Tata Communications - Good operating performance marred by one-offs - PhillipCapital

Tata Communications' (TCom) Q2FY13 results were a mixed bag with revenue exceeding estimates and EBITDA margins disappointing on account of one-offs. Below are key highlights of the result and the conference call:

Strong revenue growth: TCom's revenue was ahead of estimates and stood at Rs 42.7bn, growing 27% YoY and 4% QoQ. Global Voice Business (GVS) revenue stood at Rs 21.1bn growing 34% YoY and 3% QoQ aided by INR depreciation of 2% QoQ. Global Data Services (GDS) revenue stood at Rs 16.7bn, up 25% YoY and 5% QoQ. Neotel's constant currency revenue grew 5% QoQ, but was marginally lower YoY. Management commented that the strong revenue growth is due to significant MNC business growth and in-roads that the company made into new generation businesses. The company commented that its deal pipeline for GDS grew 86% YoY.

EBITDA margins below estimates due to several one-offs and increased investments - EBITDA stood at Rs 4.4bn, down 6% QoQ and 8% YoY. EBITDA margins stood at 10.3% declining 270bps QoQ and 250bps YoY. The management mentioned that EBITDA was negatively impacted due to the following one offs (1) US$ 3.5mn in Q2FY13 Impact due to regulatory changes (WPC Wimax charges and increase in license fee rate; part of which is recurring), (2) Rs 185mn, one time actuarial loss on Canada pension fund increasing personnel costs, (3) Unfavorable settlements (US$ 2.5mn adverse impact) in Global Voice Services as compared to positive settlements previous quarter (US$ 2.5mn positive impact), and (4) Increased sales spending and investments for future growth. Adjusting for these one-offs, we estimate EBITDA margins at 11.0-11.5%, below our estimates. We note that increased sales spending and investments in sales force for the data business isn't a one-off as the management intends to continue to invest in order to win more large clients and enhance reach.

PAT loss of Rs 2.7bn - TCom's PAT loss for the quarter stood at Rs 2.7bn, impacted by the above mentioned one-offs and forex loss of Rs 183mn. The company's debt on core business is US$ 1.6bn and that on Neotel's books is ZAR 5.1bn (US$ 0.6bn). The company has incurred capex of US$ 151mn and has stuck to its US$ 250-300mn capex guidance for FY13.

Outlook: TCom is seeing significant business traction as its revenue is growing at a healthy pace bettering our estimates. H1FY13 has however seen significant cost inflation for the core business leading to poorer than expected EBITDA performance. On account of its significant investments and focused strategy on managed services, we believe that the company's robust revenue growth is likely to continue with cost structure stabilizing. We revise our estimates incorporating stronger than expected revenue while building in muted margin performance for FY13. Maintain BUY.

Source : Equity Bulls

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