Tata Communications shares upbeat outlook; stock price targets suggest most positives priced in

Tata group firm Tata Communications shared an upbeat outlook at its investor meet -- giving a 2x revenue guidance by FY27, following which a host of brokerages upped their share price target on the stock. That said even revised targets by a few brokerages suggest a potential downside on the stock, as brokerages felt a 44 per cent upside on the counter in 2023 so far captures in most positives.

Kotak Institutional Equities raised its target to Rs 1,350 from Rs 1,300, but it sees limited upside potential post the recent run up. Motilal Oswal Securities also finds the stock Rs 1,350 worthy. A sustained improvement in earnings growth visibility will be vital for valuation rerating, it said. On Thursday, the scrip was trading 0.67 per cent higher at Rs 1,436 on BSE. ICICI Securities, however, increased its target price to Rs 1,665 on Tata Communications from Rs 1,510 earlier, as it raised its FY25E PE multiple to 22 times from 20 times.

Tata Communications expects data revenue to double by FY27 to Rs 28,000 crore, up 18 per cent compounded annually. This, it feels, will be driven by over 35 per cent annual growth in its digital services revenue, with the product mix rising over 50 per cent.

This, analysts said, is a significant acceleration in digital services revenue growth against 19 per cent in the past three years, and data revenue growth which was under 10 per cent.

Tata Communications expects international revenue to grow faster where it has good lead indicators. Despite the rise in low margin digital services, company anticipates Ebitda margin to be stable at 23-25 per cent, with RoCE of over 25 per cent.

"We believe acceleration in revenue may start showing in the next 12-18 months as the company reaps benefits of the rise in execution of order wins, and international business starts firing. We are yet to factor The Switch acquisition in our estimates, and our data revenue growth forecast is conservative at 12 per cent over FY23-25E," ICICI Securities said.

Motilal Oswal Securities said it has factored in revenue CAGR of 12 per cent and Ebitda CAGR of 10 per cent over FY23-25. The management has

reiterated improved funnel of new deal, but Motilal Oswal said its translation into meaningful growth will be key for Tata Communications to achieve double-digit earnings growth.

"The silver lining is its strong FCF of Rs 1,400-2,300 crore despite increase in capex implying FCF yield in the mid-single digits and healthy ROCE of over 20 per cent and continued deleveraging," it said.

 

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