Tata Communications has delivered a stunning performance, with its stock rallying over 100% in the past two years. Over the last 11 years, investors have enjoyed a whopping 1430% return on their investment. In April, the stock hit a new record, soaring past ₹2,000 for the first time and reaching an all-time high of ₹2,084 per share.
Driving Digital Connectivity
Tata Communications has been a key player in the digital services sector, crucially enabling enterprise connectivity across India and beyond. The company boasts a vast global network, including the world’s largest privately-owned subsea fibre backbone and a top-tier IP network, connecting more than 190 countries and territories. This network handles about 30% of the world’s internet traffic. Tata Communications links businesses to 80% of the world’s major cloud providers and reaches 4 out of 5 mobile users globally.
Currently, Tata Communications offers services like international and national voice and data transmission, bandwidth leasing on undersea cables, internet connectivity, and a range of value-added services. These include telepresence, managed hosting, mobile global roaming and signaling services, transponder leasing, and television uplinking.
Ambitious Growth Targets
At its recent annual investor meeting, Tata Communications’ management outlined bold targets for FY27. They expect data revenue to climb to ₹280 billion, aim to keep the net debt-to-EBITDA ratio below 2x, and target a return on capital employed (RoCE) of over 25%. The company plans to seek strategic acquisitions to fill gaps in its portfolio but will avoid acquisitions merely for revenue growth.
On the operational front, Tata Communications aims to sustain consolidated EBITDA margins between 23% and 25%, excluding effects from acquisitions or growth-related investments. The company is broadening its market reach by targeting new areas, buyer centres, and customer segments.
The digital segment has seen significant growth, increasing from 32% of data revenue in FY23 to 41% in FY24, with a goal to exceed 60% by FY27. Despite challenges in the Communication Platforms as a Service (CPaaS) sector, Tata Communications aims to leverage its strengths and synergies from its acquisition of Kalyera to drive profitable growth in this area.
Management expects to boost margins through acquisition synergies, digital portfolio profitability, ongoing subsidiary reviews, and continuous operational improvements. RoCE is projected to improve through sustained margins, optimised capital use, and efficient capital turnover strategies.
Mixed Analyst Opinions
Following the company’s reaffirmation of its aggressive growth strategy, analysts have varied opinions. Nuvama Institutional Equities has a positive outlook, highlighting Tata Communications’ strong position in technology and telecom, and maintains a ‘buy’ rating with a target price of ₹2,200 per share. IIFL Securities also reiterates a ‘buy’ rating, setting a target price of ₹2,231 per share.
However, Kotak Institutional Equities remains cautious, keeping a ‘sell’ rating with an unchanged fair value of ₹1,525 per share, based on a sum-of-the-parts (SoTP) valuation. They see the risk-reward balance as unfavourable.
Analysts have not changed their earnings estimates. They expect a 7.5% compound annual growth rate (CAGR) in underlying data revenue from FY2024 to FY2027, predicting it to reach ₹240 billion by FY2027 (including acquisitions), compared to management’s target of ₹280 billion. Kotak Institutional Equities forecasts the company’s EBITDA margins to improve to 23% by FY2027 due to operational efficiencies offsetting revenue mix challenges.
“Tata Communications currently trades at 12.5 times its one-year forward EV/EBITDA, a 25% premium to its long-term average. Given our profitability assumptions, we are waiting for a more favourable entry point,” said Kotak Institutional Equities.
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