Buy Tata Communications ltd For Target Rs. 2,000 By JM Financial Services
Tata Communications’ (TCOM) consolidated revenue was 1-2% lower vs. JMFe/consensus at INR 59.6bn (down 0.5% QoQ but up 5.8% YoY) vs. JMFe/consensus of INR 61bn/INR 60.4bn. Data revenue was lower than JMFe at INR 51bn due to lower core connectivity revenue, while digital portfolio revenue was robust and largely in line. However, the management indicated that order book saw healthy double-digit QoQ growth with multiple deal wins, and the sales funnel also remains healthy and diversified. Consolidated EBITDA was also 2.1% lower than JMFe/cons at INR 11.4bn on lower revenue while higher network and staff costs were offset by lower other opex. Net debt was up QoQ at INR 101bn at end1QFY26, implying net debt to EBITDA of 2.2x (vs. INR 93.8bn at end 4QFY24 or net debt to EBITDA of 2.1x), primarily due to seasonal working capital effect. However, the management expects net debt to EBITDA to fall below 2x by 2HFY26. We maintain our BUY rating on TCOM (unchanged TP of INR 2,000/share) based on 11x FY27 EV/EBITDA multiple for the data segment, (vs. 5-year historical average of 10.6x) as we expect data segment EBITDA to grow at a robust CAGR of ~24% over FY25-28E.
* Data revenue lower than JMFe at INR 51bn due to lower core connectivity revenue, while digital portfolio revenue was robust and largely in line:
Consolidated revenue was 1-2% lower vs. JMFe/consensus at INR 59.6bn (down 0.5% QoQ but up 5.8% YoY) vs. JMFe/consensus of INR 61bn/INR 60.4bn. This was due to data revenue being 1.4% lower than JMFe at INR 51.3bn (up 0.7% QoQ and 9.4% YoY) primarily led by lower core connectivity revenue at INR 26.2bn (down 1.4% QoQ but up 2.7% YoY) due to SAARC region related issues (difficulty in recoverability of dues from few clients in SAARC region, leading to subsequent exits). However, digital portfolio revenue grew largely in line with JMFe, up 2.9% QoQ and 17.4% YoY at INR 25.1bn. This healthy digital portfolio revenue growth was led by robust growth in media (up 11% QoQ and 15.8% YoY), next-gen connectivity (up 5.2% QoQ and 30.7% YoY), cloud and cyber-security (up 2.7% QoQ and 26.9% YoY) and Collaboration & CPaaS (up 2.4% QoQ and 12.1% YoY). However, incubation portfolio revenue was down 13.2% QoQ but up 13% YoY). Separately, voice revenue increased 5.5% QoQ to INR 3.9bn in 1QFY26
* Cons EBITDA also 2.1% lower than JMFe/cons at INR 11.4bn on lower revenue while higher network and staff costs were offset by lower other opex:
Network cost was higher at INR 27.3bn (up 0.6% QoQ and 15.5% YoY), being 45.8% of revenue (vs. 45.3% of revenue in 4QFY25); staff cost was also higher at INR 12.2bn (up 7.2% QoQ and up 6.4% YoY); but this was largely offset by lower other operating costs at INR 8.8bn (down 14.1% QoQ and down 12.5% YoY). Hence, reported EBITDA was 2.1% lower at INR 11.4bn (up 1.3% QoQ and up 1.1% YoY) vs. JMFe/consensus of INR 11.6bn, resulting in EBITDA margin of 19.1% in 1QFY26 (vs. 18.7% in 4QFY25). Further, PAT was even lower at INR 1.9bn vs. JMFe/consensus of INR 3.2bn due to lower other income (at INR 0.2bn vs. JMFe of INR 0.5bn) and one-off expenses: a) staff optimisation cost of INR 0.2bn; and b) loss of INR 0.4bn related to sale of its subsidiary. PAT was down 74% QoQ on a high base of 4QFY25 (which included exceptional gain of INR 6.6bn on sale of property situated at Ambattur, Chennai; and one-time gain of INR 3.1bn on sale of white-label ATM business subsidiary (TCPSL)).
* Capex moderated QoQ to INR 4.4bn (vs. INR 6bn in 4QFY25); while net debt up QoQ to INR 101bn: Capex moderated QoQ to INR 4.4bn in 1QFY26 or 7.3% of revenue (vs. INR 6.0bn or 10% of revenue in 4QFY25). Separately, net debt was up QoQ at INR 101bn at end-1QFY26 or net debt to EBITDA of 2.2x (vs INR 93.8bn at end 4QFY24 or net debt to EBITDA of 2.1x) due to seasonal working capital effect (in 1Q) and as the credit period was extended for 5-10 key accounts. However, the management expects net debt to EBITDA to come down to less than 2x by 2HFY26.
* Maintain BUY rating on TCOM with unchanged TP of INR 2,000: We have marginally tweaked our FY26-FY28 revenue/EBITDA estimates, factoring in the 1QFY26 results; while our TP is unchanged at INR 2,000. We are building in a robust ~24% data segment EBITDA CAGR over FY25–28E driven by a) strong growth in digital portfolio, positioned strongly across key megatrends like cloud, AI, IoT, etc.; b) overall EBITDA margin improving from current ~19% to ~23% by FY27 (lower end of management guidance of 23%-25%) as operating leverage and acquisition synergies are likely to be partly offset by adverse revenue mix. Hence, we reiterate our BUY rating on TCOM with unchanged target price of INR 2,000/share, based on an 11x FY27 EV/EBITDA multiple for the data segment (vs. 5-year historical average of 10.6x). Key risks: a) weak global macro leading to deferment in discretionary tech spends; b) significant delay beyond FY27 to get to positive EBITDA margin in Digital portfolio segment; c) adverse AGR ruling.
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