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MOSL: TATA COMMUNICATIONS (Buy)-Data biz disappoints-delay in Growth segment recovery

Tata Communications: Data biz disappoints; delay in Growth segment recovery

(TCOM IN, Mkt Cap USD2.4b, CMP INR568, TP INR670, 18% Upside, Buy)

 

• EBITDA growth flat (in-line): TCOM reported lackluster growth, with consol. EBITDA flat QoQ/YoY at INR5.6b (in-line). Consol. revenue declined 2% QoQ (-9% YoY) to INR39.1b (in-line). Opex savings (-3% QoQ) drove ~30bp QoQ expansion in consol. EBITDA margin to 14.2%. Yet, TCOM reported adj. net loss of INR585m (v/s INR411m net profit in 4QFY18) due to a reduction in other income.
• Data business remains subdued: Data revenue/EBITDA of INR28.9b/INR4.9b (in-line) were flat QoQ. Revenue for Traditional/Growth verticals declined 2%/9% QoQ in dollar terms. However, 4% QoQ currency depreciation partly cushioned the impact. Data EBITDA margin saw a meager 10bp QoQ uptick to 16.8%, as 40bp/360bp improvement in Traditional/Growth segment EBITDA margin was largely offset by 520bp/410bp QoQ contraction in Transformation/Payments margins. Voice revenue fell 8% QoQ, while EBITDA declined 3% QoQ (margin expanded 40bp QoQ to 6.8%, led by cost-optimization initiatives).
• Concall highlights: (1) Growth segment revenue to grow at ~35% in FY19; EBITDA losses to be halved in 2QFY19 and further reduce in 2HFY19. (2) Will spend USD12-13m opex every quarter in Innovation segment. (3) Received NCLT approval for land de-merger; awaiting MCA approval; expects to complete the demerger in CY2018. (4) FY19 capex guidance maintained at USD250-275m.