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India Equity Research Reports, IPO and Stock News
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Possible progress in demerging land
As Tata group and telecom minster trade allegations on the delay in
demerger of Tata Communication (TCom) surplus land, the longstanding
value unlocking may finally be underway. Given that TCom core
business remains under pressure with 9MFY11 consolidated loss up 4x
and high debt burden at 6.6x net debt/Ebitda, the stock's valuation at
11x FY12CL consolidated EV/Ebitda may appear stretched. However, on
our estimate of land value at Rs220/share net of taxes for minority
shareholders, the upside from value unlocking from land is significant
and, in our view, not discounted in the share price; this could also pave
the way for TCom to monetise its 11% stake in Tata
Teleservices and come out of the debt trap. Upgrade to OPF.
Is value unlocking from surplus land underway?
Nine years after the government privatised Tata Com (previously VSNL), the Tata
group and the telecom minster have been blaming each other for the delay in
demerging TCom’s 773 acres of surplus land: this suggests the long-awaited
value-unlocking may finally be happening. While upside from the land will not be
available to the Tata group, it will be shared by minorities and the government.
We estimate the embedded land value at US$1.4bn net of potential stamp duty
and capital gains tax. This is Rs220/share, or 93% of the current market price. As
the potential value-unlocking offers significant upside, we upgrade TCom to an OPF
and will look to revise our current target price based on progress.
Have mounting core business losses peaked?
TCom’s standalone 9MFY11 financial performance improved, with 15% YoY Ebitda
growth and a 57% increase in pre-exceptional PAT. On consolidated numbers,
TCom’s 3QFY11 Ebitda was up 14% but the 9MFY11 Ebitda was down 9% YoY, and
pre-exceptional loss was up 4x to Rs6.8bn. TCom’s consolidated Ebitda margin
slipped 212bps to 10% and the burden of interest and depreciation has mounted
with the international expansion. With continued pressure in the core business
and high interest and depreciation, we estimate the consolidated loss for FY11CL
will increase 62% YoY to Rs9.7bn followed by Rs9.2-9.4bn losses in FY12-13CL,
mainly due to the drag of Tyco, Teleglobe and Neotel (South Africa operations).
Is the company already in a debt trap?
TCom has high net debt of Rs75bn, implying a net debt/Ebitda of 6.6x. High
interest and significant capex requirements (US$1.5-2bn over three years) imply
a potential debt trap, and equity fundraising will be difficult. TCom still has the
ability to monetise its 11% stake in TTSL (Tata Teleservices), as shown when it
raised Rs4.2bn by selling a 1% stake in November 2008. Our TCom Rs290 sumof-
parts target price is based on Rs62/share for the core business, Rs118/share
for the TTSL stake and Rs110/share for the surplus land, with the values for TTSL
and the land both reflecting a 50% discount for risks in the unlocking process and
a holding company discount. Past media reports have suggested that Docomo
may be able to raise its stake in TTSL to 51% (currently 26%) which could be an
opportunity for TCom to get out of its debt trap. While the stock is expensive at
11x FY12CL consolidated EV/Ebitda, we see the potential for significant valueunlocking
and upgrade to OPF
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Possible progress in demerging land
As Tata group and telecom minster trade allegations on the delay in
demerger of Tata Communication (TCom) surplus land, the longstanding
value unlocking may finally be underway. Given that TCom core
business remains under pressure with 9MFY11 consolidated loss up 4x
and high debt burden at 6.6x net debt/Ebitda, the stock's valuation at
11x FY12CL consolidated EV/Ebitda may appear stretched. However, on
our estimate of land value at Rs220/share net of taxes for minority
shareholders, the upside from value unlocking from land is significant
and, in our view, not discounted in the share price; this could also pave
the way for TCom to monetise its 11% stake in Tata
Teleservices and come out of the debt trap. Upgrade to OPF.
Is value unlocking from surplus land underway?
Nine years after the government privatised Tata Com (previously VSNL), the Tata
group and the telecom minster have been blaming each other for the delay in
demerging TCom’s 773 acres of surplus land: this suggests the long-awaited
value-unlocking may finally be happening. While upside from the land will not be
available to the Tata group, it will be shared by minorities and the government.
We estimate the embedded land value at US$1.4bn net of potential stamp duty
and capital gains tax. This is Rs220/share, or 93% of the current market price. As
the potential value-unlocking offers significant upside, we upgrade TCom to an OPF
and will look to revise our current target price based on progress.
Have mounting core business losses peaked?
TCom’s standalone 9MFY11 financial performance improved, with 15% YoY Ebitda
growth and a 57% increase in pre-exceptional PAT. On consolidated numbers,
TCom’s 3QFY11 Ebitda was up 14% but the 9MFY11 Ebitda was down 9% YoY, and
pre-exceptional loss was up 4x to Rs6.8bn. TCom’s consolidated Ebitda margin
slipped 212bps to 10% and the burden of interest and depreciation has mounted
with the international expansion. With continued pressure in the core business
and high interest and depreciation, we estimate the consolidated loss for FY11CL
will increase 62% YoY to Rs9.7bn followed by Rs9.2-9.4bn losses in FY12-13CL,
mainly due to the drag of Tyco, Teleglobe and Neotel (South Africa operations).
Is the company already in a debt trap?
TCom has high net debt of Rs75bn, implying a net debt/Ebitda of 6.6x. High
interest and significant capex requirements (US$1.5-2bn over three years) imply
a potential debt trap, and equity fundraising will be difficult. TCom still has the
ability to monetise its 11% stake in TTSL (Tata Teleservices), as shown when it
raised Rs4.2bn by selling a 1% stake in November 2008. Our TCom Rs290 sumof-
parts target price is based on Rs62/share for the core business, Rs118/share
for the TTSL stake and Rs110/share for the surplus land, with the values for TTSL
and the land both reflecting a 50% discount for risks in the unlocking process and
a holding company discount. Past media reports have suggested that Docomo
may be able to raise its stake in TTSL to 51% (currently 26%) which could be an
opportunity for TCom to get out of its debt trap. While the stock is expensive at
11x FY12CL consolidated EV/Ebitda, we see the potential for significant valueunlocking
and upgrade to OPF
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