Tata Communications - Transition hiccups? - ICICI Securities

Tata Communications' (TCom) Q3FY21 EBITDA (excl. real estate revenue) came in at Rs10bn, in-line with our subdued expectation, down 10% QoQ / 38.7% YoY. This quarter was particularly disappointing with significant deceleration in net revenue growth in Growth services (13.2% YoY). The company sees this as transitional due to few misses in order wins, which were multi-fold larger than the usual contract it bids for. The cost may start rising from next quarter on normalisation of cost saving from Covid and higher cable repairs. TCom has generated healthy FCF (> PAT) and deleveraging of 11% YoY of net debt in Q3FY21. We have cut our EBITDA estimates by ~1% each for FY21E / FY22E. Our target price has increased to Rs1,110 (from Rs1,014) on roll forward to Sep'22. Maintain ADD though we see more valuation rerating, if the company delivers strong revenue growth. As per news article (link) government to sell residual stake in TCom this fiscal.

- GDS net revenue grew 8.8% YoY while total was muted at 3.6%: We would hereon closely track net revenue (total revenue minus direct cost), which is more representative of the underlying performance for TCom (like AGR for mobile services). GDS net revenue grew slower at 8.8% YoY (flat QoQ) to Rs23.5bn due to 13.2% YoY (but dip 6.1% QoQ, which was disappointing) increase in Growth services (incl. Innovative services) to Rs4.3bn. Traditional services' net revenue grew steady at 7.0% YoY (+1% QoQ) to Rs18.7bn. Total GDS revenue grew 3.6% YoY (down 2.6% QoQ) to Rs36bn. Higher net revenue can be attributed to strong growth in NPL and IP-T in Traditional services, and media and security services in Growth segment, which has lower direct cost (while UCC/SIP-T has remain flattish which has higher direct costs). By customers, enterprise segment revenue has grown 5.3% YoY (63% to GDS), and service providers' segment revenue was up 0.9% YoY.

- Some cost normalisation and one-offs hit sequential margins: Cost had few exceptions: 1) Covid-related savings such as travel, etc. worth Rs500mn (since Q1FY21), some of which has reversed in Q3FY21; and 2) Rs430mn one-off cost benefit in Q2FY21; and Rs300mn one-off costs related to GVS burdened Q3FY21. TCom has been working on realigning costs to changing business model, which has led to Traditional services' EBITDA margin expanding to 42.9% (vs 37.7% in Q3FY20); but it dipped sequential. Growth services' (incl. Innovative services) EBITDA came in at Rs230mn vs loss of Rs970mn in Q3FY20, but sequentially the EBITDA decline on slower revenue growth. Subsidiaries incurred EBITDA loss of Rs40mn vs breakeven in Q2FY21 due to weak performance in TCTS. TCom's reported EBITDA jumped 38.7% YoY (dip 10% QoQ) to Rs10bn driven by GDS EBITDA growth of 45% to Rs9.8bn.

- FCF generation improves; deleveraging begins: Capex is under control at Rs3.4bn (capex intensity: 8.1%). TCom has generated FCF (EBITDA minus capex) of Rs6.6bn in Q3FY21. Its net debt has dipped by Rs6.6bn (down 8.3% QoQ and 11% YoY) to Rs79.7bn, which indicates strong FCF generation which should have also helped from release of working capital. Notably, tax rate may remain low due to accumulated losses in international business, which has turned PBT positive and further boosted FCF.

Shares of TATA COMMUNICATIONS LTD. was last trading in BSE at Rs.1051.25 as compared to the previous close of Rs. 1129.95. The total number of shares traded during the day was 84581 in over 9040 trades.

The stock hit an intraday high of Rs. 1097 and intraday low of 1040. The net turnover during the day was Rs. 89623997.

Source : Equity Bulls

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