Broker’s Call: Tata Communications 

Yes to stock

Target: INR 1426

CMP: Rs 1,241.25

Tata Communications It posted a mixed performance for the quarter. And both, sequential revenue growth and EBITDA margin were slightly lower than estimates. It reported sequential revenue growth of 0.9 percent on a quarterly basis, driven by an increase in digital services and platforms revenues of 2.3 percent on a quarterly basis.

Voice revenue decreased 8.7% quarter-over-quarter; While data revenue increased 2.1% on a quarterly basis. There was a sequential decline in EBITDA margin (down 115 basis points quarter-over-quarter) driven by the increase in employee cost. Net debt (as of 31st March 2023) decreased by Rs.560 crore quarter on quarter to Rs.5,700 crore.

The data portfolio grew 10.3 percent year-on-year, in line with expectations. We expect the audio business to continue to decline as per the industry trend; While the data segment will continue to drive the company’s overall performance. Private capital expenditures related to 5G should also present opportunities for the company.

We expect EBITDA margin to remain in the indicative range of 23% to 25% going forward. We estimate a revenue compound annual growth rate of 10.2% over fiscal year 23-25 ​​with an average EBITDA margin of 24.3%. We maintain our Add rating on the stock with an adjusted price target of $1,426 per share based on EV/EBITDA of 8.5x in FY25. The stock is trading at EV/EBITDA of 8.7x/7.2x on FY24E/FY25.