Dalal Street Investments

Sell the Rally in Tata Communications + MTNL – Goldman

January 7, 2010

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.


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