Tata Communications Neutralised Amid Target Price of Rs 1720: Motilal Oswal

Tata Communications Posts Steady 4Q Performance

Tata Communications (TCOM) has delivered a steady fourth quarter, driven by a significant acceleration in Digital portfolio growth. According to a recent research report by Motilal Oswal, TCOM's data revenue grew by 11.5% year-over-year (YoY) and 6% quarter-over-quarter (QoQ), primarily due to the 19% YoY increase in Digital portfolio growth, outpacing the 15% YoY growth seen in the third quarter. Additionally, the company's core-connectivity revenue grew by 4.5% YoY.

However, when adjusted for foreign exchange (FX), Tata Communications' consolidated revenue growth was relatively muted at 3.7% YoY. The company's consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) grew by 14% YoY to INR12.8 billion, as margins expanded by 85 basis points (bp) YoY to 19.8%. Notably, the EBITDA margin was down 25bp QoQ, missing estimates by 25bp.

Key Drivers of Growth

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The research report highlights that the acceleration in data revenue growth and margin expansion are key drivers for re-rating Tata Communications. The company's data business is valued at 9 times its estimated enterprise value to EBITDA (EV/EBITDA) for fiscal year 2028 (FY28E), while the voice and other businesses are valued at 4 times EV/EBITDA.

Revised Target Price

Based on this valuation, Motilal Oswal has revised its target price for Tata Communications to INR1,720. The research firm has reiterate its Neutral rating for the company, citing the need for continued acceleration in data revenue growth and margin expansion to re-rate the stock.

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Note: Growth rates are based on YoY and QoQ comparisons.