Tata Communications Limited (TCL), on a standalone basis, concluded the last quarter with disappointing results across all operational segments. Net sales dropped 18.3% to Rs8.5 billion owing to the decline in wholesale as well as enterprise and carrier data services.
EBITDA plunged by 4% q-o-q to Rs1,475 million. However, margins improved by 259 bps to 17.3% primarily due to a 25.8% drop in network costs.
TCL’s wholesale voice revenue continued its downfall in FY08 with a drop of 15% to Rs17 billion due to the shrinking market share as well as dropping revenue per minute.
With continuous shift of traffic to captive networks, we expect the business to experience volume growth at diminishing rate and profitability to remain under pressure.
In contrast to our expectations, the company posted a decline of 22.8% q-o-q and 6.2% y-o-y in the segment revenue. Although the business holds potential, driven by bandwidth demand from IT/ITeS and broadband services, TCL’s volatile performance remains a concern.
We have lowered our estimates and expect the revenue to grow at a CAGR of 6.6% for FY08-10E. However we expect the growth rate to pick up beyond FY10 as enterprise and data business starts to contribute around 50% of total revenues helped by expansion of Wi-Max and Managed and other services.
At the current price of Rs. 350.5, the stock is trading at a forward P/E of 29.4x and 28.1x for FY09E and FY10E. Our sum-of-the-parts valuation of Rs402 suggests a premium of 12% to the current price. While TCL’s assets hold value, its volatile financial performance remains a concern. We still maintain HOLD rating on the stock.