Buy This Mid Cap Tata Stock For 14% Potential Upside, Given Nearly 9% Returns In Past 1 Week

Emkay Research in its equity report on Tata Communications has suggested 'buy' the stocks of the company for a target price of Rs 1,210 apiece. Tata communications is a telecom sector mid cap Tata Group stock with market capitalization of Rs 30,571 crore. The company posted 1.1% QoQ and 5.1% YoY revenue growth in Q1FY23, largely in line with estimates. The company's growth in digital platforms was steady at 12.3% YoY, while core connectivity grew by 3.6%. This led to 7.6% YoY growth in the data segment. Collaboration was the only segment to see a YoY decline. Cloud hosting and Media services saw strong revenue growth.

Stock Outlook

Tata Communications stock's current market price (CMP) is Rs 1,070.20 apiece. Today, it opened at Rs 1,080 apiece. The CMP of the stock fell 0.64%. Its 52-week low is Rs 856.25 apiece, recorded last month on the 15th. The stock's 52-week high was recorded on January 17, 2022, at Rs 1,591.95 apiece. ROE is 159.74%. TTM EPS is Rs 60.68. TTM PE ratio is 17.63. Face value is Rs 10. The dividend yield is 1.94%.

The shares of the company in the past 1 week the has gained 8.99%, and in the last 1 month, it has gained 19.91% returns, respectively. In the past 1 year, it has given negative returns of 21.03%. The stock has performed well in 3 and 5 years, in 3 years it has given positive returns of 124.29% and in 5 years it has given positive returns of 63.66%, respectively.

Investors buying the stocks of the company at the CMP could witness potential gains of 14% in 12 months considering the estimated the target price of Rs 1,210 apiece.

Revenue growth - the only missing ingredient

Tata Communications' revenue grew by 1.1% QoQ and 5.1% YoY to Rs43.1bn, in line with estimates. The data segment saw steady growth of 7.6% YoY, led by 12.6% YoY growth in the digital platform and services (0.9% QoQ). Unexpectedly, voice revenue grew by 4.6% QoQ, with margins expanding to 11% from 7% in Q4.

The brokerage said, "We believe that some sequential INR depreciation would have also partially supported revenue growth. Other operating expenses declined 4.4% QoQ (7% below estimates), leading to 3% QoQ growth in EBITDA. EBITDA margins stood at 25%, above our estimate of 23.3% and at the higher end of management's guidance. Finance costs decreased 11% QoQ, thanks to the fall in net debt, as well as lower weighted average cost of debt. Depreciation also declined 8.8% QoQ to Rs5.4bn. Other income remained elevated at Rs2.3bn, attributable to higher tax refunds for the second quarter in a row. ETR was lower at 22.9% vs. 38.6% in Q4FY22. These factors led to a 41% jump in RPAT QoQ. FCF rose to Rs9.5bn from Rs7.5bn in Q4FY22 on account of lower capex, while net debt declined further to Rs61.3bn from Rs67.4bn."

Emkay Research Suggests buy for a Target Price of Rs 1,210 apiece

The brokerage said, "While, the management has been highlighting improving funnel rates, deal conversions and new product launches, double-digit revenue growth timelines still remain elusive. We reiterate that for any meaningful re-rating of the stock, revenue pick-up and consistency in guidance are essential. A key positive is the healthy balance sheet, which has seen a sharp improvement in the last few years. The strong balance sheet should support in tapping both organic and inorganic opportunities."

They added, "We believe that both capex and opex will see an acceleration ahead, in line with the company's guidance. FCF should also be limited in next three quarters. We have broadly maintained our revenue and EBITDA estimates for FY23-25, while the higher RPAT in FY23 is due to higher other income."

Brokerage maintain buy with a revised Target Price of Rs 1,210 (8x Sept'24E EBTIDA) as we roll forward valuations to Sept'24E.

Key risks: 1) increased losses in incubation services; 2) inability to close large deals; 3) continued delays in revenue recovery despite higher investments; and 4) higher competitive intensity.

Disclaimer

The stock has been picked from the brokerage report of Emkay Research. 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 taking any investment decision.