Tata Communications: India CommTech play trading well below global peers

2 Apr 2024 , 11:37 AM

Analysts of IIFL Capital Services take a look at TCOM’s positioning as a CommTech player and the company’s recent strides towards becoming one. A CommTech player lies somewhere between a telco and a system integrator (SI), in terms of asset lightness, margin profile and return ratios. A flurry of new product launches, partnership with NVIDIA and organisational changes are steps towards strengthening TCOM’s CommTech credentials, in analysts of IIFL Capital Services view. TCOM’s target to double its data revenue between FY23 and FY27 entails ~40% digital portfolio revenue Cagr. Acquisitions of Switch and Kaleyra would go a long way in helping achieve this target. Analysts of IIFL Capital Services also note that global CommTech players trade at an average of 1YF 10x EV/sales. At 5x/10x EV/sales for TCOM’s digital portfolio, March’25 fair value per share comes to ~Rs3,092/Rs5,292. This suggests a significant upside, if TCOM’s Digital portfolio business achieves scale and drives re-rating. Analysts of IIFL Capital Services raise Mar’25 TP to Rs2,342. However, demand weakness could weigh on near-term financials and offer a better entry point. Maintain ADD.

Positioning itself as a CommTech player:

CommTech players fall in the middle of the spectrum between telcos on one end and SIs on the other. CommTech players like TCOM work very closely with client teams on the specifications of their requirements, resulting in tailor-made solutions. TCOM offers a single pane of glass architecture for clients to view, monitor and troubleshoot the network.

TCOM’s transition towards a CommTech player is on track:

TCOM’s FY27 revenue target implies 40% revenue Cagr for the Digital portfolio (a proxy for CommTech). The acquisition of Switch has expanded TCOM’s capabilities in media and geographical footprint (US). Integration of Kaleyra (CPaaS) has started on a healthy note, with margins springing a significant positive surprise. NVIDIA’s announcement of a collaboration on AI Cloud connectivity also augurs well.

Global CommTech players command premium valuation:

A glance at global CommTech players indicates 10x average 1YF EV/sales. Three/five out of the eight CommTech players that analysts of IIFL Capital Services looked at are Ebitda/PAT loss-making. However, their average revenue in CY23 was ~US$2.5bn vs US$1bn annualised Q3FY24 run-rate for TCOM; suggesting their significantly better scale. Even if analysts of IIFL Capital Services value TCOM’s Digital portfolio at 50% discount to global CommTech on EV/sales, potential upside comes to 50%.