Shares of Tata Communications are under selling pressure, though off early lows, after the management deferred its ambition target of doubling data revenue to Rs 28,000 crore by one year to FY28, which implies a lower three-year CAGR of around 13 percent as against near 19 percent, as previously projected over FY23-27.
Motilal Oswal in a note said that the task of ramping up digital margins to double digits would 'remain a tall ask' and has maintained its Neutral rating with an unchanged target price of Rs 1,660 per share.
Nuvama has a Buy rating on the share with a target price of Rs 2,000 per share, as it sees M&A and asset sale as key triggers going forward. It added that the guidance deferral was not unexpected. The company is a 'unique play' that combines telecom stability and growth in IT services, said Nuvama.
The MOSL note said the ambition of a higher digital portfolio is 'very optimistic' without any future acquisitions. It has priced in a three-year CAGR of around 12 percent for digital revenue, reaching around Rs 12,800 crore by FY28, which would be almost 51 percent share. MOSL said it will wait for higher data revenue and margin expansion before turning constructive. The MOSL note added, "Tata Comm would still fall short of its ambition of reaching Rs 28,000 crore in data revenue in FY28 without further acquisitions. Overall, we build in a ~9% data revenue CAGR over FY25-28, with data revenue reaching Rs 25,000 crore by FY28." After a significant time correction that saw a mere 5 percent return since the 2023 analyst meet, valuations of Tata Communications are now looking reasonable, MOSL added.
Shares of Tata Communications are higher by 10 percent in last one month but are trading flat on a YTD basis.
The management said in its March quarter earnings call that it sees its two recent acquisitions - Kaleyra and Switch - both approaching 'inflection point' and synergies should play out in the coming quarters.
"On the cost side, synergy execution, while it was being done, we were hit with something that we couldn't anticipate. So that's where you see the margins did not kick in as quickly as we anticipated. But that is on The Switch side. Similarly, on the Kaleyra, I think the capabilities are very good. Again, we are cutting down on a few areas which had low margins, bringing a bit more discipline into how we manage some of the tail accounts and so on and so forth. So that should help improve the margins in the normal terms," MD and CEO AS Lakshminarayanan said.
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