Consistent margin gains are key for Tata Communications stock: Analysts

Tata communications transferred 773 acres of land valued at about Rs 12,000 crores in to Hemisphere Properties India (HPIL)

The Tata Communications stock hit the upper circuit, gaining 5 per cent, as the uncertainty over the surplus land demerger ended with the company transferring 773 acres valued at about Rs 12,000 crore into a new entity — Hemisphere Properties India (HPIL).  

All shareholders of Tata Communications will get shares in the demerged entity in the ratio of 1:1, with the record date set at November 18. The demerged entity needs to be listed within two months and the government, which owns 51 per cent, is expected to start the process. 

The surplus land was skewing the process of valuing Tata Communications as it formed a large part of the stock price even after factoring in the discount to its asset value. 

The stock is now expected to trade on its fundamentals rather than on the value attributed to the surplus land. There could be more upside, though.

Rohit Chordia and Aniket Sethi of Kotak Institutional Equities Research said there is surplus real estate (excluding the demerged land) on the firm’s books that is owned by the company.  

This could be contiguous to the land demerged into HPIL. Any change in the land use clause for HPIL land parcels could unlock value for Tata Communications. 

While analysts have not included the same in their estimates of fair value, any move on this front would be positive for shareholders. 

Investors will look at the performance of its two key segments of data and voice. The data portfolio, which accounts for 78 per cent of revenues, reported 12.2 per cent year-on-year growth in the June quarter. 

This was led by traditional services, which is the largest segment of the data business. 

Margins for the business were up 490 basis points over the year-ago quarter on lower customer churn, higher productivity gain, and lower other expenses. 

Analysts at ICICI Securities believe margin gains, driven by improvement in growth services business of the data segment, are key for the stock performance. 

Revenue and profit growth in the voice business is also a key trigger as margin for this part is half that of the company’s. 

Investors should await consistent growth and margins in the data business, as well as the impact from any new entrant such as Reliance Jio, before considering the stock.