Tata Communications: An outlier in telecom space

Strong data business growth, asset sales & expansion should keep revenue growth at robust levels

In a sector wracked with volatility and stock price spikes, Tata Communications has been one of the few telecom stocks which has seen a secular uptrend in prices over the last one year. While business to consumer sector (B2C) peers have posted December quarter results which reflect multi-year operational lows, Tata Communications (B2B model) has stood out. Robust growth in data services segment (revenues up 11 per cent, operating profit up 20 per cent year-on-year) helped the company post adjusted consolidated revenues and operating profit ahead of estimates.

Going ahead, strong traction in data, cost cutting efforts and expansion in growth drivers (digital-internet of things) should help boost revenues. Free cash flows for the nine months ended FY17 stood at Rs 460 crore as against Rs 290 crore in the year ago period. This should improve, according to analysts at Emkay Global Financial Services. "Data segment is expected to deliver healthy performance going forward with margin improvement and continued cash generation." This segment is expected to witness double-digit revenue growth over the next year in dollar terms, excluding the data centre business. The company wants to create services around internet of things (IoT) security and mobility space. Data contributes about 57 per cent of revenues and operating profit margins in the business at over 21 per cent are much higher than other segments.

In the voice business, the company continues to face pricing pressures, leading to lower realisations and segment performance below expectations. Revenues in the quarter from this segment fell 18 per cent over the year ago period. Operating profit margins in the segment are nothing to talk about ranging from 4.2-6.6 per cent over the last four quarters. It is no surprise that the company is focussing on cost control in this business to maintain and improve free cash flows going ahead.

The other feature that could keep the stock in demand is valuations. Phillip Capital analysts say that current valuation of 7 times estimated FY18 enterprise value to operating profit doesn't fully capture the core value of the business, and there is significant rerating potential as it divests more non-core businesses. The company has been divesting assets, notable being the South African telco Neotel and data centres in India and Singapore. While the India data centre deal is completed and the company received $250 million after deal related costs, taxes and debt, the other divestments are likely to get completed in the current quarter.