Tata Communications Ltd. share price target

Tata Communication reported a better-than-expected performance on the operating front led by superior revenues and margins in the data segment. The topline was at | 4403 crore, up 5.6% YoY, 0.1% QoQ, led by superior data revenues (forming ~82% of revenues) that grew 9.9% YoY. EBITDA came in at | 1042 crore, up 26.2% YoY, with margins at 23.7% (up 385 bps YoY) driven by strong data margins of 27.1% (up 450 bps YoY), aided by structural cost efficiency (likely to remain) of ~| 100 crore (including moving of employee base in India) and Covid-19 led benefits (savings in travel costs,...

Growth segment Revenue grew 8% to INR9.2b, led by new deals while EBITDA jumped 16% to INR1.2b. TCOMs order book is equally growing in India/international markets and stake in the data center partnership important and has no immediate plans to monetize the land parcel. Voice segment revenue was flat QoQ at INR8b while EBITDA grew 46% QoQ to Payments solution segment revenue was down 37% QoQ to INR520m and EBITDA loss stood at INR40m (v/s profit of INR220m in 4QFY20), affected by the lockdown as average transactions declined to 56 in 1QFY21 (v/s 84 in 4QFY20). Despite some impact of COVID-19 on deal conversions, TCOM witnessed healthy addition in its order book, which is equally growing in India/international markets and across business verticals. It saw marginal QoQ revenue growth due to one-time gain in 4QFY20 and benefit of increase in traffic from customers, which was offset by lower revenue from other part of the Increased bandwidth usage led growth in this business.

Data business continued to witness healthy traction with strong margin turnaround in growth and stable trajectory in traditional services driving the profitability. The company witnessed strong 9.8% YoY, 9.1% QoQ revenue uptick in the growth segment driven by a surge in conferencing traffic. Margins expanded 510 bps QoQ to 11.6%, recording double digit margin for the first time. They also guided for double digit growth in data revenue and EBITDA growth in the medium term and would be sharing their strategic outlook later this month. We conservatively bake in 7.3% revenue CAGR...

15 June 2020 Data EBITDA growth at 15% QoQ was the strongest (without any one-offs) in the last 15-16 quarters, supporting 15% consol. But the traditional segment (contributing 60%/99% to revenue/EBITDA) saw flattish EBITDA, despite robust 24% QoQ traffic growth. Yet, new-age businesses (Growth and Innovation) benefited from the lockdown, contributing 60% of EBITDA growth. We increase our FY21/FY22E EBITDA estimates by 9% given the (a) better- than-expected EBITDA, (b) steady traditional business, and (c) managements confidence on improving trajectory in the new age business segments. Consolidated revenues were up 4% QoQ to INR44b (in line with est.) with voice segment revenue at INR8b (down 1% QoQ) and data segment revenue at INR36b (up 5% QoQ). On back of the COVID-19 crisis, there has been significant uptick in Internet traffic (+24% QoQ) and conferencing revenue (+20% QoQ), resulting from quick deployment of global work-from-home (WFH) measures and solutions. Consolidated EBITDA jumped 14.2% QoQ to INR8.7b (5% above est.); EBITDA margin expanded 180bp QoQ to reach 19.2%.

The data business continued to witness healthy traction with growth and traditional services driving the profitability. The sequential weakness in margin was due to negative EBITDA in transformation services due to oneoff transition cost and one-time client related issue aggregating to | 61 crore, during the quarter. The company remains confident of expanding the growth services portfolio, notwithstanding muted growth in its key part viz. Unified Communications. They attributed IZO platform as the key driver of the growth services traction, going ahead, as it has a humongous addressable market size of US$4 billion. We conservatively bake in 7.2%...

The data business has continued to surprise positively with traction in traditional services, (past operator's consolidation impact, aided by efficient churn management) & third consecutive quarter of growth services profitability. Overall GDS total order book (TCV sales) on TTM basis was stable at $1.4 billion. For Q2FY20, total order book (TCV sales) was at US$259.3 million. While traditional data business order book was at US$130.3 million, up 12.7% YoY, growth services were at US$129 million, up 35.9% YoY. We conservatively bake in 8.7% revenue CAGR in data...

performance in the second quarter, with revenue/EBITDA growth of 3%/1% QoQ (pre-IND-AS 116) exceeding our estimate. Data revenue/EBITDA increased 6%/3% QoQ, as Traditional segment (two thirds contribution to Data) grew strongly, while Growth segment improved off a low base. This 11 November 2019 was partly offset by an increase in EBITDA loss in Innovation segment and continued downtrend in Voice segment with 9% EBITDA decline. (2) Traditional deal pipeline has improved with a margin potential of 35-36%. (3) RJio is not a big threat for Enterprise business, and TCOM is confident of protecting and growing market share in the segment. Traditional and Growth offer stable EBITDA growth, but increased spends on new product launches and deal expenses in Innovation and Transformation continue taking away the gains. We value TCOM on an SOTP basis and cut our target multiple to 6x/2x on FY21E Data/Voice EBITDA, given its slow earnings growth, allocation of Traditional and Growth EBITDA to other segments and stance.

We now remove the land value of | 263/share from our target price and value the residual company (TCL) at an SOTP target price of | 260/share. We value GDS business at 5x FY21 EV/EBITDA while the voice business is...

Data business reported a robust performance during the quarter on the back of a strong performance in traditional as well as growth services. Traditional services, past the operator consolidation impact and aided by efficient churn management led profitability with margins of 36.2%. On growth services, the order book for the quarter grew 17% YoY, which provides revenue visibility for the segment. The overall order book remained stable at US$1.4 billion. However, on account of continued investment in innovation services, EBITDA margins are expected to be capped in the near term. We build in 70...