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Tata Communications - Rising visibility on revenue growth - ICICI Securities

Posted On: 2021-10-24 15:29:43 (Time Zone: IST)


Tata Communications' (TCom) Q2FY22 data business revenue dipped YoY on various reasons, but company has given comfort on reaching double-digit growth with a sustained RoCE of 25-30%. It has seen double-digit orderbook growth (a significant improvement), and decrease in churn from price erosion and termination. It aspires for price hike (network services) to support investment into infrastructure vs the general norm of price reduction. TCom is in a sweet spot with corporates looking to significantly invest in upgrading their networks, and adoption of next-gen connectivity. TCom's ability to provide digital services only add to TAM. We remain positive on the telecom enterprise opportunity, and TCom is the best pure-play in this business. Though we have cut our EBITDA for FY22E / FY23E by 4% and 2%, the EPS cut is small on controlled capex and lower debt. Maintain BUY, with an unchanged target price of Rs1,750 (P/E - 22x FY23E).

  • Data net revenue dipped 2.5% YoY / up 2.1% QoQ: We are closely tracking net revenue (total revenue minus direct cost), which is more representative of the underlying performance for TCom. Data net revenue dipped 2.5% YoY (+2.1% QoQ) to Rs22.5bn. TCom remains confident on improving its revenue growth trajectory on the back of: 1) double-digit growth in the orderbook, after a challenging past few quarters; 2) high base of SIP trunking behind; 3) slippage of revenue on chip shortage and logistics to H2; 4) decreased churn from price erosion, and termination of contracts; and 5) focus returning to investment into network from significant rise in demand for digital services. TCom orderbook increase was aided by both small and large deals with ~80% of the orders coming from existing customers.
  • Data EBITDA (adj) margin at 31.8%: Data business EBITDA declined 3.3% YoY (+12.7% QoQ) to Rs10.5bn despite a one-off gain of Rs500mn on delayed employeecost recognition and reversal of provisions. EBITDA margin remains higher (vs guidance of 23-25%) due to lower reinvestment as intended by the company for driving revenue growth. Transformation business saw EBITDA loss of Rs210mn on provisioning, and onerous contracts which should see normalisation in H2FY22.
  • FCF conversion remains healthy: TCom capex stood at Rs7.7bn (US$100mn), and it has reiterated its guidance of US$250mn for FY22. It has reduced net debt by Rs250mn in H1FY22, lower due to payment towards dividend of Rs4bn. STT (data centre business in which TCom has 26% equity stake) is planning to increase its data centre capacity from 135MW to 400MW in next five years, which would require investment of Rs60bn-90bn depending on land investment. The spend will be a mix of debt and equity, and the company intends to maintain its stake, which implies TCom will have to invest (proportionately) for STT growth as well.

Shares of Tata Communications Limited was last trading in BSE at Rs. 1387.50 as compared to the previous close of Rs. 1427.85. The total number of shares traded during the day was 36165 in over 4664 trades.

The stock hit an intraday high of Rs. 1460.00 and intraday low of 1372.10. The net turnover during the day was Rs. 50643978.00.


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