CMP: 187
Target: 270 in 6 months

Company description:

Tata Communications Limited (formerly VSNL) was the monopoly ILD (International Long Distance) voice service provider until March 2002, when it was privatised and the Tata Group picked up a majority stake. The company , along with its subsidiaries is a leading global provider of a new world of communications. With a leadership position in emerging markets, Tata Communications has continued to pioneer innovative products and display leadership across its Enterprise Telecom portfolio. With strong emphasis on innovation in terms of technology, a vertically and horizontally-diverse service portfolio and strong global network, it has succeeded in offering best-in-class products and services together with a compelling value proposition to its Enterprise customers. The Tata Communications global network includes one of the most advanced and largest submarine cable networks and a Tier-1 IP network with connectivity to more than 200 countries and territories across 400 PoPs (Post Office Protocol), as well as nearly 1 million square feet of data centre and collocation space worldwide along with acquisition of Tyco for US$130m in July 2005 and Teleglobe for US$239m. It also has a 10.0% stake in Tata Tele (post equity dilution from the entry of NTT DoCoMo) and 741 acres of surplus land.

 Tata Communications' depth and breadth of reach in emerging markets includes leadership in Indian enterprise data services, leadership in global international voice, and strategic investments in South Africa (Neotel), Sri Lanka (Tata Communications Lanka Limited) and Nepal (United Telecom Limited).

 Core business trends are healthy:

a.       Voice Segment- This has been benefitting from a steady volume growth as TCOM has managed to increase its market share as well as rupee depreciation.

b.      Data Segment - Margin in the data business too has held on despite high marketing spend with a rising contribution of higher-margin enterprise segment.

c.       Neotel - South African subsidiary, has seen steadily growing up and has now achieved EBIT breakeven.

d.      Overall biz continues to improve as Shanghai joins Tata Communications' global Telepresence network via partnership with China Mobile and JW Marriott.

Recognition and Awards:

Frost & Sullivan honours Tata Communications  with four awards in the Enterprise Telecom Services category at the 2013 Frost & Sullivan, India, Information & Communications Technology (ICT) Awards and they are for:

•   Enterprise Data Service Provider of the Year (fifth year in a row)

•  Hosted Contact Centre Service Provider of the Year (third year in a row)

•  Third-Party Managed Service Provider of the Year (second year in a row)

•   Managed Video Conferencing Service Provider of the Year

 Land sale Benefit:

 The cabinet has given approval for a land demerger. Four years back company's Land     NAV was at Rs110/share now it has to be at least Rs250/ share due to increase in land valuation.  Unlocking of land will be a key catalyst for Tata Communications, as it not only benefits minority shareholders, but will also give management flexibility to undertake any corporate restructuring (a logical merger with group company TTSL) or raise equity to de-leverage. It could also pave the way for unwinding the residual government stake.

Valuation:

 We expect Tata Communications to emerge as one of the biggest beneficiaries of an improving pricing environment given its dominant position in the Telecommunication sector. With company achieving EBIT breakeven in FY13and further capturing value from its existing business (domestic + international + SA subsidiary), surplus land and stake in Tata Teleservices  and also, with India at the cusp of data growth leaving tremendous scope for expansion may result stock price going up by 40%.
We believe the stock at CMP Rs.187 is a good opportunity point as long term drivers are intact with a target price of Rs. 270 in 6 months.