Initiate coverage on Tata Communications (TCL) with a ‘buy’ rating and a target price of Rs 760 per share. Our target excludes the land value of R181 per share. At current price, TCL’s core business is trading at 6.4x FY17e EV/ebitda against global average of 9-10x. We believe, with higher growth and superior RoCE, core business will get a valuation of R731/share after discounting FY17e ebitda by 8x. The Neotel deal will be an additional sweetener generating R29 for TCL’s 67.3% stake.
With increase in acceptance of managed services among enterprises and TCL’s continuous thrust on improving service quality and launching innovative solutions, this segment is expected to report 22% CAGR over FY14-17e. Additionally, with higher penetration of internet and increase in use of bandwidth hungry applications, the company’s network services segment is expected to clock 12% CAGR over FY14-17e to R7,423.6 crore.
Heightened competition from VoIP players is likely to keep top line of the company’s voice business under pressure. However, management’s sharpened focus on high yielding minutes will lead to voice ebitda margin being stable at 8-9%. With low maintenance capex and stable margins, the voice business is anticipated to generate FCF of R550-600 crore over FY14-17e.