Tata Communications shares: Buy stock, target revised upward, says ICICI Securities

Shares of Tata Communications Ltd climbed 8 per cent in Tuesday's trade after ICICI Securities upgraded the stock to 'Buy' with an upward revision in stock price, saying the stock is undervalued, given the core connectivity free cash flow (FCF) and digital services potential.

Calling its risk reward 'compelling', ICICI Securities said Tata Communications stock price has plunged notably beset by near-term revenue weakness – making the company’s revenue guidance seem rather ambitious.

This, ICICI Securities said, presents strong upside potential and compelling risk-reward. Following the development, the stock rose 7.53 per cent to hit a high of Rs 1,475.85.

"In FY24, TCom was hurt by a cable cut in the Red Sea and weak order book (OB) growth. With the Red-sea issue now behind and double-digit FY25–TD order book growth, TCom’s data revenue growth will likely swell. We believe TCom’s strong digital product portfolio aside, Street is yet to bake in Rs 3,300 crore of FY27E FCF generation (Ebitda minus capex) in core connectivity (7.2 per cent of EV)," ICICI Securities said.

Tata Communications has launched many products serving cloud ecosystem, which are seen benefiting from its adoption. Also, Tata Communications has been agile in embedding AI in internal process and services – these upfronted investments are undervalued, ICICI Securities said.

"We arrive at an SoTP-based TP of Rs 1,840; our estimates remain unchanged. We assign 11 times FY27 EV/Ebitda to its core business. At CMP, we believe, TCom deserves a double upgrade to BUY due to strong pile-up of sales funnel; and early signs of OB growth; strong digital services portfolio with focus on serving cloud ecosystem; and adoption of AI within the organisation," ICICI Securities said.

It said there is upside risk to connectivity demand from rising adoption of AI. Tata Communications has got financial discipline and sharp focus on capital allocation without compromising on growth investments, ICICI Securities said.

It estimated a digital services revenue CAGR of 17 per cent over FY25–27 despite a low base; and excitement around new services. ICICI Securities said it's conservative estimates are hugely influenced by Tata Communications' track record.

"Also, the bulk of cost its heavy-lifting is now behind; further, TCom expects the rise in digital revenue/operating leverage to help break-even digital services at EBITDA. Our estimate anchors digital services’ EBITDA break even in FY27E (against Rs 800 crore Ebitda loss in FY25E); and a significant drop in cash-burns," it said.