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Tata Communications (TCOM IN) Summary

Core Information

• Share Price: INR286
• Target Price: INR405 (+42%)
• Market Cap (USD): 1.4B
• Average Daily Trading Volume (USD): 4.5M
• Sector: Telecommunications
• Country: India
• Recommendation: BUY (Unchanged)

Key Financial Highlights

• 4QFY14 Revenue: INR52.1b (+5.3% QoQ and +18.5% YoY), higher than forecast due to one-time revenue from Neotel.
• 4QFY14 EBITDA: INR7.8b, unchanged QoQ. EBITDA margin was 15% (-70bps QoQ and +390bps YoY), lower than forecast due to Neotel's margin decline.
• EBITDA CAGR (FY14-16): 21%.
• EBIT margin: Expected to increase to 5.7% in FY16 from 4.8% in FY14.
• Net debt/EBITDA: Expected to fall to 2.3x in FY16 from 3.1x in FY14.
• Free Cash Flow (FCF): Expected to be INR7.3b over FY15-16, with a significant pickup going forward.
• Net DPS (INR): Expected to rise to 6 in FY16 from 5 in FY14.
• Core P/E: Expected to decrease to 18.8x in FY16 from 46.5x in FY15.
• P/BV: Expected to decrease to 8.1x in FY16 from 10.5x in FY15.
• Net dividend yield: Expected to increase to 2.1% in FY16 from 1.6% in FY15.
• ROAE: Expected to rise to 48.3% in FY16 from 3.1% in FY14.
• ROAA: Expected to rise to 1.6% in FY16 from 0.1% in FY14.

Revenue and EBITDA Growth Projections

Business Segments

• Global Data and Managed Services (GDMS):
  • Revenue grew 17.2% YoY in FY14.
  • Expected to drive 18.5% CAGR over FY14-16.
  • EBITDA margin expected to increase to 20.7% in FY16 from 19.8% in FY14.
• Global Voice Services (GVS):
  • Revenue grew 18.4% YoY in FY14.
  • Expected to grow at 7.5% CAGR over FY14-16.
• New Businesses:
  • Revenue grew 11.7% YoY in FY14.
  • Expected to grow at 5.0% CAGR over FY14-16.

Balance Sheet and Capital Structure

• Net debt/equity: Expected to fall to 2.3x in FY16 from 3.1x in FY14.
• Stake in Neotel: Expected to be sold, reducing debt by INR27b and net debt/EBITDA to 1.6x in FY16.
• Land parcels: Expected to be sold in FY15, contributing to balance sheet strengthening.

Valuation

• Sum-of-the-parts valuation:
  • Land Value: INR39.3b.
  • Investment in TTSL: INR5.9b.
  • Total EV: INR221b.
  • Net Debt: INR102b.
  • Market Cap: INR115b.
  • Target Price (TP): INR405, based on sum-of-the-parts valuation.

Valuation of Surplus Land

• Net value recovered: INR39.3b.
• Value per share: INR138.

Valuation of TCOM's Stake in TTSL

• EV/Sub - IDEA (INR): 4,005.
• Discount: 50%.
• EV/Sub - TTSL (INR): 2,003.
• Value to TCOM (INRm): 5,918.
• Value per share (INR): 20.8.

Summary Results (Quarterly and Cumulative)

Key Ratios

• EBITDA margin: Expected to rise to 15.7% in FY16 from 15.5% in FY14.
• EBIT margin: Expected to increase to 5.7% in FY16 from 4.8% in FY14.
• Pretax profit margin: Expected to increase to 2.7% in FY16 from 1.3% in FY14.
• Net debt/EBITDA: Expected to fall to 2.3x in FY16 from 3.1x in FY14.
• FCF yield: Expected to rise to 20.1% in FY16 from 1.3% in FY14.
• P/BV: Expected to fall to 8.1x in FY16 from 10.5x in FY15.

Conclusion

Tata Communications is expected to benefit from the growth in global data usage and strong cash flow generation from its GDMS and GVS businesses. The company's balance sheet is expected to strengthen through the sale of its stake in Neotel and land parcels. The target price of INR405 is based on sum-of-the-parts valuation, which includes the value of land and its stake in TTSL. The company's financial performance and valuation metrics suggest a positive outlook for its future growth and profitability.