Tata Comm tanks 10%, biggest fall since March 2020 as weak Q4 weighs heavy

Tata Communications Ltd share price declined 10 percent, its biggest fall since March 2020, on April 25 after the company reported a weak set of numbers for the March quarter.

The stock ended at Rs 1,119.50 on BSE, down 9.27 percent, its worst closing since March 12, 2020. The scrip slipped to Rs 1112.70 during the day.

Tata Communications posted revenue growth of 1.9 percent quarter on quarter (QoQ) and 4.7 percent year on year but higher operating expenses led to a 6 percent miss on EBITDA.

Net profit was down 7.6 percent quarter on quarter due to lower EBITDA, higher D&A and taxes, offset in part by higher other income.

The recovery in the data segment (up 2.1 percent QoQ) continued, supported by robust growth in the digital platform (up 3.4 percent QoQ).

Core connectivity growth was at 0.5 percent QoQ. All digital segments, except collaboration, grew in double-digits YoY in FY22.

The company has maintained its EBITDA margin guidance of 23-25 percent and plans to invest margin back into the business to drive revenue growth.

"This should be partially weak from the order book of Q3; while the order book funnel has sequentially improved, management commentary does indicate gradual recovery in revenue growth. TCom revenue growth faced headwinds from fewer feet on the Street, delay in decision making and under-performance of usage-based services,” ICICI Securities in a note to its investors.

The company is hopeful of acceleration in revenue in FY23. Showing willingness to invest both in capex and opex to drive growth implies huge commitment. “We would wait for early signs of an uptick in revenue,” the note said.

ICICI Securities has cut its earnings per share estimates by 5-12 percent over FY23-24E, and reduced the target price to Rs 1,600 from Rs 1,680. It, however, maintained a “buy” rating on the stock.

"Higher attrition levels have impacted the deal funnel in H2FY22. Management is hopeful of a recovery in the funnel rate in ensuing quarters, with the ongoing hiring,” said Emkay Research said in a note to investors.

The India business, with digital platforms, has been performing well. The decline in international revenues, however, had affected revenue growth.

“Though we estimate continued revenue recovery in coming quarters, higher-than-expected cost inflation should restrict margin expansion,” the brokerage said.

In the past, management highlighted it would pursue inorganic opportunities to accelerate revenue growth.  Given its strong balance sheet, the company should aggressively pursue it.

“In our view, for any valuation re-rating, sustained double-digit revenue growth in the digital segment is essential. Sharp cut in earnings is on account of an EBITDA downgrade and higher dividend payout resulting in lower other income as well", Emkay Research report said.

The brokerage firm cut its FY23-24E EBITDA by 4-8 percent due to higher-than-expected cost inflation. It, too, has maintained a “buy” rating, with a revised target of Rs 1,650 from Rs 1,800.