Published on 2/12/2019 10:30:50 AM | Source: ICICI Securities Ltd

Hold Tata Communications Ltd For Target Rs.371 - ICICI Securities

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Strong margin in traditional services continues

Tata Communications’ (TCom) Q2FY20 EBITDA (ex-real estate revenues) came in at Rs7.9bn, up 21.7% YoY (5% above estimates) on higher margin in Traditional Network Services. TCom’s TCV wins have been healthy at US$0.5bn driven by Growth Services. The disappointment for the quarter was slower growth in Growth Services and lower margin in TCTS, while the management expects recovery in coming quarters and believes EBITDA margin expansion will continue. We await new MD’s briefing on the strategy, and future growth path for TCom. We have increased EBITDA estimate by 1.4-1.5% and target price to Rs371 (earlier: Rs311) as we rollover to FY22 and deduct Rs47/sh for AGR liability. Maintain HOLD.

* GDS revenue rose 10.7% YoY on good show by Traditional Services: TCom’s Q2FY19 revenue grew 4.9% YoY (up 2.5% QoQ) to Rs42bn, hurt by a sharp 12.5% YoY fall in GVS revenue to Rs8.7bn. GDS revenue grew 10.7% YoY (+3.7% QoQ) to Rs33.6bn (I-Sec: Rs33.4bn). GDS revenue growth was driven by strong show in Traditional Services, which was hurt last year from telcos’ consolidation in India. Within GDS, Traditional Services revenue grew 7.2% YoY to Rs21.6bn; Growth Services revenue grew slower at 16.2% YoY to Rs7.9n. We note Growth Services, and Innovation Services have witnesses decline in revenue from Q4FY19 on one-off events. TCTS’ revenue grew strong 27.5% YoY to Rs3.2bn.

* Traditional Services deliver strong EBITDA, yet again: TCom’s EBITDA rose 21.7% YoY / 0.8% QoQ to Rs7.9bn. GDS EBITDA rose strong 28.5% YoY / 2.1% QoQ to Rs7.1bn, while GDS EBITDA margin rose 270bps YoY to 21.2%. Within GDS, Traditional Services EBITDA rose strong 30.2% YoY to Rs8.2bn as EBITDA margin improved to 37.8% (up 620bps YoY). We believe Traditional Services’ margin benefited from lower customer churn and higher productivity gain, which we believe is sustainable. The company has indicated margin in the range of 35-36%. Growth Services’ EBITDA loss rose to Rs1.22bn (from Rs0.9bn YoY). TCTS’ EBITDA margin drops to 5.6% from 12.5% in Q2FY19 on aggressive pricing to showcase capacities. GVS EBITDA came in at Rs812mn, down 15% YoY / down 9% QoQ.Net profit came in at Rs539mn, lower on higher tax of Rs1.1bn on remeasurement of deferred tax asset, which adversely impacted tax by Rs525mn.

* GDS’ TCV win of US$0.5bn in H1FY20: In Q2FY20, TCV win increased 12.6% to US$259bn. Growth Services order book grew 36% YoY to US$129mn, and Traditional Services’ was down 3.7% YoY to US$130mn (vs US$109mn revenue for Growth Services in Q2FY19).


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