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MOSL: TATA COMMUNICATIONS (Neutral)-Traditional strength intact, smaller segments leaking earnings though

Tata Communications: Traditional strength intact, smaller segments leaking earnings though

(TCOM IN, Mkt Cap USD1.5b, CMP INR368, TP INR420, 14% Upside, Neutral)

 

 

• Traditional segment continues improving: TCOM delivered a modest performance in the second quarter, with revenue/EBITDA growth of 3%/1% QoQ (pre-IND-AS 116) exceeding our estimate. Data revenue/EBITDA increased 6%/3% QoQ, as Traditional segment (two thirds contribution to Data) grew strongly, while Growth segment improved off a low base. This was partly offset by an increase in EBITDA loss in Innovation segment and continued downtrend in Voice segment with 9% EBITDA decline. PAT declined 31% QoQ to INR485m with higher tax provisions. For 1HFY20, revenue/EBITDA were up 5%/25% YoY.
• Concall highlights: (1) FY20 capex guided at USD200-225m, of which a large part would be incurred for network expansion; growth capex would be ~15-20%. (2) Traditional deal pipeline has improved with a margin potential of 35-36%. (3) RJio is not a big threat for Enterprise business, and TCOM is confident of protecting and growing market share in the seg
• Modest expectation as smaller segments leak earnings: Hemisphere Properties Pvt. Ltd. (HPIL) demerger is on track and further steps are undertaken for share allotment. TCOM also has surplus land parcel of 757 acres available for monetization across top cities, which should have equally attractive value. Traditional and Growth offer stable EBITDA growth, but increased spends on new product launches and deal expenses in Innovation and Transformation continue taking away the gains. We have marginally upgraded our EBITDA estimates building in a CAGR of 11% over FY19-21.