Tata Communications Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Telecommunication - Service Provider

Company

Tata Communications Ltd

Reco Price
Rs. 642.85
Price Target (1 Year)
Rs. 772.00
Upside
20.09%

Date

November 25, 2016
Sensex
26316.34
CNX Nifty
8114.30

Exchange

Code

NSE
TATACOMM
BSE
500483

CenturyLink Level 3 merger and Data business to drive future growth of the company.

Building the enterprise business:
Tata Communications’ returns and margins will improve with successful execution of its mix shift strategy, which is comprised of providing service bundle infrastructure solutions to enterprise clients. The CenturyLink deal reiterates the importance of this strategy, which is being widely adopted by other leading global players as well. Tata Communications Ltd (TCOM) has been shifting towards enterprise clients (49% in FY12 vs. 58% of the clients in FY16), led by its bundled service offerings and increased value proposition. We believe that this allows the company to gain a better value for its services and thereby improve margins.

CenturyLink acquires Level 3:
Two of the largest global communication network players – Century Link and Level 3 (TCOM’s peers) have announced a merger in a cash-plus-stock deal at an EV of U$ 34bn. The deal has been finalized at a 40% equity premium with high multiples of 4.5x EV/Sales and 12x EV/EBITDA. Combining these networks will allow Level 3 to fill connectivity gaps in its IP VPN business and will allow CenturyLink to improve its revenue mix from enterprise clients led by managed services. On a pro-forma basis, CenturyLink will derive 76% of revenues from enterprise clients post-merger (vs. 64% now).

Data business to drive incremental margins for TCOM:
The strong growth in the data segment comes on the back of traction in the traditional services portfolio, which grew 6% YoY, whereas, growth services portfolio grew 14% YoY. Traditional services continued to absorb losses from the growth services and posted higher EBITDA margin. The reduction in losses seen in the growth services portfolio will aid overall consolidated margins. In addition, the subsidiaries that host Tata Communications Payment Solutions Limited (TCPSL) and Tata Communications Transformation Services Limited (TCTSL) continue to post a strong numbers, with a 19.9% YoY revenue growth and a 240 bps YoY margin expansion that will help the company in achieving accelerated performance.

JV with ST Telemedia:
The company is achieving the right milestones at the right time, with many of its strategic transactions materializing as per plan. In October 2016, it completed its India Data Center JV with ST Telemedia, and by end of this year it is expect to conclude the Singapore leg of that venture. The company has also been working very closely with ST Telemedia to identify areas for business integration, to enhance customer service and to realize the full potential of the business partnership in the Data Center space, and beyond. Both partners are very committed to ensuring a smooth transition for existing customers and the employees of Tata Communication in India and Singapore. This JV will clearly display the benefits at an operating PBT level, with a reduction in net debt.

Stock Data

CMP (Rs)
637.95
Face value (Rs)
10
52 Week Range (Rs)
687.90 - 325.00
Market cap (Rs Crores)
18247.13
Price To Book Value (x)
-62.75
P/E Ratio (x)
N/A
EV/EBIDTA (x)
9.32

One Year indexed Stock Performance

Tata Communications LtdSensex
Tata Communications Ltd
Return (%)
1m
6m
12m
36m
Absolute
-2.62
39.03
44.04
135.15
Sensex
-6.32
1.68
1.38
27.72

Shareholders

(in %)
30-Sep
Promoter
74.99
Public
25.01
Others
0.00
Total
100

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Industry

India is currently the world’s second-largest telecommunications market and has registered strong growth in the past decade and half. The Indian mobile economy is growing rapidly and will contribute substantially to India’s Gross Domestic Product (GDP), according to report prepared by GSM Association (GSMA) in collaboration with the Boston Consulting Group (BCG).

The liberal and reformist policies of the Government of India have been instrumental along with strong consumer demand in the rapid growth in the Indian telecom sector. The government has enabled easy market access to telecom equipment and a fair and proactive regulatory framework that has ensured availability of telecom services to consumer at affordable prices. The deregulation of Foreign Direct Investment (FDI) norms has made the sector one of the fastest growing and a top five employment opportunity generator in the country.

The Indian telecom sector is expected to generate four million direct and indirect jobs over the next five years according to estimates by Randstad India. The employment opportunities are expected to be created due to combination of government’s efforts to increase penetration in rural areas and the rapid increase in smartphone sales and rising internet usage.

International Data Corporation (IDC) predicts India to overtake US as the second-largest smartphone market globally by 2017 and to maintain high growth rate over the next few years as people switch to smartphones and gradually upgrade to 4G. Driven by strong adoption of data consumption on handheld devices, the total mobile services market revenue in India is expected to touch US$ 37 billion in 2017, registering a Compound Annual Growth Rate (CAGR) of 5.2 per cent between 2014 and 2017, according to research firm IDC. India is expected to have over 180 million smartphones by 2019, contributing around 13.5 per cent to the global smartphone market, based on rising affordability and better availability of data services among other factors.

Profile

Tata Communications, founded in 1986, is the leading global international wholesale voice operator and provider of International “Long Distance Enterprise Data” and “Internet Services” across India. The company provides its advanced solutions capabilities and domain expertise across its domestic and international network. With its wide portfolio of services including transmission, IP, converged voice, mobility, managed network connectivity, hosted data center, communications solutions and business transformation services to global and Indian enterprises & service providers, the company enjoys a leadership position among its peers.

Having a strong international presence, Tata Communications has offices in 80 cities in 40 countries across the globe. The company has expended its footprints in the African market with strategic investment in South African operator, Neotel. The company operates through three major segments namely, Global Voice Solutions (GVS), Global Data and Managed Services (GDMS) and South African operations.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar 14
Mar 15
Mar 16
Mar 17E
Mar 18E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • % Margin
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Exceptional Income / Expenses
  • Tax
  • Profit After Tax
  • Extra Items
  • Minority Interest
  • Share of Associates
  • Consolidated Net Profit
  • Adjusted EPS
  • 17714.21
  • -
  • 15325.08
  • 2389.13
  • 13.49
  • 177.68
  • 2566.81
  • 427.47
  • 2139.34
  • 1851.90
  • 287.44
  • 216.22
  • 343.28
  • 160.38
  • -59.25
  • -1.40
  • 1.69
  • 101.42
  • 5.64
  • 19913.34
  • 12.41
  • 16952.24
  • 2961.10
  • 14.87
  • 429.41
  • 3390.51
  • 750.79
  • 2639.72
  • 2161.09
  • 478.63
  • -105.22
  • 370.46
  • 2.95
  • 0.00
  • -1.80
  • 0.14
  • 1.29
  • 0.05
  • 20605.53
  • 3.48
  • 17916.70
  • 2688.83
  • 13.05
  • 608.50
  • 3297.33
  • 718.27
  • 2579.06
  • 2274.49
  • 304.57
  • -258.60
  • 256.40
  • -210.43
  • 0.00
  • -1.78
  • 0.37
  • -211.84
  • -7.43
  • 20465.91
  • -0.68
  • 17327.71
  • 3138.20
  • 15.33
  • 0.00
  • 3138.20
  • 370.00
  • 2768.20
  • 2275.00
  • 493.20
  • 0.00
  • 163.02
  • 330.18
  • 0.00
  • 2.50
  • 0.10
  • 332.78
  • 11.67
  • 21372.35
  • 4.43
  • 17766.52
  • 3605.83
  • 16.87
  • 0.00
  • 3605.83
  • 285.00
  • 3320.83
  • 2275.00
  • 1045.83
  • 0.00
  • 345.69
  • 700.14
  • 0.00
  • 2.80
  • 0.10
  • 703.04
  • 24.65
Source: Stockaxis Research, Company Data

Valuation

Tata Communication Ltd. has a competitive business model and with centuryLink 3 merger and increase in demand of Data business will turnaround the overall performance.

At CMP of Rs 642.85, the stock is trading at 8.49x (EV/EBITDA) FY18 which is very low valuation for such growth oriented stock whereas it trades at 9.32x (EV/TTM EBITDA) & 11.39x (EV/EBITDA) FY16. We assign Buy rating on stock with target price of Rs 772.00.

 

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