Tata Communications: Surge in traffic, digitisation trends to power revenue

Surge in traffic and digitisation trends to power revenues

The Tata Communications (Tata Comm) stock was up 8 per cent in trade on Tuesday after the company reported better-than-expected performance in the March quarter. Management commentary on achieving double digit growth for the data business on a consistent basis also boosted sentiment. 

Tata Communications is among a small list of companies that saw an upward revision in operating profit for financial year 2020-21 (FY21) and FY22 on the back of multiple growth drivers. 

Growth in the March quarter was entirely driven by the data segment, which accounted for 81 per cent of revenues and over 90 per cent of operating profit. Within the data segment, new age businesses (Growth and Innovation), aided by the lockdown, contributed the bulk of profit growth. Operating profit and margins for the Growth business, which contributes 24 per cent to data revenues, more than doubled on a smaller base. This business includes cloud platform and services, managed hosting, security, broadcast, and video streaming among others. Lower losses of Innovation (cloud platform, mobility services) is the other margin driver as the business posted a loss of Rs 133 crore at the operating level. 

 

 

Despite overall operating profit growth, the company reported a loss at the net level of Rs 272 crore due to a Rs 378 crore exceptional item. Adjusted net profit for the quarter was Rs 103 crore as compared to a loss of Rs 27 crore a year ago.

Given the corporate digitisation trends, sharp surge in data traffic, especially after the onset of the pandemic and the shift from products to being a platform services company, is expected to boost its revenues going ahead.

Deleveraging of the balance sheet (debt of over Rs 9,176 crore) and resolution of the adjusted gross revenue demand by the Department of Telecommunications (DoT) are additional triggers for the stock. 

While net debt to operating profit under 3 times is in control, how the pending Tata Teleservices acquisition pans out could influence debt levels. Though business prospects are strong, given the sharp stock surge (up 143 per cent) since the start of this financial year, average target prices at the Rs 630 levels leaves little upside from current levels.