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MOSL: TATA COMMUNICATIONS (Buy)-Dismal quarter-Growth business drives outlook

Tata Communications: Dismal quarter; Growth business drives outlook

(TCOM IN, Mkt Cap USD2.7b, CMP INR636, TP INR730, 15% Upside, Buy)

 

• Subdued data EBITDA – a dampener: Consol. revenue fell 2.6% QoQ to INR40.1b (4% miss), mainly due to a decline in voice revenue (-10% QoQ). Data revenue was flat QoQ at INR29.0b, but investments toward new client acquisitions led to a steep 10% QoQ decline in data EBITDA (INR4.8b) with 200bp margin contraction (16.7%). This dragged down consol. EBITDA to INR5.6b (-9% QoQ, 10% miss). Net loss stood at INR1,210m; adj. for exceptional items, PAT stood at INR411m. Traditional business revenue fell 2% QoQ, with EBITDA margin down 120bp QoQ to 30.4%. Growth services revenue, however, grew strongly by 8% QoQ, with margins up 340bp to -14.1%. Payment Solutions broke even with INR3m EBITDA. For FY18, consol. revenue/EBITDA fell 5% YoY to INR166.5b/INR22.9b (1%/3% miss), while net loss narrowed to INR3.3b.
• Analyst meet highlights: 1) Expect traditional biz revenue CAGR of 5% over FY18-21; margins to be at 29-30%. 2) Growth segment revenue CAGR is expected to be 35% over FY18-21. 3) Expect data EBITDA margin to improve from ~17% to 23-25% by FY21. 4) FY19 capex guidance stands at USD250-275m.
• Growth business set for take-off: Given the dismal 4Q results, we cut our revenue/EBITDA estimate by 3-6% for FY19/20. We expect consol. revenue/EBITDA CAGR of 5%/20% over FY18-20, led by 12%/24% CAGR in data revenue/EBITDA. In FY18, Growth business witnessed a robust 37% revenue jump, led by a strong order book, coupled with the payback from investments. We expect this strong momentum to continue in FY18-20, boosting both Growth and Data business margins, as majority of front-loaded opex is behind. Traditional biz EBITDA should continue growing at a steady 4% CAGR over FY18-20. Moreover, breakeven of the Payment biz EBITDA in 4QFY18 (led by higher ATM transactions) augurs well.