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Tata Communications Ltd
Underweight
TATA.BO, TCOM IN
Voice business and Neotel weigh on profitability; Maintain Underweight
• In what was expected to be a seasonally strong quarter, TCOM delivered
sub-2% Q/Q revenue growth (JPME was 4.3%) held back by a lackluster
performance in the Wholesale Voice business and a flattish development at
Neotel. EBITDA margin improved only 20bp Q/Q to 10.3% (JPME 11.0%).
Other income, which included a one-off reversal of a liability, helped a net
loss of Rs1.97B come in in-line with JPME. Loss per share was Rs6.93.
• Voice weighs on results: Voice minutes continued to show robust growth
(+14% Y/Y), but we believe severe pricing pressure drove modest revenue
here (flat Q/Q, +3% Y/Y). We believe Voice margins were under pressure
too and note that stand-alone EBITDA margin declined 3pp to 23%.
• Neotel disappoints: Neotel (South African JV) delivered largely flat
revenue Q/Q vs. JPME of +15% and, as a result, we estimate the EBITDA
margin declined ~1pp to -39% after a 7pp improvement in 2Q. We expect
Neotel to remain a 2pp drag on consolidated EBITDA and believe that the
break-even result expected by management is highly unlikely.
• Data growth welcome but not enough to off-set pressures elsewhere:
Data revenue contributed 84% of the Q/Q growth and accounted for 39% of
3Q revenue, up from 38% in 2Q. While this is encouraging we estimate that
we need to see a reversal of contribution between voice and data revenue to
add 2pp to margins.
• Capex spillover likely: TCOM has spent only ~US$250MM in capex
YTD, in our view, and we lower our FY11 estimate to $350MM from
$400MM earlier. We expect some spillover into FY12.
• Maintain Underweight, with new Dec-11 price target of Rs207: We
remain concerned about pricing pressure in the voice business, slower
growth in service provider data, a delayed turnaround in Neotel’s
profitability, and a stretched balance sheet. TCOM trades at a 9.3x FY12E
EV/EBITDA, a 36%/45%/20%/113% premium to Bharti/RCOM/Idea/Tulip
Telecom. Risks to our view: margin expansion driven by data growth, TTLS
stake and/or surplus land sale, and a quick turnaround at Neotel...
3Q results highlights
TCOM delivered revenue of Rs30.2B, +1.9% Q/Q, +8.9% Y/Y, missing JPME of
Rs30.9B by 2.3%. Within the mix, data revenue increased 4% Q/Q, accounting for
39% of total revenue vs. 38% in 2Q. Voice revenue was flat Q/Q and increased only
3% Y/Y at Rs16.2B (-3.3% vs. JPME) despite a 14% Y/Y growth in total minutes.
We believe severe pricing pressure drove this modest development. Other revenue
increased only 0.9% Q/Q and we believe that this was due to a lackluster
performance at Neotel.
Consolidated EBITDA margin was 10.3% (+20bp Q/Q), 70bp below JPME of
11.0%. Absolute EBITDA of Rs3.1B was 8.4% below JPME of Rs3.4B. We believe
pricing-driven margin pressure in the voice segment held consolidated profitability
back, in addition to our estimated 1pp deterioration in Neotel's EBITDA margin to
-39% vs. the 7pp improvement seen in 2Q.
Other Income came in at Rs690MM and included Rs440MM for a one-off reversal of
liability that was no longer required. 3Q net loss was Rs1.97B (-6.5% margin), inline with JPME of Rs1.97B. 3Q EPS was -Rs6.93 vs. JPME of -Rs6.92.
Other highlights: Strategic agreement with Videotron: Last month, the company
signed an agreement with the Canada-based telecom operator to outsource
Videotron’s entire international voice traffic through TCOM's network. New CEO:
From February 1, 2011, Mr. Vinod Kumar will begin as the new CEO of the
company. He will replace the current CEO, Mr. N. Srinath.
Valuation and rating analysis
Our new Dec-11 price target of Rs207 (down from Rs245 earlier) is based on our
sum-of-the-parts valuation. We use a WACC of 13% and a terminal growth rate of
3%. The core business (ILD, NLD voice, data and others) contributes Rs18 value, its
10.7% stake in Tata Teleservices adds Rs75, while the surplus land is valued at
Rs114. Lower profitability estimates and the spillover in capex drive the change to
our valuation of the core business.
Table 5: Sum-of-the-parts valuation
Rs
Core business 18
Tata Teleservices 75
Land 114
Total 207
Source: J.P. Morgan estimates.
Key risks to our Underweight 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.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Communications Ltd
Underweight
TATA.BO, TCOM IN
Voice business and Neotel weigh on profitability; Maintain Underweight
• In what was expected to be a seasonally strong quarter, TCOM delivered
sub-2% Q/Q revenue growth (JPME was 4.3%) held back by a lackluster
performance in the Wholesale Voice business and a flattish development at
Neotel. EBITDA margin improved only 20bp Q/Q to 10.3% (JPME 11.0%).
Other income, which included a one-off reversal of a liability, helped a net
loss of Rs1.97B come in in-line with JPME. Loss per share was Rs6.93.
• Voice weighs on results: Voice minutes continued to show robust growth
(+14% Y/Y), but we believe severe pricing pressure drove modest revenue
here (flat Q/Q, +3% Y/Y). We believe Voice margins were under pressure
too and note that stand-alone EBITDA margin declined 3pp to 23%.
• Neotel disappoints: Neotel (South African JV) delivered largely flat
revenue Q/Q vs. JPME of +15% and, as a result, we estimate the EBITDA
margin declined ~1pp to -39% after a 7pp improvement in 2Q. We expect
Neotel to remain a 2pp drag on consolidated EBITDA and believe that the
break-even result expected by management is highly unlikely.
• Data growth welcome but not enough to off-set pressures elsewhere:
Data revenue contributed 84% of the Q/Q growth and accounted for 39% of
3Q revenue, up from 38% in 2Q. While this is encouraging we estimate that
we need to see a reversal of contribution between voice and data revenue to
add 2pp to margins.
• Capex spillover likely: TCOM has spent only ~US$250MM in capex
YTD, in our view, and we lower our FY11 estimate to $350MM from
$400MM earlier. We expect some spillover into FY12.
• Maintain Underweight, with new Dec-11 price target of Rs207: We
remain concerned about pricing pressure in the voice business, slower
growth in service provider data, a delayed turnaround in Neotel’s
profitability, and a stretched balance sheet. TCOM trades at a 9.3x FY12E
EV/EBITDA, a 36%/45%/20%/113% premium to Bharti/RCOM/Idea/Tulip
Telecom. Risks to our view: margin expansion driven by data growth, TTLS
stake and/or surplus land sale, and a quick turnaround at Neotel...
3Q results highlights
TCOM delivered revenue of Rs30.2B, +1.9% Q/Q, +8.9% Y/Y, missing JPME of
Rs30.9B by 2.3%. Within the mix, data revenue increased 4% Q/Q, accounting for
39% of total revenue vs. 38% in 2Q. Voice revenue was flat Q/Q and increased only
3% Y/Y at Rs16.2B (-3.3% vs. JPME) despite a 14% Y/Y growth in total minutes.
We believe severe pricing pressure drove this modest development. Other revenue
increased only 0.9% Q/Q and we believe that this was due to a lackluster
performance at Neotel.
Consolidated EBITDA margin was 10.3% (+20bp Q/Q), 70bp below JPME of
11.0%. Absolute EBITDA of Rs3.1B was 8.4% below JPME of Rs3.4B. We believe
pricing-driven margin pressure in the voice segment held consolidated profitability
back, in addition to our estimated 1pp deterioration in Neotel's EBITDA margin to
-39% vs. the 7pp improvement seen in 2Q.
Other Income came in at Rs690MM and included Rs440MM for a one-off reversal of
liability that was no longer required. 3Q net loss was Rs1.97B (-6.5% margin), inline with JPME of Rs1.97B. 3Q EPS was -Rs6.93 vs. JPME of -Rs6.92.
Other highlights: Strategic agreement with Videotron: Last month, the company
signed an agreement with the Canada-based telecom operator to outsource
Videotron’s entire international voice traffic through TCOM's network. New CEO:
From February 1, 2011, Mr. Vinod Kumar will begin as the new CEO of the
company. He will replace the current CEO, Mr. N. Srinath.
Valuation and rating analysis
Our new Dec-11 price target of Rs207 (down from Rs245 earlier) is based on our
sum-of-the-parts valuation. We use a WACC of 13% and a terminal growth rate of
3%. The core business (ILD, NLD voice, data and others) contributes Rs18 value, its
10.7% stake in Tata Teleservices adds Rs75, while the surplus land is valued at
Rs114. Lower profitability estimates and the spillover in capex drive the change to
our valuation of the core business.
Table 5: Sum-of-the-parts valuation
Rs
Core business 18
Tata Teleservices 75
Land 114
Total 207
Source: J.P. Morgan estimates.
Key risks to our Underweight 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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