Tata Communications - Upping its game to position as global player - ICICI Securities

Digital transformation is a great theme, particularly considering that India has very few good ICT enterprise enablers. TCom has been working on transforming into a global digital solutions provider from a 'data pipe'. It has taken huge efforts and time to reach inflection point. New CEO and CFO come from software background, which shows Board intent, and are likely to catalyse creation of a 'solution mindset'. TCom is also engaging with SIs (TCS) to fast expand its reach, which should add to growth, in our view. FY21 was a dud year on revenue front, but should recover in the near future. We see EBITDA growth at a CAGR of 14% and EPS growth at 36%, over FY21-FY23E, on low base and financial leverage. We value the stock at 18x FY23E EPS at Rs1,461 (from Rs1,232). We have changed the valuation metrics from the earlier SOTP-based methodology. Upgrade to BUY (from Add).

- Focus on six platforms. TCom has disclosed it would focus on six services for future growth and that it has built capabilities for 'right to win': 1) MOVE IoT, 2) Network++, 3) InstaCC, 4) collaborations, 5) Media, and 6) MMX. The market size for each of these services is staggeringly high, but the addressable market for TCom is much lower. However, the addressable market is expanding due to technological evolution (e.g. internet-based services), or TCom's own innovations / product launches.

- Internet opening up the global market. Internet services are becoming important for WAN transport, helped by adoption of cloud, but it is also increasing the complexity of network architecture. We see internet opening up a huge opportunity for TCom, which earlier suffered from weak presence in the developed markets for its traditional WAN services. We see TCom winning new large-scale network transformation deals due to: 1) it being among the largest internet backbone; 2) level playing field in the emerging market for managed network services such as SD-WAN; 3) NetFoundry, wholly owned subsidiary, could be a game changer; and 4) partnership with SIs such as TCS.

- Unified communication - focus is on managed services and CCaaS. SIP trunking was a volume-driven market with large share of revenues coming of video conferencing companies such as Teams, Webex, etc. TCom is shifting focus to more managed services and cloud-based UC solutions, where demand from enterprises is rising (has a component of fixed fee). It also plans to grow InstaCC, which provides cloud-based contact centres (CCaaS). UCaaS and CCaaS are growing in mid-teens globally.

- Media services and managed cloud services. Media is a niche service and TCom has made huge inroads in the market of live events and video CDNs. This segment was most impacted from the covid situation. Opening of the economy and multi-channel broadcasting should help TCom grow its media services. Company offers managed cloud services only in India, nonetheless the opportunity is huge. We therefore expect more efforts from TCom to drive growth in managed private cloud services in the coming years.

Shares of TATA COMMUNICATIONS LTD. was last trading in BSE at Rs.1140.05 as compared to the previous close of Rs. 1121.05. The total number of shares traded during the day was 25990 in over 1668 trades.

The stock hit an intraday high of Rs. 1151.7 and intraday low of 1127.85. The net turnover during the day was Rs. 29657410.

Source : Equity Bulls

Keywords