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Tata Communications – Watch Neotel
We forecast 4% Q/Q revenue growth for Tata Communications to INR30,885m,
driven by healthy growth in both voice and data due to the festive season. We
forecast a 90bp sequential margin improvement to 11.0% as a result of operational
leverage. Our net loss estimate is INR1,972m and an EPS of -INR6.9.
We will be looking for an update on margin improvement at Neotel (South Africa
JV), which the company has stated will achieve breakeven for FY11 — unlikely in
our view.
Our Q3 capex estimate is INR4.9bn (~US$110m) and we continue to expect the
company to spend US$400m of capex this fiscal year.
Tata Communications
We have slightly increased our estimate for net interest expense which drives a
INR1.5/0.1 reduction in our FY11/FY12 EPS estimates.
Tata Communications
We have a December 2011 price target of Rs245 based on our SOTP valuation. The
core business (ILD, NLD voice, data and others) contributes Rs45 of the value, its
10.7% stake in Tata Teleservices adds 86 while the surplus land is valued at Rs114.
Risks to our UW rating and price target include: [1] faster-than-expected growth in
data, [2] a quick turnaround in Neotel, [3] visibility with regards to monetization of
surplus land, and [4] sale of stake in Tata Teleservices.
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