Sell Tata Communications; target of Rs 286: Asit C. Mehta

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Sell Tata Communications; target of Rs 286: Asit C. Mehta

Asit C. Mehta is bearish on Tata Communications and has recommended sell rating on the stock with a target of Rs 286 in its October 29, 2010 research report.

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Asit C. Mehta is bearish on Tata Communications and has recommended sell rating on the stock with a target of Rs 286 in its October 29, 2010 research report.

"Tata Communications (TCom) consolidated revenue for 2QFY11 increased 9% YoY to Rs 29.6 billion. Sequentially the revenues increased by 2.6%. The overall growth in revenues was contributed equally by voice and data, which showed similar growth trends. Majority of growth was from the "others" segment (which includes revenues from data centres, VPN etc.) The voice revenues continue to be major contributor the topline, however their share has declined from 55% in 1QFY11 to 54.6% in 2QFY11. While that of data segment remained stable at 38.5% during the same period."

"Pperating profit declined by 9% YoY to Rs 2.9 billion on account of increase in the employee cost. However sequentially the operating profits have increased significantly mainly on account of reduction in network opex. The operating margins stands at 10.1% in 2QFY11 versus 9.0% in 1QFY11 and 12.1% in 2QFY10. Sequentially the operating profits have started improving with the shift in the revenues towards the data segment. Having accumulated high debt on its balance sheet (debt equity of 1.95x), the company continues to experience the interest pressure with costs increasing from 4.6% in 1Q FY11 to 4.7% in 2QFY11. TCom registered net loss of Rs 2.1 billion in 2QFY11 as against loss of Rs 1.5 billion in 2QFY10 and loss of Rs 2.8 billion in 1QFY11."

"TCom's business mix is progressively shifting toward data reflected in improved margins sequentially. The operations of Neotel are expected to turn

EBITDA positive by FY11 and PAT positive by FY12. This in turn will result in improving the margins for the Tata Communications as some margin erosion for the company was attributed to the Neotel operations. However the stretched balance sheet continues to depress earnings, acting as negative catalysts for the stock. Improvement in the data segment revenues, increased revenues contribution from Neotel and margins improvement would be the factor to watch out in coming quarters. We maintain our "SELL" recommendation for a target of Rs 286. (3x PBV its book value of Rs 95.5 for FY12E)," says Asit C. Mehta research report.

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To read the full report click on the attachment