Shares of Tata Communications Ltd were among the largest gainers on Wednesday, rising by as much as 11.6% to Rs246 on the National Stock Exchange. In the past two trading sessions, the shares have risen by around 17%. Interestingly enough, the sudden investor interest in the telecommunications solutions provider is because of the controversy surrounding the surplus land held by the company. Stocks typically correct when a controversy breaks, but in the case of Tata Communications, investors are hoping that it would expedite the sale process of the surplus land.
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HSBC analysts said in a note to clients, “The probe ordered by India’s telecom minister into the delay in the demerger of surplus land of the company has raised hopes that the land sale is likely to be soon.”
Analysts at BNP Paribas echoed the view, raising their target price on the company by 36% to Rs313, according to agency reports.
Although the disinvestment process of the former Videsh Sanchar Nigam Ltd was completed in February 2002, the unlocking of the “surplus” land holdings of the company hasn’t happened for more than nine years. As a result, analysts at HSBC have been valuing the land holdings at just 50% of their estimated fair value. With the recent missive from the telecom minister suggesting there will be some progress, the broker has cut the discount to 40%. Needless to say, if things really start moving on this front, the shares will be re-rated to a much larger extent.
Besides, as the company management has been pointing out, the land demerger will also enable it to raise funds by issuing fresh equity. Currently, it can’t do so because of the government’s reluctance to dilute its shareholding. If the company is free to issue equity, it can tackle its high debt, which has risen to almost two times the equity. Interest cost has risen to about 5% of sales and is one of the reasons for the company’s pre-tax losses amounting to more than 5% of sales this fiscal.
If the government is serious about expediting the sale process of the land holdings, Tata Communications’ shareholders would gain much more than the 17% return they have enjoyed in the past two days.
Graphic by Sandeep Bhatnagar/Mint
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