Buy Tata Communications, fair value Rs 425: Kotak Institutional Equities

Kotak Institutional Equities has upgraded Tata Communications stock to buy from add but lowered the fair value to Rs 425 from Rs 500 earlier. The brokerage thinks that at just over 5 times trailing (FY2020E) EV/EBITDA, there is a lot of value in the company despite any short-term business disruption on account of the Covid-19. The core business should not see much impact barring on the business from the media vertical in the short term. New business signing could get delayed on account of travel restrictions but quick recovery is expected once things normalize.

The share price of the company moved down by -7.34 per cent from its previous close of Rs 246.55. The last traded price of the stock was 228.45.

Tata Communications Ltd., incorporated in 1986, is a midcap company with a market cap of Rs 6441 crore, operating in the telecommunications sector.

Investment Rationale

The brokerage cut FY2020E/21E/22E EBITDA forecasts by 2 per cent/10 per cent/4 per cent, respectively. It has baked in a 2.3 per cent year-on-year decline in EBITDA in FY2021E (sharper in USD terms) against expectations of a 7 per cent year-on-year growth earlier. Even as the fluidity of the Covid-19 situation makes ST forecasts risky, Kotak is comfortable with FY2022E forecasts. At 4.7 times FY2022E EBITDA, the stock is pricing in a pretty dismal long-term prognosis. But the brokerage feels the selloff is overdone and has upgraded the stock to buy from add;

Financials

Tata Communications Ltd. key products/revenue segments include telecommunication services which contributed Rs 5389.13 crore to sales value (100.00 per cent of total sales) for the year ending March 31, 2019. For the quarter ended December 31, 2019, the company has reported consolidated sales of Rs 4228.72 crore, down -1.03 per cent from last quarter sales of Rs 4272.76 crore and down -.95 per cent from last year's same quarter sales of Rs 4269.47 crore. The company has reported net profit after tax of Rs 57.60 crore in the latest quarter.