Tata Communications (TCOM) released a poor set of 4Q FY3/09 results recently. Consolidated revenues of Rs25.9 billion (up 21.4% y-o-y and flat q-o-q) missed our estimate by 5%.
However, EBITDA of Rs4.2bn (up 102.7% y-o-y and 12.9% q-o-q) came in 11% ahead of our estimate because of a transfer in network cost to capex from opex.
A net loss (excluding exceptional) of Rs118 million was significantly poorer than our net profit estimate of Rs1,225 million.
Management noted that there has been no progress on the issue of surplus land assets. We do not see a likelihood of this in the next 12 months.
Following NTT DoCoMo’s purchase of a 26% stake in Tata Teleservices (Not listed), Tata Group’s telecom businesses will have three external partners – the government of India in TCOM and NTT DoCoMo and Temasek (not listed) in Tata Teleservices.
This would increase the complexity in any groupwide restructuring of the three telecom businesses in the Tata Group, in our view.
Non-core business assets and land already comprise 63% of our target price. We see limited potential for TCOM to realize value from the sale of surplus land assets in the next 12 months.
It now has extremely expensive valuations of a 155x PER and 12.5x EV/EBITDA on FY3/10E numbers. This is clearly not warranted, in our view, given modest EPS growth, if any, in FY3/10E and a RoE of 1.9%.
We recommend investors SELL into the strength and switch to Bharti.