Tata Communications shares fall 16% in two weeks; check brokerage views and target prices

Shares of Tata Communications Ltd extended its fall and cracked another 6 per cent during the trading session on Friday to Rs 1740.90, with its total market capitalization barely holding Rs 50,000 crore mark. The Tata Group firm has declined more than 16 per cent from its 52-week high at Rs 2,085 hit about two weeks ago.

Brokerage firms continue to remain divided on the stock, particularly after a muted performance in the March 2024 quarter. However, they are not very positive on the counter, despite the strong parentage of Tata. Market analysts said that pressure on margins and sturdy ambitions of growth may weigh on the counter as they see the stock to fall further from current levels.

Tata Communications reported weak Q4, with continued moderation in organic revenue growth and margin contraction. Organic data revenue growth further moderated to 4.8 per cent YoY on broad-based growth moderation in the digital portfolio, said Kotak Institutional Equities. The brokerage believes that the management's ambitions remain a tall ask.

Tata Communications' reported Ebitda was 8 per cent below our estimate, as reported margin contracted further by 160 bps QoQ to 18.6 per cent on weaker profitability of recent acquisitions. Management reiterated their ambition of doubling data revenue by FY2027 and getting back to 23-25 per cent Ebitda margins in the medium term, said with a 'sell' rating and fair value of Rs 1,525.

Tata Communications reported a 1.5 per cent fall in consolidated net profit on a year-on-year (YoY) basis to Rs 321.2 crore for the quarter ended 31 March, 2024. The company's bottomline came in at Rs 326 crore in the year ago period. Revenue from operations increased about 25 per cent YoY to Rs 5,691.7 crore as against Rs 4,568.7 crore in the same quarter last fiscal.

Tata Communications' Ebitda rose merely 2.1 per cent YoY at Rs 1,056.3 crore while its EBIT margin took a hit as they dropped to 18.6 per cent from 22.6 per cent in the year ago. The company also said that its board has recommended a final dividend of Rs 16.70 per share for the financial year ended March 31, 2024.

"We estimate a CAGR of 14 per cent and 20 per cent in revenue and EBITDA over FY24-26, respectively. We have increased our Ebitda estimates by 7 per cent in FY26, factoring in improvement in Kaleyra and Switch margin," said Motilal Oswal. It has set an ambitious revenue growth target of Rs 28,000 crore by FY27 in the digital portfolio, it said.

Net debt jumped 60 per cent YoY to Rs 9,000 crore due to inorganic acquisitions. At P/E of 22 times and EV/Ebitda of 9.1 times on FY26E, Motilal sees limited upside. Margin improvement and data revenue growth should be the key catalysts for further valuation re-rating, it added, maintaining 'neutral' rating with a revised target price of Rs 1,910 on the stock.