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Tata Communications (TATCOM) provides telecommunications services worldwide. It operates through three segments; Voice Solutions, Data & Managed Services and Real Estate segments. It offers voice & data transmission services; internet connectivity services and other value-added services, such as unified conferencing & collaboration, managed hosting, mobile global roaming & signaling, transponder lease, television up-linking and other managed services, as well as sells and leases bandwidth on undersea cable systems.

Investment Rationale:

Data business to bolster revenue growth: TATCOM is one of the world’s leading wholesale providers of data, IP and mobile signaling services. It has one of the most advanced and largest subsea fiber cable networks, which shares around 30% of the world’s internet routes and connects businesses to 80% of the world’s clouds. In Q2 FY22, all segments in data witnessed growth except for collaboration portfolio. With gradual pick up in travel and re-opening of offices, revival in collaboration portfolio is expected. Further the company is continuously investing in IoT network, cloud infrastructure applications and analytics to enhance its end-to-end offerings. Its diversified product portfolio enables it to mitigate the risk of being dependent on a particular portfolio.

On macro economic front, the cloud, hosting, security & SDWAN market is expected to grow at around 18% CAGR over 2020-24E. TATCOM is well positioned to leverage its wide network infrastructure to benefit from the growth in this segment. We are forecasting a 7% CAGR rise in its data business over FY21-24E.

Voice segment to continue the declining trend: It is one of world’s largest players in the wholesale voice industry and has served approximately 18.2bn minutes of international voice traffic globally in FY21. The global voice market is witnessing gradual decline due to structural headwinds. TATCOM’s voice business has been continuously falling in the past years. Revenue from the Voice segment declined by 20% CAGR over FY17-21. With increasing acceptance of VoIP services by OTT players and consolidation of the domestic telecom market to a limited number of players, we expect TATCOM’s voice segment to de-grow by 15% CAGR over FY21-24E.

Profitable growth with healthy margins: Due to the Covid-19 induced lockdown, the company undertook various cost cutting measures which resulted in improved margins in FY21. In Q2 FY22, mainly on the back of shift of focus towards the more profitable data business, EBITDA margin expanded by 263bps sequentially to 26.7%. TATCOM is continuing to make structural changes to drive productivity, fine-tune its processes and drive manpower productivity to optimize cost. With improved focus on core connectivity segment, we expect the EBITDA margin to be in the range of 25-27% over FY22-24E.

Outlook & Valuation: Cloud-first and Internet-first strategies are accelerating digital adoption which will lead to a strong demand for cloud security and hosting services but due to less customer engagement voice business is likely to de-grow. With new deal wins, continued focus on traditional data and increasing participation in complex deals, we expect TATCOM’s revenue to grow by ~4% CAGR over FY21-24E. We value the company at EV/EBITDA multiple of 11x to its FY24E EBITDA and arrive at a target price of Rs.1,676, reflecting an up-side potential of 20%. Thus we assign a “BUY” rating on the stock.

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