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Tata Communications
N: Revenue growth pressures may lead to margin-dilutive
investments
Regulatory issues in India and pricing pressure in global
markets may result in margin-dilutive investments
Globally the fibre space is seeing consolidation; positive for
TCOM but linked to surplus land monetisation
Maintain Neutral rating; cut TP to INR205 (from INR241)
Revenue growth may raise capex pressures: The draft national telecom policy, combined
with the likely downward revision of termination charges, has raised concerns about the
medium-term revenue growth prospects for TCOM, particularly from its Indian operations,
which account for 30% of total revenues. Also, 20% of revenues come from Europe and the
possibility of pricing and volumes pressures cannot be ruled out. The c400bps jump in
EBITDA margins in the recent quarter was positive, although it was driven by cost-cutting and
may limit longer-term scalability (particularly for Neotel, South Africa operations). We believe
given the challenges on top-line growth, the company may be forced to invest in new, subscale
products/segments that are marginal dilutive and result in capex pressure.
Global space seeing consolidation, real estate catalyst likely to be the key: Globally the
fibre/wholesale space has seen some consolidation (Century Link-Saavis and Level3 –Global
Crossing) and TCOM’s ability to improve its balance sheet may allow it to benefit from this.
However, this will depend to a large extent on the monetisation of surplus land, in our view,
post which TCOM will have the capability to raise fresh/equity or participate in any
meaningful strategic initiative. Early this year, the government announced a probe into the
delay of the demerger of TCOM’s surplus land and this raised some hope for investors of a
resolution, however, progress since then has been slow. We believe monetisation will be
delayed, with not much visibility in the next nine months.
Maintain Neutral, cut TP to INR205 (from INR241): We cut our target price to INR205, given
the higher-than-previously estimated interest payments, and concerns over longer-term
revenue/EBITDA growth. We cut our FY2013e earnings estimates by c32% on account of
higher financing charges (given the rate hikes) and depreciation charges (higher capex). We
have also cut the value of TCOM’s c10% stake in Tata Teleservices by 8% to INR33 as we
align our valuation to the active subscribers. We make no changes to our valuation for the
surplus land and value it at INR97 (40% discount to the fair value). Upside risks for the stock
include the ability to benefit from global consolidation and a quick monetisation of surplus
land. Downside risks include lower-than-estimated volume growth and pricing pressure in
global markets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Communications
N: Revenue growth pressures may lead to margin-dilutive
investments
Regulatory issues in India and pricing pressure in global
markets may result in margin-dilutive investments
Globally the fibre space is seeing consolidation; positive for
TCOM but linked to surplus land monetisation
Maintain Neutral rating; cut TP to INR205 (from INR241)
Revenue growth may raise capex pressures: The draft national telecom policy, combined
with the likely downward revision of termination charges, has raised concerns about the
medium-term revenue growth prospects for TCOM, particularly from its Indian operations,
which account for 30% of total revenues. Also, 20% of revenues come from Europe and the
possibility of pricing and volumes pressures cannot be ruled out. The c400bps jump in
EBITDA margins in the recent quarter was positive, although it was driven by cost-cutting and
may limit longer-term scalability (particularly for Neotel, South Africa operations). We believe
given the challenges on top-line growth, the company may be forced to invest in new, subscale
products/segments that are marginal dilutive and result in capex pressure.
Global space seeing consolidation, real estate catalyst likely to be the key: Globally the
fibre/wholesale space has seen some consolidation (Century Link-Saavis and Level3 –Global
Crossing) and TCOM’s ability to improve its balance sheet may allow it to benefit from this.
However, this will depend to a large extent on the monetisation of surplus land, in our view,
post which TCOM will have the capability to raise fresh/equity or participate in any
meaningful strategic initiative. Early this year, the government announced a probe into the
delay of the demerger of TCOM’s surplus land and this raised some hope for investors of a
resolution, however, progress since then has been slow. We believe monetisation will be
delayed, with not much visibility in the next nine months.
Maintain Neutral, cut TP to INR205 (from INR241): We cut our target price to INR205, given
the higher-than-previously estimated interest payments, and concerns over longer-term
revenue/EBITDA growth. We cut our FY2013e earnings estimates by c32% on account of
higher financing charges (given the rate hikes) and depreciation charges (higher capex). We
have also cut the value of TCOM’s c10% stake in Tata Teleservices by 8% to INR33 as we
align our valuation to the active subscribers. We make no changes to our valuation for the
surplus land and value it at INR97 (40% discount to the fair value). Upside risks for the stock
include the ability to benefit from global consolidation and a quick monetisation of surplus
land. Downside risks include lower-than-estimated volume growth and pricing pressure in
global markets.
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