MF Global India - Tata Communication
vikram ag
Tata Communications reported its audited Q4 FY08 results. The results are not comparable on a QoQ and YoY basis as the company has hived off its retail broadband subsidiary. Although, the subsidiary has been incurring losses the results on QoQ basis have not shown substantial improvement on absolute terms after hiving off.
On a consolidated basis the company has reported a 4% dip in revenues YoY. EBITDA margins dipped by 200bps YoY mainly on account of certain one off expenses related to litigations, restructuring costs and other which the company does not expect in the forthcoming years. Adjusting for the one off expenses the management indicated that EBITDA margin improved by 150bps on YoY basis.
Other Highlights
· The management expects the revenues to grow by 15% YoY and EBITDA margin to be in the range of 14% in FY09 which implies an improvement of 380 bps YoY. The management has maintained its guidance of managing 20% EBITDA margin by the end of FY12.
· The management has guided for a capex of USD550-600 mn for FY09, bulk of which will be spent on laying submarine cables.
· The management expects roll out WiMax will depend on the availability of spectrum in 3.3MHz or 2.5MHz bands. The government's policy on spectrum in these bands is still not very clear. This poses strong risks for the company on its WiMax roll out.
· The management has maintained its status quo with regards to de-merger or auction of surplus land, as the management is yet to receive any formal communication from the ministry.
Valuation
· We had valued TCOM at Rs 530 on SOTP methodology with 46% of its value coming from the land bank, core business on DCF methodology at 120, TTSL stake at Rs105 and other investments on book value. The core business has performed below our expectations and uncertainty still looms large on the unlocking of value of land bank. Hence, we assign a discount of 20% to the land bank, value core business at 105 based on DCF methodology and we have maintained our estimates on TTSL stake and other investments, translating to our new target price of Rs 470, implying an upside of 11.6%. Hence, Neutral.