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Tata Communications (TCOM)
Telecom
Good quarter; margin sustainability and cash flow turnaround the key. TCOM
reported a solid quarter driven by sharp 420 bps qoq margin expansion despite a
modest revenue miss. Margin expansion was driven by substantial absolute cost
reduction within the core business and strong revenue performance at Neotel, which
turned EBITDA positive during the quarter. We raise estimates substantially. Raise our
SOTP-based target price to Rs200/share (from Rs180). REDUCE rating stays.
2QFY12 – a strong quarter led by sharp margin expansion
TCOM reported a solid quarter with EBITDA growth of 46% qoq and 60% qoq to Rs4.8 bn; our
estimate was Rs3.53 bn. Revenues at Rs33.7 bn (+3.6% qoq, +14% yoy), however missed our
estimate by 1.6%. Revenue growth benefitted to some extent from Re depreciation; constant
currency revenue growth was likely lower. Key highlight of the quarter was the strong 420 bps
qoq expansion in EBITDA margins to 14.2% from 10% in 1QFY12. Margin expansion was led by
absolute reduction in costs qoq across cost line items. From a business segment perspective,
EBITDA expansion was driven equally by core business profitability improvement and profitability
swing at Neotel, TCOM’s South Africa subsidiary. Neotel turned EBITDA positive during the quarter.
Segmental performance – good across segments
TCOM’s 2QFY12 performance was good across segments. Net revenue (gross less interconnect)
growth was solid across segments. Net voice revenues were up 6.5% qoq and 4.1% yoy, data
revenues were up 5.4%, while Neotel revenues grew a strong 22.3% qoq. Neotel turned EBITDA
positive (1QFY12 EBITDA margin was a negative 15.8%), while voice and data profitability
improved 200 bps and 400 bps qoq respectively. Management indicated 8% EBITDA margin for
the voice segment (on gross revenues, 44% on net) and 26% for the data segment.
Management confident of sustaining margin improvement trajectory
The sharp qoq margin improvement came in a positive surprise. TCOM management indicated
that there were no-offs and margin improvement was driven solely by strong cost rationalization.
Management has also indicated that the upward margin trajectory can be sustained over the
coming quarters. Key drivers would be further improvement in Neotel profitability and revenue-mix
swing in favor of data within the core business.
Poor cash flow profile remains an area of concern
TCOM’s net debt, ex-Neotel increased by a sharp Rs8.7 bn to Rs72.5 bn at end-Sep 2011 despite
strong EBITDA generation during the quarter. Capex intensity remains high and so does the
interest burden on the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Communications (TCOM)
Telecom
Good quarter; margin sustainability and cash flow turnaround the key. TCOM
reported a solid quarter driven by sharp 420 bps qoq margin expansion despite a
modest revenue miss. Margin expansion was driven by substantial absolute cost
reduction within the core business and strong revenue performance at Neotel, which
turned EBITDA positive during the quarter. We raise estimates substantially. Raise our
SOTP-based target price to Rs200/share (from Rs180). REDUCE rating stays.
2QFY12 – a strong quarter led by sharp margin expansion
TCOM reported a solid quarter with EBITDA growth of 46% qoq and 60% qoq to Rs4.8 bn; our
estimate was Rs3.53 bn. Revenues at Rs33.7 bn (+3.6% qoq, +14% yoy), however missed our
estimate by 1.6%. Revenue growth benefitted to some extent from Re depreciation; constant
currency revenue growth was likely lower. Key highlight of the quarter was the strong 420 bps
qoq expansion in EBITDA margins to 14.2% from 10% in 1QFY12. Margin expansion was led by
absolute reduction in costs qoq across cost line items. From a business segment perspective,
EBITDA expansion was driven equally by core business profitability improvement and profitability
swing at Neotel, TCOM’s South Africa subsidiary. Neotel turned EBITDA positive during the quarter.
Segmental performance – good across segments
TCOM’s 2QFY12 performance was good across segments. Net revenue (gross less interconnect)
growth was solid across segments. Net voice revenues were up 6.5% qoq and 4.1% yoy, data
revenues were up 5.4%, while Neotel revenues grew a strong 22.3% qoq. Neotel turned EBITDA
positive (1QFY12 EBITDA margin was a negative 15.8%), while voice and data profitability
improved 200 bps and 400 bps qoq respectively. Management indicated 8% EBITDA margin for
the voice segment (on gross revenues, 44% on net) and 26% for the data segment.
Management confident of sustaining margin improvement trajectory
The sharp qoq margin improvement came in a positive surprise. TCOM management indicated
that there were no-offs and margin improvement was driven solely by strong cost rationalization.
Management has also indicated that the upward margin trajectory can be sustained over the
coming quarters. Key drivers would be further improvement in Neotel profitability and revenue-mix
swing in favor of data within the core business.
Poor cash flow profile remains an area of concern
TCOM’s net debt, ex-Neotel increased by a sharp Rs8.7 bn to Rs72.5 bn at end-Sep 2011 despite
strong EBITDA generation during the quarter. Capex intensity remains high and so does the
interest burden on the company.
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