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MOSL: TATA COMMUNICATIONS (Buy)-Data business delivers, offsetting the roughness in Voice

Tata Communications: Data business delivers, offsetting the roughness in Voice

(TCOM IN, Mkt Cap USD2.6b, CMP INR639, TP INR750, 17% Upside, Buy)

 

• EBITDA up 9% QoQ: Consol. revenue fell 2.4% QoQ (-5.6% YoY) to INR41.1b (3.6% miss) due to subdued voice revenue, partly offset by better data revenue. Data EBITDA growth of 17% QoQ (led by sharp cost-optimization measures) led to an 8.6% QoQ (+7.7% YoY) increase in consol. EBITDA to INR6.1b (7% beat) and a 150bp QoQ expansion in margins to 14.9%. Voice EBITDA dropped 28% QoQ to INR738m. PAT stood at INR101m. However, adjusted for INR298m of one-time interest income from Tata Sons and INR160m tax jump due to DTA revaluation, PAT stood at -INR37m v/s INR291m in 2QFY18.
• Traditional business fuels data growth: Traditional business witnessed a steep 400bp QoQ margin improvement to 31.6%, led by 2% revenue growth, coupled with 3% cost savings. This acted as a key catalyst, driving a 4%/17% QoQ rise in data revenue/EBITDA to INR28.8b/INR5.4b, with the margin at 18.7% (+210bp QoQ). Further, transformation segment EBITDA grew 20% QoQ to INR404m. Growth segment reported a 9% QoQ increase in EBITDA loss to INR622m.
• Near-term earnings headwinds; long-term growth intact: Management indicated that TCOM could see revenue/EBITDA impact of USD50-55m/USD7-8m in FY19E due to the sale TTSL to Bharti Airtel. Further, management is exploring acquisition of TTSL’s enterprise business, but the contours of the deal remain unknown. Subsequently, we cut EBITDA by 1%/4% for FY19/20E. However, over the next 2-3 years, (a) completion of transformation exercise should improve the traditional segment margin and (b) growth and ATM segments should breakeven, driving healthy EBITDA CAGR of 20% over FY18-20E.