Tata Communications - India weakness dampens quarter :: Kotak Sec

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Tata Communications (TCOM)
Telecom
India weakness dampens quarter. Tata Communications (TCOM) reported a 2.6%
sequential growth in consolidated revenues despite weakness in the standalone India
business, which was down 2% qoq; non-India business possibly benefitted from
improving economic climate in developed countries as well as currency movements.
Even as EBITDA margin improvement continued, 2QFY11 results do little to change our
cautious view on the company’s core business. We retain our REDUCE rating

2QFY11 consolidated results – weak India business, Neotel performance worsens
TCOM reported a 2.6% sequential growth in consolidated revenues to Rs29.6 bn (+9% yoy),
driven by strong international business performance; standalone India business revenues were
down 2% qoq, reflecting a weak seasonal quarter as well as TCOM’s gradually eroding market
share in the India NLD segment. Margins continued their gradual recovery with the company
reporting a 110 bps qoq improvement in EBITDA margin to 10.1%. Higher other income and
lower taxes aided a decline in net loss qoq to Rs1.9 bn from Rs2.7 bn in 1QFY11. However, losses
at Neotel (a South Africa-based service provider in which TCOM has a 56% stake) rose further.
2QFY11 standalone results – declining revenues reflective of eroding market share
TCOM’s standalone revenues of Rs8.2 bn (down 2% qoq) for 2QFY11 came in 3% below our
expectations. EBITDA margins of 25.8% (flat qoq) were in line with our expectations led by
aggressive cost cutting. Core net income of Rs242 mn was 35% lower than our estimate; other
income was impacted by non-recurrence of forex income of Rs102 mn booked in the previous
quarter.
Recovery in core business some time away; no clarity on land sale; reiterate REDUCE rating
We believe TCOM’s core business continues to remain under pressure; the company’s stretched
balance sheet (and constraints on raising equity on account of Government ownership) also
curtails their ability to make requisite investments. We reiterate our REDUCE rating on the stock
with a target price of Rs225/share. Our fair value estimate is SOTP-based and comprises
􀁠 Core business valued at Rs95/share – based on 6X FY2012E estimated consolidated EBITDA of
Rs13 bn less net debt of Rs51 bn.
􀁠 10.7% stake in TTSL valued at Rs67/share. We peg TTSL’s EV at 20% discount to our fair value
for Idea and deduct net debt to the extent of Rs70 bn.
􀁠 Surplus land assets valued at Rs64/share – at 70% discount to estimate market value of surplus
land (Rs214 bn).