Hold Tata Communication; target of Rs 1740: ICICI Securities

ICICI Securities research report on Tata Communication

Tata Communications’ (TCom) Q2FY24 data business revenue grew slower at 10% YoY / 0.7% QoQ due to a drag from G-SIP and fewer events in media. Data business net revenue grew even slower at 8.1% due to higher direct cost, which along with rise in other expenses hurt the underlying EBITDA margin. Company remains confident on continued strong growth in data business on the back of rise in contribution from the fast growing digital services and healthy sales funnel. Nonetheless, it has experienced some slowdown in decision making which is slowing deal conversion. Its game plan remains to improve position in the US market (same as tech companies), which is appreciable. We have downgraded the stock to HOLD (from Buy) on higher implied valuations and near term macro challenges potentially delaying tech spending.

Outlook

Our EBITDA margin assumption has been impacted due to the rise in direct cost for core connectivity. Our EPS estimates have been downgraded by 15.7% for FY24E and 19.2% for FY25E. Accordingly, our target price has been cut to INR 1,740 (from INR 1,850), valuing the company at 28x FY25E EPS (earlier: 24x). We downgrade the stock to HOLD (from Buy) on near-term macro challenges, and integration-related pressure on margins and EPS (rise in depreciation and finance cost).