Strong performance; healthy outlook…
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, lower SG&A costs and concession from the government from international entities). The company reported a PAT of | 257.8 crore, up ~2.4x YoY.
Strategic growth plans paint a healthy future ahead
The company has laid down a strategic direction for growth with steps such as deeper engagement with key clients, cleaner structure, automation in processes and greater ownership of customer outcomes. Tata Communication intends to transform into a solution platform and has launched Secure Connected Digital Experience (SCDX), a platform based solution for digital experience for its enterprise customers. Its medium term financial targets include (1) double-digit EBITDA growth led by double digit data revenue growth, continued cost optimisation, (2) RoCE of 20% in the next three years and (3) healthier balance sheet with significant reduction.
Data segment margin witnesses upward shift
A turnaround in growth services was visible with a second consecutive quarter of double digit margins along with a healthy trajectory in traditional services driving profitability. The funnel addition has been highest in the last two years across all portfolios including network transformation and unified collaboration. The company expects the same to get converted into an order book and then revenues, over the next couple of quarter. We bake in 8.8% revenue CAGR in FY20-22E in the overall data segment, largely driven by traction in growth and innovation services. We expect data margins to expand to 25.4% in FY22 vs. 19.3% in FY20, driven by enhanced growth segment margin trajectory and structural cost control measures.
Valuation & Outlook
The consistent performance of the data segment is impressive with step up in margins led by scale & cost initiatives. The rising internet traffic and work from home (WFH) are structurally positive for the company. We revise our EBITDA estimates upwards by ~20% and ~14% for FY21 and FY22, respectively. The company’s strategic growth plan, focused approach and consistent improvement in data segment warrant a multiple re-rating, a part of which is visible in the price run up. We believe continued performance and deleveraging possibilities bode well for the company. Thus, we upgrade to BUY (vs. HOLD earlier) with a revised SoTP target price of | 880/share.
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