Tata Communications’ (TCOM) marked turnaround has been led by focus on operational efficiency, a transient pricing uptick in voice business and the rupee weakness. We concede that core business growth and margins could moderate as benefits of rupee and pricing reverse in the near term.
However, strong cash flow generation and non-core asset sales (Neotel stake sale, demerger of land bank and monetization of additional properties) would improve balance sheet health. Despite the recent outperformance (31% return in 2013), we believe valuations are inexpensive.
TCOM owns the world’s largest submarine cable network and has ~19% share in global wholesale voice business. It is the biggest player in data center/ collocation and ATM management businesses in India with 1m+ sq. ft of storage space and 17,000+ ATMs under management.
With peak capex in core business behind and profitability improving, we estimate free cash generation of US$500m over FY14-16 for TCOM.
After turnaround of the core business, we believe focus would shift to balance sheet deleveraging through sale of non-core assets. This includes – i) stake sale in Neotel, and ii) sale of select residential properties across the country.
Demerger of a 740 acre land parcel is another key trigger for minority shareholders of TCOM.