Maintain ‘buy’ on Tata Communication, target Rs 615

By: | Published: May 21, 2016 6:07 AM

Tata Communications (TCOM) has announced the sale of a 74% stake in its India and Singapore data center business to Singapore Technologies Telemedia (ST Telemedia) for an EV of $634 million.

Tata Communications (TCOM) has announced the sale of a 74% stake in its India and Singapore data center business to Singapore Technologies Telemedia (ST Telemedia) for an EV of $634 million.

The deal, attractively valued at 18x EV/EBITDA, would bring in cash flows of $400 million, helping TCOM de-lever its balance sheet and curtail investments in this capital-intensive business. We continue to like TCOM for its focus on reducing capital intensity and the shift to a service-bundled infrastructure strategy. We maintain ‘buy’ but raise our SOTP-based March 2017 target price R615 (R570 earlier) in view of the deal.

TCOM has signed definitive agreements with ST Telemedia to sell 74% of its data centre business for a consideration of $469 million; TCOM will retain the remaining 26% stake. The sale will effect the transfer of a proportionate share in TCOM’s 14 data center facilities in India and three facilities in Singapore to ST Telemedia.

The EV (100% business) for the India business is R31.3 billion, while the Singapore data center business is valued at SG$232.4. The data center business contributed $35 million to TCOM’s EBITDA.

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