Tata Communications (TCOM) has transformed from a long-distance voice services provider to a full-service data connectivity and value-added services provider. Its deep connectivity and array of customised solutions should drive a healthy 10% CAGR in data revenue over FY16-19 in a largely commoditised market. Yet, its focus on (a) the higher-margin enterprise segment, and (b) value-added services should support a 490bp expansion in core EBITDA margin over FY16-19.
Factoring healthy 14% Core EBITDA CAGR over FY16-19 and subsequent deleveraging potential, the stock trades at an EV of 6x FY19E EBITDA. This is despite 40% stock price appreciation in the last six months. We recommend Buy; our SOTP-based target price is R778.
TCOM’s growing focus on the data business (contributing 57% of core revenue), leveraging its 710,000 km deep submarine network and leadership position in emerging markets, holds it in good stead. Cisco expects business IP traffic to grow at a CAGR of 18% over the next five years. TCOM’s shift from a commoditised network provider to a full-service customised enterprise solutions provider has led to sticky clientele growth. Its value-added offerings like unified communication, hosting, managed security, and a host of sector-specific data offerings also provide strong growth potential. We expect TCOM’s data segment to record healthy 10% revenue CAGR over FY16-19.