FREE

MOSL: TATA COMMUNICATION (Buy)-Story remains intact-Growth segment to drive profitability

​TATA COMMUNICATION: Story remains intact; Growth segment to drive profitability

(TCOM IN, Mkt Cap USD2.9b, CMP INR676, TP INR811, 20% Upside, Buy)

We spoke with the TCOM management to understand the business outlook post the sale of a couple of businesses. Our key takeaways:

Traditional segment: Expect 5-7% revenue CAGR, 300-400bp margin expansion over FY17-19

After the sale of the data business, the traditional business is largely led by the connectivity business, which is growing at just 2-3%, globally. TCOM should grow faster than the global market due to (a) its deeper reach, particularly in the Asia-Pacific emerging markets, which should support higher growth, (b) its being an independent connectivity player, unlike most players in the market that hold the network through consortium; this allows it to provide better SLA and have low access costs, which in turn improve its competitive position and margin profile.

Post the sale of the data center business, we expect revenue for the traditional segment to grow at a CAGR of 5% over FY17-19. The sale of margin-accretive data center business has led to a 250bp reduction in the traditional segment EBITDA margin to 27.5% in FY17E. We expect EBITDA margin to recover about 300bp over the next two years on (a) high operating leverage from the inherent fixed cost model in the connectivity business, and (b) lower access cost v/s peers. We expect traditional segment EBITDA to grow at a CAGR of 10% over FY17-19 to INR27.9b.