Tata Communications Limited (TCL)’s revenue on a standalone basis dipped 4.9% y-o-y to Rs9.9 billion in Q3’09 owing to the fall in the wholesale voice and enterprise & carrier data segment.
However, EBITDA shot-up 50.1% during the quarter due to substantial 24.5% yoy decline in the network cost.
We believe that the wholesale voice business’s revenue growth will be negative in the coming years considering the poor performance in the last few quarters with continuous shifting of traffic to captive network.
Therefore, we expect the revenue to decline at a 1-2% CAGR during FY09-FY11.
In the near-term, the growth outlook remains bleak for the segment as the IT/ITES businesses are severely affected by the global financial crisis.
Nevertheless, TCL’s enterprise and data business holds a strong potential in the long run given the under penetrated market and an expected launch of WiMax services.
We expect the volume growth to pick up post FY10 and the segment to contribute more than 50% of the revenue as the company expects to achieve ~11 mn subscriber by 2013 through WiMAX facility with an exponential CAGR of 155% during FY08-FY13.
Besides, we also expect the global economic scenario to revive from the current worst phase after FY10 that ultimately will boost the sales volume.
Based on our SOTP valuation, we have arrived at a fair value estimate of Rs366 after discounting the total value (except land) by 10%, which is the conglomerate discount.
This gives us a ~21% downside from the current market price of Rs462.5. Therefore, we have maintained our SELL rating on the stock.