Buy This Mid Cap Tata Group Stock, With Healthy Orderbook Brokerage Sees 25% Upside

ICICI Securities has a buy call on Tata Communications Limited with an unchanged target price of Rs 1,500 per share. According to the given target price, the stock is likely to surge 25% in 12 months from its current level. Tata Communications is a mid-cap telecom sector stock of the Tata Group. It has a market cap of Rs 34,362.45 crore.

Stock Outlook & Returns

The stock of Tata Communications is currently trading at Rs 1,209.75 per share on NSE. Its 52 week low level is 856.25, which was recorded on 15 June 2022 and its 52 week high is Rs 1,591.95, which was recorded on 17 January 2022.

The stock surged 3.32% in the past 1 week, whereas, in the past 3 months it moved up by 23.02%, giving a positive return. However, in the past 1 year, the stock fell 16.5%, giving a negative return. It has given a multibagger return in 3 years, around 234.78%. Whereas, in 5 years, the stock has given 71.38% positive returns.

Data revenue rose 11.2% YoY / 4.6% QoQ to Rs35bn

"We are closely tracking net revenue (total revenue minus direct cost), which is more representative of the underlying performance for Tata Communications. In Q2FY23, net revenue was hit by higher direct cost due to acceleration in project execution, one-off in the previous quarter and lower-margin projects to showcase capabilities. Hence, net revenue growth decelerated to 9.6% YoY / 2.6% QoQ to Rs24.7bn. Tata Communications remains positive on its near-term growth prospects in data business on the back of supply chain issue stabilising; it is maintaining inventory of hardware, and value addition from international business," the brokerage has said.

 

Digital Platform & Services revenue grew 16.6% YoY / 6.2% QoQ

Digital Platform & Services revenue grew 16.6% YoY / 6.2% QoQ to Rs10bn. However, net revenue grew slower at 9.3% YoY and was down 0.6% QoQ to Rs4.8bn. This was due to dip in Collaboration revenue, which was up only 1.1% YoY / 2.9% QoQ to Rs3.8bn. Cloud, hosting and security grew 21.9% YoY / 5.8% QoQ to Rs3bn. Nextgen connectivity and media revenue was up 31.7% and 40.1%, YoY. Incubation revenue rose by a strong 2.8x YoY (36% QoQ) to Rs1.2mn. Core connectivity net revenue was up 6.7% YoY / 2.4% QoQ to Rs19.3bn. Transformation business revenue dipped 3.9% YoY to Rs3.2bn.

Orderbook remains healthy

Tata Communications saw good growth in its orderbook during the quarter aided by rise in the project pipeline for Digital Services and Incubation. The quality of orderbook has also improved with more large-project deals. However, supply-chain disruption in equipment supply is hurting project execution and revenue booking, but it is expected to ease soon. Sales funnel for future orderbook is stable and the company said deal-win rate is healthy.

Outlook & Valuation, Maintains buy with unchanged target price Rs 1,500

According to the ICICI Securities, Tata Communications' Q2FY23 data revenue grew 4.6% QoQ / 11.2% YoY and showed significant acceleration though lower net revenue growth took away some lustre. Net revenue growth was hit due to various factors including the high base of Q1FY23, project execution cost, and low-margin new projects (showcase projects). Management is confident of orderbook build-up and sales funnel, and it hinted at easing supply chain issue. Therefore, data revenue growth outlook has turned brighter in our view and is likely to significantly accelerate. "We believe net revenue growth will likely follow total revenue growth unlike this quarter. Lower EBITDA margin guidance of 23-25% is on intention to invest for growth, and absolute EBITDA expectation to improve eventually. Digital Services product portfolio is getting stronger, and Incubation had consistent growth in past few quarters which was lacking previously. Despite our optimism on growth, we are retaining EPS estimates with an upward bias as we wish to track consistency in performance. Our target price is unchanged at Rs1,500 (20x FY24E EPS). Maintain BUY," the brokerage ha said.

 

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.