Buy Tata Communications Stock As Consolidated Profit Jumps To Rs 1,481 Cr, Achieves Financial Fitness Goal

Renowned brokerage firm Emkay Global has given buy call for Tata Communications (TCOM) stock for a potential gain of 32%. TCOM management reiterated its strategy regarding platform transformation with a focus on product innovation, new launches, higher customer wallet share and financial fitness to accelerate topline growth.

1. Tata Communications stock outlook

The Current Market Price of Tata Communications is Rs 875 apiece. If you buy the stock at the current market price, there is a strong potential that it will give you a return of 32% with a target price of Rs 1155 apiece. The 52-week high is Rs 1591 apiece and 52-week low is Rs 856.25 apiece. The P/E is 16.83 and EPS is 51.99.

Although the company has achieved its financial fitness targets in the last two years and now has a healthy balance sheet and strong cash-flows, it continues to be noncommittal on the timelines for achieving double-digit revenue growth in the Data segment.

Current Market Price	Rs 875
Target Price	Rs 1155
Potential Gain	32%
52-week Low	Rs 856
52-week-High	Rs 1591

2. Tata Communications Financial Performance

In the last two years, although the company has delivered on its financial fitness goals, revenue recovery has seen a delay. Management sounded positive about the improving funnel rate, potential deal conversions, new product launches and increased investments. However, it continued to be noncommittal regarding revenue growth guidance. Although management has reemphasized its double-digit medium-term topline growth guidance for the Data segment, there are no clear timelines. As we have highlighted in our past reports, double-digit revenue growth is essential for sustaining a re-rating. Amid these challenges, the stock saw a 30% correction after Q4FY22 results.

According to Emkay, the stock will remain range-bound until TCOM is able to achieve sustainable double-digit revenue growth in the Data segment. The only positive is strong FCF generation despite higher capex spends.

3. Key Risks

There are some risks that may include, 1) increased losses in incubation services; 2) inability to close large deals; 3) continued delays in revenue recovery; and 4) higher competitive intensity.

4. Valuation

According to Emkay, "We have cut FY23-25E EBITDA by 3-8% due to the delay in revenue recovery and lower margins (closer to management's guided range). We cut target multiple for Data segment to 8x (Jun'24E EBITDA) from 10.5x and arrive at a revised SOTP based TP of Rs1,155. With management remaining noncommittal regarding the timelines of double-digit revenue growth in the Data segment, we have cut our FY23-25 revenue assumptions by 2-3%. Earlier, we were assuming double-digit data segment revenue growth from H2FY23. We have trimmed FY23-25E EBITDA margins as well, now estimating closer to the guided range of 23-25%."

5. About Tata Communications Ltd

Tata Communications is a digital ecosystem enabler that powers today's fast-growing digital economy. The Company enables the digital transformation of enterprises globally, including 300 of the Fortune 500 - unlocking opportunities for businesses by enabling borderless growth, boosting product innovation and customer experience, improving productivity and efficiency, building agility and managing risk, according to the official website of the company.

The market capitalisation of the company is Rs 24,937 crore.

6. Disclaimer

The above stock was picked from the brokerage report of Emkay Global. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.