IIFL says Tata Communications is Market perform

Tata Communications has been mired in an enervating price
battle in its core wholesale voice business, corroborated by
the fact that FY10 wholesale EBIT share fell to a 5-yr low.
Over FY10-12, price decline would continue albeit at a slower
pace coupled with 17%/5% cagr in ILD/NLD volumes.
Inadequate operating CFs and US$950mn ex-Neotel capex
over FY10-12 would further stretch balance sheet with D/E
likely to worsen to 2.6x. Neotel, South Africa’s second fixed
line operator, is also likely to be a drag on consolidated PAT in
the near term. While non-business related positives like land
holdings and Tata Tele stake support the stock, core business
valuation of Rs71/share does not inspire confidence. Assign
MP.
Wholesale price decline to moderate; ILD traffic at 17% cagr
Tcom has endured a consistent decline in wholesale voice pricing with
net retention/min hovering at ~0.4p/min in FY10, down 18% from
FY07 levels. While the direction of ILD/NLD tariff is unlikely to reverse
anytime soon, we expect pace of decline in net ret/min to moderate
to ~5% over FY10-12. ILD traffic grew at a healthy ~22% cagr over
the past 2 years and we expect FY10-12 volume cagr at 17%.
Neotel remains a drag on consolidated picture
Tata Communications booked Rs1.1/3.7bn as its share of operating
loss/pre-tax loss from Neotel holding in FY10. Being a challenger to
incumbent operator Telkom in South Africa’s national and enterprise
market, we believe Neotel has an uphill task to profitability. While it
may turn EBIDTA breakeven by end of current fiscal, it could still act
as a drag at consolidated PAT level.
Core outlook remains tepid; Assign MP
Current stock price adequately reflects the upsides from TTL stake
(10%, Rs95/share) and land holding (741 acres, Rs120/share). But
core business value of Rs71 does not inspire confidence given the
commoditized nature of wholesale voice and consolidated losses over
the next two years. Assign MP with a SOTP target of Rs287.
Visibility/news flow on potential monetization of land holdings
presents upside risk to our rating.