Tata Communications (TCOM)
Telecom
Difficult to build an upside case despite recent correction. We do not see nearterm
upside to any of three value drivers of TCOM stock – (1) surplus land monetization
remains in limbo, (2) TTSL’s financial performance and outlook remain weak, and
(3) core business faces increasingly challenging global macro environment. We
introduce our consolidated estimates for FY2012-14E and reduce our SOTP-based
target price to Rs180/share from Rs205 earlier. Reiterate REDUCE.
Core business faces global economic slowdown challenges; balance sheet stretched
TCOM’s core business (wholesale voice and data services to global carriers and enterprises)
prospects are highly sensitive to the health of the global economy. A recession or slowdown could
lead to a sharp slowdown in global voice volume growth and also exacerbate the already prevalent
pricing pressure in the voice business. The company’s data revenue growth, a bright spot in recent
years, could get hit as well. Our estimates and those of the Street face downside risks should such
a recessionary scenario materialize.
Potential P&L headwinds could further pressure the company’s already stretched balance sheet.
TCOM ended FY2011 with a net debt of Rs76.6 bn, implying a net debt/ TTM EBITDA ratio of
6.3X. We note that the company has since taken a stake in its South African investee company
Neotel to >50%. Full consolidation of loss-making (at the EBITDA level) and highly leveraged
Neotel dents leverage ratios even further.
Do not see upside risks to other drivers, surplus land and TTSL stake, either
Core business valuation forms only about 20% of our SOTP valuation for TCOM. The balance 80%
comes from the company’s stake in TTSL (22%) and surplus real estate assets (58%). We present
our SOTP-based fair valuation for the company in Exhibit 1. Our SOTP break up is –
Core business valued at Rs35/share – based on 6X FY2013E estimated consolidated EBITDA of
Rs15.3 bn less net debt of Rs82 bn
9% stake in TTSL (post the recent rights issue) valued at Rs39/share (no holdco discount)
Surplus land assets valued at Rs105/share – at 50% discount to the fair value
Introduce consolidated estimates
We have incorporated the full consolidation of Neotel into our estimates. Exhibit 3 gives our
condensed consolidated financial forecasts for TCOM.
Telecom
Difficult to build an upside case despite recent correction. We do not see nearterm
upside to any of three value drivers of TCOM stock – (1) surplus land monetization
remains in limbo, (2) TTSL’s financial performance and outlook remain weak, and
(3) core business faces increasingly challenging global macro environment. We
introduce our consolidated estimates for FY2012-14E and reduce our SOTP-based
target price to Rs180/share from Rs205 earlier. Reiterate REDUCE.
Core business faces global economic slowdown challenges; balance sheet stretched
TCOM’s core business (wholesale voice and data services to global carriers and enterprises)
prospects are highly sensitive to the health of the global economy. A recession or slowdown could
lead to a sharp slowdown in global voice volume growth and also exacerbate the already prevalent
pricing pressure in the voice business. The company’s data revenue growth, a bright spot in recent
years, could get hit as well. Our estimates and those of the Street face downside risks should such
a recessionary scenario materialize.
Potential P&L headwinds could further pressure the company’s already stretched balance sheet.
TCOM ended FY2011 with a net debt of Rs76.6 bn, implying a net debt/ TTM EBITDA ratio of
6.3X. We note that the company has since taken a stake in its South African investee company
Neotel to >50%. Full consolidation of loss-making (at the EBITDA level) and highly leveraged
Neotel dents leverage ratios even further.
Do not see upside risks to other drivers, surplus land and TTSL stake, either
Core business valuation forms only about 20% of our SOTP valuation for TCOM. The balance 80%
comes from the company’s stake in TTSL (22%) and surplus real estate assets (58%). We present
our SOTP-based fair valuation for the company in Exhibit 1. Our SOTP break up is –
Core business valued at Rs35/share – based on 6X FY2013E estimated consolidated EBITDA of
Rs15.3 bn less net debt of Rs82 bn
9% stake in TTSL (post the recent rights issue) valued at Rs39/share (no holdco discount)
Surplus land assets valued at Rs105/share – at 50% discount to the fair value
Introduce consolidated estimates
We have incorporated the full consolidation of Neotel into our estimates. Exhibit 3 gives our
condensed consolidated financial forecasts for TCOM.
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