Upside for Tata Communications hinges on data growth, esp newer segments

Land monetisation could be a short term trigger

After falling 14 per cent on lower than expected results in the December quarter, the stock of Tata Communications more than erased the losses gaining 26 per cent since then. Half of those gains came in the last two trading sessions due to an increase in target price. The triggers being land bank monetisation and robust growth in data services.

With the government looking to offload its 26 per cent stake in the company through an offer for sale, the company will have the option to monetise the 756 acres of surplus land across the country. Analysts at CLSA peg the gross value of the land at Rs 11,800 crore with net value post taxes in case of sale at Rs 9,400 crore. This would translate to a per share value of Rs 331. The research firm has increased the target price of the stock to Rs 1,475 from Rs 1,365 per share earlier; there is an upside of 20 per cent from the current levels.

The key fundamental trigger however remains the prospects and pace of growth of its data services, especially newer segments. What should aid this are partnerships such as the one the company announced recently with Google Cloud. This will enable businesses to deploy and access Google Cloud services through Tata Communications solutions such as the IZO Managed Cloud.

The partnerships are expected to reflect in the revenues of its data business especially the growth services segment. This segment accounted for 18 per cent of data revenues in Q3 and is the growth engine both for the data segment as well as overall revenues.

Given the disappointment in the December quarter, the street will keep an eye on deal conversions which took a hit due to Covid-19 and holidays. The other factor will be the ability of the company to sustain and improve its margins. Despite the muted revenue performance in Q3, the company managed to improve margins by 680 basis points to 24.8 per cent. With some of the costs expected to reverse and higher maintenance expenditure margins could be under pressure.

While prospects are good, given the 3.5 times gains in the stock price over the past year there is little room for disappointment. While valuations at 18 times FY22 earnings estimates have discounted some of the upsides, analysts believe there could be more rerating if the company can deliver on the revenue growth front.