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Covid headwinds impact performance…

About the stock: Tata Communications (TCOM) is the leading global digital ecosystem enabler.

* It provides its clientele with state-of-the-art solutions, including a wide range of communication, collaboration, cloud, mobility, connected solutions, network and data centre services

Q1FY22 Results: TCOM reported muted Q1FY22 results.

* Topline came in at | 4103 crore, down 6.8% YoY & up 0.7% QoQ. Data revenues (forming ~76% of revenues) declined 2.2% YoY (up 0.6% QoQ), largely due to slower deal conversion and moderation of UCC traffic

* Consolidated EBITDA came in at | 986 crore, down 5.3% YoY and 2.9%QoQ due to one-off with at 24% (up 37 bps YoY and down 89 bps QoQ. PAT of | 296 crore (up 15% YoY, down 1% QoQ) was aided by lower depreciation and tax rate.

What should investors do?

TCOM’s share price has grown at ~25% CAGR over the past five years.

* We maintain BUY on the company

Target Price and Valuation: We value TCOM at a target price of | 1725

Key triggers for future price performance:

* Growth to be driven by platforms viz. a) cloud, edge, security, b) next generation connectivity, c) NetFoundry d) MOVE, IoT, wherein each have robust market size growth potential of 15-25% CAGR in next four to five years

* We expect ~8% revenue CAGR in FY21-23E in the overall data segment, driven by likely acceleration in growth from H2FY22 onwards. We expect overall margins to at 25.5% in FY23 vs. 24.9% in FY21

* Strong cash flows generation to aid deleveraging

Alternate Stock Idea: Apart from TCOM, we like Bharti Airtel in the telecom space

* A play on favourable industry structure - a good enough kicker for eventual hike in tariff as well as superior digital play in the medium to long term

* BUY with a target price of | 720

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