Neutral Tata Communications Ltd For Target Rs.2,000 Motilal Oswal Financial services Ltd
Weak 1Q; aspires for double-digit EBITDA growth in FY27
* Tata Communications (TCOM) delivered a subdued 1QFY27 with reported EBITDA rising 8% YoY (8% miss) as margin contracted ~90bp QoQ. Adjusted for prior period provisions, EBITDA grew ~13% YoY (flat QoQ, ~5% miss).
* Data revenue grew 11% YoY (flat QoQ), driven by 17% YoY growth in digital portfolio (+1% QoQ), especially Interaction (+32% YoY) and Next-Gen Connectivity (+31% YoY). Core connectivity grew ~6% YoY (flat QoQ). However, adjusted for FX benefits, data revenue inched up ~4% YoY.
* TCOM aspires to deliver double-digit reported EBITDA growth in FY27, driven by acceleration in network growth and reduction in digital losses by optimizing the portfolio mix and aligning sales incentives to contribution margin rather than just revenue growth.
* We cut our FY27/28 EBITDA by 3%/1% due to weaker 1QFY27 and a gradual ramp-up in EBITDA margins. We model ~10%/13% revenue/EBITDA CAGR over FY26-29, with margin expanding to ~21% by FY29 (vs. 19.4% in FY26).
* We believe the new management has hit all the right notes so far by shifting its focus towards profitable growth, rather than just revenue growth. However, we await more clarity on the management’s strategy and improvement in execution before we turn more constructive on TCOM.
* We reiterate our Neutral rating on TCOM with a revised TP of INR2,000.
Data revenue up 11% YoY (flat QoQ); profitability remains weak
* Gross revenue at INR65.8b grew 10.5% YoY (flat QoQ, our est. INR66.7b). However, adjusted for FX, consol. revenue growth was muted at ~2.8% YoY.
* Data revenue at INR57.1b grew 11.3% YoY (flat QoQ), driven by ~17% YoY (~1% QoQ) growth in the digital portfolio and ~5.7% YoY (flat QoQ) growth in core-connectivity revenue. Adjusted for FX, growth was weak at ~4% YoY.
* Net revenue (a proxy for gross margin) at INR36b grew ~9% YoY (-1% QoQ) due to weaker digital margins (-2% YoY vs. 17% YoY growth in gross revenue).
* Consolidated Reported EBITDA at INR12.3b grew 8% YoY (-4% QoQ, 8% miss) as margin contracted ~90bp QoQ (-40bp YoY) to 18.7% (145bp miss).
* Adjusted for the prior-period provision of INR0.5b, normalized EBITDA at INR12.8b rose ~13% YoY (flat QoQ, 5% miss) as margin contracted ~15bp QoQ to 19.5% (+40bp YoY, 65bp miss).
* Reported PAT at INR1.3b declined 29% YoY (49% QoQ, ~64% miss).
* Adjusted for INR1.1b exceptional items, PAT came in at INR2.4b (+14% YoY, flat QoQ, 35% miss), due to weaker EBITDA, lower other income (-24% YoY, 68% miss), and higher interest costs (+5% YoY, 9% higher vs. our estimates).
* Net debt rose INR8b QoQ to INR104b, with net debt-to-EBITDA inching up to ~2.1x (vs. 2x QoQ).
* Committed capex stood at ~INR6.6b in 1QFY27 (vs. INR5.4b in 4QFY26), while cash capex grew relatively lower at ~9% YoY to INR6.9b (down ~4% QoQ).
* Reported FCF outflow of INR4.4b (vs. INR8.3b QoQ and INR6.2b outflow YoY). ? Reported RoCE (annualized) moderated to 14.7% from 14.9% in 4QFY26.
Valuation and view
* TCOM aspires to deliver double-digit EBITDA growth in FY27, driven by a focus on acceleration in network growth, reduction in digital losses through portfolio mix optimization, and aligning sales incentives towards profitable growth.
* We believe the new management has hit all the right notes so far by shifting its focus towards profitable growth, rather than just revenue growth. However, we await more clarity on the management’s strategy and improvement in execution before we turn more constructive on TCOM.
* We cut our FY27/28 EBITDA by 3%/1% due to weaker 1QFY27 and a gradual ramp-up in EBITDA margins. We model ~10%/13% revenue/EBITDA CAGR over FY26-29, with margin expanding to ~21% by FY29 (vs. 19.4% in FY26).
* We value TCOM’s data business at 9x Sep’28E EV/EBITDA (earlier Jun’28) and the voice and other businesses at 4x EV/EBITDA. Further, we ascribe INR80b (INR281/share) value to TCOM’s 26% stake in STT Datacenter (implying ~USD3.2b equity value) to arrive at our revised TP of INR2,000 (earlier INR1,950). We reiterate our Neutral rating.
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