* TCOM reported better-than-expected operating performance after a lag of few quarters and the same was driven by healthy EBITDA growth in the Data segment. Cost control aided EBITDA increase in Data segment despite elevated losses in Growth Services.
* Growth Services continued to record robust growth of 38.5% yoy and Traditional Services also reversed its negative trend to report revenue growth. However, revenue miss was due to disappointing performance in the Voice segment.
* Revenue growth in growth services is expected to remain robust while focus on cost saving in entire data business would aid EBITDA. Management hopeful of exiting FY19 with EBITDA margin of 20% vs 18.6% in 3Q.
* Continued weakness in Voice business and factoring impact of TTSL is leading to EBITDA cut of 5%/6% for FY19/20E. Recent underperformance, higher value per share for land parcel and valuation roll forward is resulting to rating up-grade to ACCUMULATE with revised PT of Rs730 (7x FY20 EV/EBITDA).
EBITDA beat driven by cost control initiatives in Data segment
Consolidated revenue at Rs41.1bn was down by 5.6% yoy, 3.4% lower than our estimates largely on account of revenue miss in the Voice business. Consolidated reported EBITDA at Rs6.1bn was up 7.7% yoy, 7% beat on our estimate. EBITDA beat was driven by lower-thanexpected network cost and other opex. EBITDA margin at 14.9% expanded by 184bps yoy, aided by an increase in margin in the Traditional Services. Network cost at Rs19.1bn was down by 12.2 yoy (10% lower than estimate) and operating expense was down 9.8% yoy at Rs8.4bn (4% lower than estimate). Adj. PAT stood at Rs103mn vs Rs13mn in Q3FY17.
Underlying data revenue growth remained in single digit despite healthy increase in Growth Services and Transformational Services, however, trajectory of the same is expected to improve. Our estimates now factor in impact of TTSL contract termination in FY19 which has lowered revenue/EBITDA by Rs3.2bn/Rs600mn. Contrary to expectation, EBITDA loss in Growth Services increased owing to change in the product mix while future guidance on loss reduction remains intact. Some products within the Growth Services are expected to see EBITDA break-even by end-FY18, which has already been factored in. As visibility on the land demerger is now clear, we have increased per share value for land parcel in our target price to Rs276 (assumed 50% earlier). Clarity on land demerge, recent underperformance and valuation roll forward to FY20 is resulting to up-grade in our rating. However, the company will have to deliver consistently on data business EBITDA for sustain re-rating as it has seen patchy performance in last few quarters. Another key event to watch out for would be deal consummation for TTSL’s Enterprise business.
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