Tata Comm
Rating: Overweight
Tata Communications is transitioning from a voice and connectivity provider into higher-margin managed services, leading to improving cash flows, Ebitda margins, and RoCE (return on capital employed). It trades at 4.5x F17 EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation, and amortisation) on our estimates, well below global peers. TCOM is placed well to exploit growing data/cloud business.
World’s leading alternative telecom carrier: TCOM ranks among the world’s top four telecoms in terms of IP (internet protocol) backbone capacity. Globally, it carries 10% of IP traffic, 19% of wholesale voice, 50% of global mobile signalling, and it owns 24% of global subsea cables. As of June 2014, it had a dominant 30% domestic revenue market share in co-location and cloud services.
Market under-appreciates two drivers: Business mix change is set to drive profits: Our F16/17 earnings forecasts are >30% above consensus, supported by our bullish stance on managed network business. We project managed services contribution to core Ebitda will rise from near zero in F14 to 24% by F17, driving consolidated Ebitda margins up 209bps.
Unlocking value via non-core asset monetisation aids de-leveraging and profit growth. TCOM owns 700 acres of non-surplus land that it can monetise by either leasing to build datacenters for customers or build and manage for them. Our bull case assumes cash from sale of its Neotel stake at R19/share, and surplus land sales add R189/share.
Improving fundamentals not reflected in valuations: Over F14-17, we expect RoCE to improve 580bps, with decreasing capex intensity, and FCF (free cash flow) yield to grow from -0.8% to 11.5% posing upside risk to dividends.
We estimate a 15% F14-17 Ebitda CAGR; TCOM, trades a 30% discount to global peers, despite the group’s highest Ebitda growth outlook.
Key risks include slower-than-expected growth in managed data services and higher-than-expected capex for sea cables.
—Morgan Stanley
