Tata Communications Ltd. share price target

We upgrade Tata Communications’ (TCom) two notches to BUY (from Hold). TCom’s stock price has plunged notably beset by near-term revenue weakness – making the company’s revenue guidance seem rather ambitious. In our view, this presents strong upside potential and compelling risk-reward.

Tata Communications (TCOM)’s 3Q results were a mixed bag as ~10% YoY revenue growth in the Digital portfolio was offset by continued weakness in core connectivity (-1% QoQ).

Tata Communications (TCOM) reported weak results with consolidated EBITDA declining 1% QoQ (5% miss) and margins contracting 60bp QoQ to19.4%.

Tata Communications’ (TCom) H1FY25 revenue print was muted due to subdued orderbook in FY24, and longer deal conversion cycle.

Tata Communications’ (TCom) Q1FY25 revenue print was muted with just 0.8% QoQ growth in the data business; however, TCom has shown a sharp improvement in its consol.

Management reiterated its ambition to double data revenue by FY27 to
INR280b (at 18% revenue CAGR), driven by the DPS segment that is likely to
contribute more than 60% of data revenue.

Tata Communications’ (TCom) Q2FY24 data business revenue grew slower at 10% YoY / 0.7% QoQ due to a drag from G-SIP and fewer events in media. Data business net revenue grew even slower at 8.1% due to higher direct cost, which along with rise in other expenses hurt the underlying EBITDA margin.

Tata Communications’ (TCom) Q1FY24 data and digital services revenue (organic) grew 14.2% and 28% YoY, respectively, which is significant acceleration vs consensus estimates. It believes the growth is likely to sustain, and remains committed to achieving INR 280bn revenue by FY27E in data services.

Tata Communications (TCom) has agreed to acquire Kaleyra, a US-based omni- channel integrated CPaaS player for enterprise value of US$250mn (0.73x CY22 sales). This is likely to enhance TCom’s global position in CPaaS services (which is growing at 25% CAGR as per Juniper), and with The Switch acquisition, TCom’s position in the US may become stronger.

Tata Communications (TCom) has shared an upbeat revenue growth outlook for FY23 27E in its investor meet (on June 7, ’23). The company expects its data revenue to grow by 2x to Rs280bn by FY27 at a revenue CAGR of 18%. This will be driven by >35% growth in its digital services revenue during the same period, and its mix will rise to >50%.

Tata Communications’ (TCom) Q4FY23 data revenue grew 2.2% QoQ / 11.2% YoY sustaining double-digit growth. However, data EBITDA margin dipped 240bps QoQ to 24% due to higher employee cost.

Tata Communications’ (TCom) Q3FY23 data revenue grew 2.9% QoQ / 11.1% YoY. Company maintained good revenue growth momentum even in the seasonally weak quarter, which shows rising execution efforts.