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Tata Communications (TCOM)
Telecom
Road to recovery remains long and winded. Tata Communications (TCOM) reported
another subdued quarter with a sequential revenue growth of 2% and margin
expansion of 20 bps qoq at the consolidated level. Net loss at the consolidated level
remained around the Rs2 bn mark despite a one-time benefit of Rs440 mn at the other
income level from reversal of liabilities. News flow on troubles at Neotel, TCOM’s South
African subsidiary, has emerged and there is little progress on land sale. REDUCE.
3QFY11 consolidated results – some improvement, but still weak
TCOM reported a 1.9% sequential growth in consolidated revenues to Rs30.2 bn (+9% yoy),
driven by strong revenue performance at the standalone India level. Ex-India revenues were flat
qoq. Margin pressure at the standalone level (OPM down 330 bps qoq) negated strong cost
control and margin improvement in the international business, keeping consolidated OPM
expansion in check at 20 bps (consol OPM of 10.3% was below our expected 11%). Higher other
income (aided by one-time benefit of Rs440 mn) aided a marginal decline in net loss qoq to Rs1.97
bn from Rs2.14 bn in 1QFY11. However, losses at Neotel (a South Africa-based service provider in
which TCOM has a 56% stake) rose further.
Negative news flow on Neotel has surfaced
Deloitte and Touche, independent auditors for Neotel (the South African 56% subsidiary of Tata
Communications), have raised doubts over Neotel’s ability to continue as a going concern.
Paraphrasing auditors’ comment in Neotel’s annual report – ‘Neotel’s recurring losses and
shareholder’s deficit raise substantial doubt’. TCOM’s SEC filing says ‘Neotel’s board was satisfied
that the company has access to adequate resources (undrawn credit facilities and access to equity
from TCOM and other shareholders – see Exhibits 1 and 2 for exact statements from the auditors
and the board) and to stay in business for the foreseeable future’.
Recovery in core business some time away; no clarity on land sale; reiterate REDUCE rating
We reiterate our REDUCE rating on the stock with a target price of Rs225/share. Our fair value
estimate is SOTP-based (see Exhibit 3 for details) and comprises
Core business valued at Rs95/share – based on 6.5X FY2012E estimated consolidated EBITDA of
Rs14 bn less net debt of Rs70 bn.
10.7% stake in TTSL valued at Rs67/share.
Surplus land assets valued at Rs64/share – at 60% discount to the fair value.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Communications (TCOM)
Telecom
Road to recovery remains long and winded. Tata Communications (TCOM) reported
another subdued quarter with a sequential revenue growth of 2% and margin
expansion of 20 bps qoq at the consolidated level. Net loss at the consolidated level
remained around the Rs2 bn mark despite a one-time benefit of Rs440 mn at the other
income level from reversal of liabilities. News flow on troubles at Neotel, TCOM’s South
African subsidiary, has emerged and there is little progress on land sale. REDUCE.
3QFY11 consolidated results – some improvement, but still weak
TCOM reported a 1.9% sequential growth in consolidated revenues to Rs30.2 bn (+9% yoy),
driven by strong revenue performance at the standalone India level. Ex-India revenues were flat
qoq. Margin pressure at the standalone level (OPM down 330 bps qoq) negated strong cost
control and margin improvement in the international business, keeping consolidated OPM
expansion in check at 20 bps (consol OPM of 10.3% was below our expected 11%). Higher other
income (aided by one-time benefit of Rs440 mn) aided a marginal decline in net loss qoq to Rs1.97
bn from Rs2.14 bn in 1QFY11. However, losses at Neotel (a South Africa-based service provider in
which TCOM has a 56% stake) rose further.
Negative news flow on Neotel has surfaced
Deloitte and Touche, independent auditors for Neotel (the South African 56% subsidiary of Tata
Communications), have raised doubts over Neotel’s ability to continue as a going concern.
Paraphrasing auditors’ comment in Neotel’s annual report – ‘Neotel’s recurring losses and
shareholder’s deficit raise substantial doubt’. TCOM’s SEC filing says ‘Neotel’s board was satisfied
that the company has access to adequate resources (undrawn credit facilities and access to equity
from TCOM and other shareholders – see Exhibits 1 and 2 for exact statements from the auditors
and the board) and to stay in business for the foreseeable future’.
Recovery in core business some time away; no clarity on land sale; reiterate REDUCE rating
We reiterate our REDUCE rating on the stock with a target price of Rs225/share. Our fair value
estimate is SOTP-based (see Exhibit 3 for details) and comprises
Core business valued at Rs95/share – based on 6.5X FY2012E estimated consolidated EBITDA of
Rs14 bn less net debt of Rs70 bn.
10.7% stake in TTSL valued at Rs67/share.
Surplus land assets valued at Rs64/share – at 60% discount to the fair value.
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