM (%)|| 12.6|| 12.0|| 13.9|| 14.5|
| Reported PAT|| (7,947)|| (6,234)|| 1,636|| 3,097|
| yoy growth (%)|| 2.3|| (21.6)|| -|| 89.4|
| EPS (Rs)|| (27.9)|| (21.9)|| 5.7|| 10.9|
| P/BV (x)|| 3.7|| 5.9|| 5.6|| 4.9|
| EV/EBITDA (x)|| 12.6|| 11.5|| 8.6|| 7.1|
| ROE (%)|| (27.1)|| (39.3)|| (3.6)|| 19.4|
| ROCE (%)|| 0.7|| 1.5|| 4.7|| 7.1|
India Infoline News Service / 08:59, Sep 15, 2014
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