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Tata Communications Ltd. -Road to profits still not visible
„PO cut; reiterate Underperform, as profit visibility still low
We maintain our Underperform rating on Tata Communications ((TCom) despite the
18% fall in the stock price over the last 6 months. Flattish losses in 3Q FY11, modest
growth in data revenues and the weak top-line performance of Neotel (S. Africa)
suggest that TCom is still far from the road to profits. We have cut PO to Rs240/sh on
lower real estate valuation and a 6% cut to FY12 EBITDA; our PO pegs the core
business at the average wholesale carrier valuation of ~6x FY12E EV/EBITDA.
Losses stay largely unchanged in 3Q FY11
In 3Q FY11, TCom’s net loss excluding exceptionals was ~Rs2.4bn vs. a loss of
Rs2.1bn in 2Q FY11. Cost-control lifted margins by ~20bps QoQ, but the lack of
top-line momentum (+2% QoQ) and lower other income (-51% QoQ) dragged
performance. Our conversation with the company indicates that Neotel losses
stayed almost flat QoQ, due to weak revenue ramp-up. TCom said that industry
growth in South Africa has recently slowed, thereby hurting Neotel’s ramp-up.
Risk to FY12 remains on the downside
Our FY12 estimate of a ~Rs9bn loss (vs. Rs10bn in FY11) assumes ~15% YoY
growth in data revenues and 10% YoY growth in Neotel’s top line. Based on 3Q
trends, our data growth f’casts seem safe, but risk to Neotel is on the downside.
Balance sheet health remains a worry
We estimate TCom's net debt/EBITDA at ~5-6x for both FY11E and FY12E
indicating stretched debt-servicing. We do not foresee any material drop in net
debt levels unless TCom explores equity-infusion or other deleveraging option
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Communications Ltd. -Road to profits still not visible
„PO cut; reiterate Underperform, as profit visibility still low
We maintain our Underperform rating on Tata Communications ((TCom) despite the
18% fall in the stock price over the last 6 months. Flattish losses in 3Q FY11, modest
growth in data revenues and the weak top-line performance of Neotel (S. Africa)
suggest that TCom is still far from the road to profits. We have cut PO to Rs240/sh on
lower real estate valuation and a 6% cut to FY12 EBITDA; our PO pegs the core
business at the average wholesale carrier valuation of ~6x FY12E EV/EBITDA.
Losses stay largely unchanged in 3Q FY11
In 3Q FY11, TCom’s net loss excluding exceptionals was ~Rs2.4bn vs. a loss of
Rs2.1bn in 2Q FY11. Cost-control lifted margins by ~20bps QoQ, but the lack of
top-line momentum (+2% QoQ) and lower other income (-51% QoQ) dragged
performance. Our conversation with the company indicates that Neotel losses
stayed almost flat QoQ, due to weak revenue ramp-up. TCom said that industry
growth in South Africa has recently slowed, thereby hurting Neotel’s ramp-up.
Risk to FY12 remains on the downside
Our FY12 estimate of a ~Rs9bn loss (vs. Rs10bn in FY11) assumes ~15% YoY
growth in data revenues and 10% YoY growth in Neotel’s top line. Based on 3Q
trends, our data growth f’casts seem safe, but risk to Neotel is on the downside.
Balance sheet health remains a worry
We estimate TCom's net debt/EBITDA at ~5-6x for both FY11E and FY12E
indicating stretched debt-servicing. We do not foresee any material drop in net
debt levels unless TCom explores equity-infusion or other deleveraging option
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