Tata Communications – BUY

India Infoline News Service | Mumbai |

Tata Communications’ (Tcom) data revenues have grown at ~17% cagr over the past three years and the company expects 15% to be the trend line for data business.

CMP Rs288, Target Rs315, Upside 11%

Buoyancy in data revenues to continue; room for margin expansion

Tata Communications’ (Tcom) data revenues have grown at ~17% cagr over the past three years and the company expects 15% to be the trend line for data business. Although it expects 20% EBIDTA margin for data but this includes drag from new services such as ATMs, mobile broadband and cloud, enterprise voice and business video etc; since these services are far from maturity, their current losses eat in to data profitability. Over a longer term, we believe data margins have a higher potential compared to existing levels.


Wholesale voice to chug along; focus more on FCF

Over the past several years, wholesale voice has been a commoditized but a cash cow business for Tcom whose market share is inching towards 20%. Tcom’s market share is more than the combined share of the 2nd and 3rd ranked players, an indication of its scale. Company indicated that it’s not chasing volumes but is consciously focused on generating free cash flows which would grow from ~US$120mn in FY13. For instance in the current year, H1 saw wholesale voice generate FCF of US$84mn on the back of pricing strength in India though voice margins did normalize to 8.3% in Q3 from an elevated 11% in previous quarter due to moderation in India termination pricing .


Improved operational traction supports our BUY reco

We turn optimist on Tcom’s core business after several quarters of guarded outlook as data services would drive incremental margin upside while voice continues its steady growth. Data business also has inherently faster growth potential, less of commoditized products and better margin profile. Our numbers do not exclude any impact of Neotel stake sale though we expect leverage position to improve significantly if the transaction with Vodacom is completed. We build in 15% revenue cagr over FY13-15 while EBIDTA is likely to post a faster 26% compounded growth over the same period. We value the company on SOTP basis to account for its stake in Tata Tele as well as legacy land holdings; recommend BUY


Financial summary
Y/e 31 Mar (Rs m)
FY13
FY14E
FY15E
FY16E
Revenues
172,130
196,632
221,664
248,482
yoy growth (%)
21.3
14.2
12.7
12.1
Operating profit
20,597
30,281
34,136
38,515
OPM (%)
12.0
15.4
15.4
15.5
Reported PAT
(6,234)
2,615
2,915
4,280
yoy growth (%)
(21.6)
-
11.5
46.8
EPS (Rs)
(21.9)
9.2
10.2
15.0
P/BV (x)
5.8
4.9
4.1
3.4
EV/EBITDA (x)
11.4
7.7
6.7
6.0
ROE (%)
(39.3)
2.9
15.9
19.5
ROCE (%)
1.5
5.9
7.3
8.5
Source: Company, India Infoline Research
BSE 714.05 34.45 (5.07%)
NSE 715.40 35.75 (5.26%)

***Note: This is a NSE Chart

 

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