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MOSL: TATA COMMUNICATIONS (Buy)-A weak quarter, but long-term prospects promising

​Tata Communications: A weak quarter, but long-term prospects promising

(TCOM IN, Mkt Cap USD3.0b, CMP INR678, TP INR780, 15% Upside, Buy)

• Flat EBITDA on weak data segment performance: Consol. revenue fell 2% QoQ (-6.5% YoY) to INR 42.2b (4% miss) due to a decline in voice revenue (-6.4% QoQ, -20% YoY) to INR14.3b. Consol. EBITDA stood at INR5.6b, marginally up by 1% QoQ (-14% YoY, 4% miss), as a 2% drop in data EBITDA was offset by 17% voice EBITDA growth. Core PAT turned negative at INR2.5b v/s INR323m in the previous quarter. Adjusted PAT was down 10% QoQ to INR 0.3b (adj. for INR1.9b provision for TTSL investment and other exceptional provisions of INR0.3b.)
  
• Data EBITDA impacted by high churn, TTSL revenue loss: Data segment (80-85% of EBITDA) disappointed with flat QoQ revenues at INR27.8b, coupled with a 60bp margin contraction. Within data, traditional segment (~70% of data revenue) saw revenue/EBITDA decline of 3%/7%, attributed to high one-off churn. Further, transformation segment saw 9% QoQ EBITDA drop due to the sale of TTSL. Growth segment was the only silver line, with 16% QoQ jump in revenues, reducing EBITDA loss by INR105m to INR572m.
  
• Uncertainty over next two quarters; long-term growth intact: TCOM may face near-term headwinds from a) TTSL sale to Airtel, which could risk a portion of INR50-55m revenue exposure, b) likely TTSL’s enterprise business acquisition and its unknown contours, c) recovery of traditional segment revenue loss. This, coupled with a weak 2QFY18, led to a cut in FY18/19 EBITDA estimates by 5%/9%. However, TCOM’s strong competitive position and management’s healthy growth outlook for growth and traditional segments augur well. We expect 15% EBITDA CAGR over FY17-20E.