Tata Comm: Behind turnaround, a louder voice

The segment grew 15% year-on-year, aided by the fall in the rupee

The Tata Communications stock on Wednesday jumped 10.3 per cent to Rs 251.9 after the company announced its first quarterly profits since 2008-09 after market hours on Tuesday. The improved performance was led by an annual 660-basis-point rise in the earnings before interest, tax, depreciation and amortisation (Ebitda) margin, to 16.9 per cent. On a sequential basis, the margin increased 240 basis points.

The spurt in margins helped the company record a net profit of Rs 80 crore for the quarter ended September. A net profit, after 12 quarters of losses, signals a turn in the core business performance and indicates the measures to improve the financials are paying off. As a result, analysts are upgrading the stock. Rumit Dugar and Udit Garg of Religare Institutional Research have raised their FY14 and FY15 Ebitda estimates six per cent. Better cost-control discipline, lower capex and improving revenue growth prospects, specially in data, have helped, says a telecom analyst of a US-based brokerage. Also, with net debt of the core business ($1.48 billion, or Rs 9,000 crore) at its peak levels, reduction in borrowing costs (four per cent, against six per cent two years ago) and lower capex intensity would help deleverage further, the company feels.

Given the improvement in recent quarters, most have a ‘buy’ rating on the stock, with targets ranging from Rs 300- 400. The stock is valued at 23 times its earnings and five times its enterprise value/Ebitda, based on FY15 estimates. While the price has seen a jump of 49 per cent since the beginning of August, at the target prices mentioned, there is an upside of 19-59 per cent.

Any news on the sale of land or the South African subsidiary Neotel would see a spurt in prices. Of the target price, analysts estimate land value at Rs 110 a share and the Neotel stake sale at Rs 30 a share.

At Rs 4,950 crore, revenues in the quarter rose 10 per cent sequentially and 16 per cent year-on-year, ahead of estimates. The voice business, which contributes 50 per cent to revenues, grew 15 per cent year-on-year, aided by the fall in the rupee. Margins for this segment grew 480 basis points year-on-year to 10.9 per cent, though sequentially, these were down 40 basis points, as the June quarter had seen growth in this business. The management has scaled its forecast for voice business margins (on a sustainable basis) 100 basis points to nine-9.5 per cent. To reduce the volatility in voice revenues, the company is reducing its exposure to the spot market and adopting the contract route. The voice business has been a pain due to falling call rates resulting in weak performance for the segment and losses for the company. Stability returning to the business gives comfort.

Global data (40 per cent of total revenues) saw margins rise 540 basis points sequentially and 660 basis points year-on-year to 22.1 per cent, helping improve overall margins. The company has indicated this year, the segment’s margins would be 20 per cent. While global data revenues increased 11 per cent and 19 per cent compared to the previous and year-ago quarters, respectively, Ebitda growth was 47 per cent and 70 per cent, respectively.