Sell the Rally in Tata Communications + MTNL – Goldman

Tata Communications has risen to an extent that it no more deserves the valuation it is trading at, while MTNL appears inexpensive but no visibility on potential re-rating and hence Goldman sachs has initiated coverage on the stock with a SELL Call. Aditionally, their weaker competitive positioning in the Indian telco space and Tata’s not coming with a blue print to merge Telecom operations is a cause of concern. Both the companies are ill-prepared to tackle the overbidding risks related to the upcoming 3G/BWA license auction.

Tata Communications:
Strong revenue/EBITDA growth; but largely factored in by consensus: We expect TCOM’s revenues / EBITDA to grow at 8%/24% CAGR from FY2009-FY2012E, given faster uptake of data/internet services and an increasing mix of data products.

Goldman sees downside risk to consensus net profit estimates for FY2010-FY2011 from higher net interest expense (due to increase in debt needed to fund capex and service roll-out) and higher D&A (from a potential BWA license win).

IN SOTP valuation the core business is merely valued at Rs 103 while investments and holdings add 192 / share taking the Valuation to Rs 295 which is also Goldman’s Target Price with a SELL rating.

MTNL’s wireline and wireless revenues to decrease at a CAGR of 11% and 8%, respectively, from FY2009-FY2012E, given continued F2M substitution, weaker competitive positioning and the impact of intense price competition in the wireless market.

MTNL’s FY10E net cash per share (around Rs80/share) to decline in the coming 6 months given the upfront 3G/BWA license payments (estimated upfront fee payment of Rs20/share).

MTNL is already in Red when it comes to EPS and 12-month target price by using a 10-year DCF-based methodology yields to Rs 70 and hence the SELL rating.