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Hold Tata Communications – Indiabulls

March 31, 2008

Tata Communications Limited (TCL), in third quarter revived out of the sequential drop witnessed in Q2’08. The key highlights of the quarter were: 9.8% qoq increase in sales to Rs. 10.4 bn on the back of robust revenue growth of 31.7% of Enterprise and carrier data services. EBITDA rose marginally by 0.9% qoq to Rs. 1,535 mn due to a hike of 107 bps in operating costs and 58 bps in network costs. Enterprise and data services touched EBITDA margin of 91% for the first time.

Voice business continues to show disappointing performance due to pricing pressure and movement of voice traffic to captive networks like Bharti and RCom. As a result TCL’s market shares in both National Long Distance (NLD) and International Long Distance (ILD) has declined to 19.6%. Enterprise & Carrier business holds the key as the sector is expected to grow at a CAGR of 30% for next four years driven by bandwidth demand from IT/ITeS companies in India.

At the current price of Rs. 528.1, the stock is trading at a forward P/E of 47.1x FY08E and 45.2x FY09E. TCL’s Land at Rs. 190 per share and 15.61% stake in Tata Tele Services Ltd. (TTSL) at Rs. 135 per share. Based on the DCF valuation, Indiabulls has valued the core business at Rs. 132 per share. Sum-of-the-parts valuation of the stock suggests a target price of Rs. 520.

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