This Tata Group Company Stock Can Deliver Gains Of Up To 20%

Motilal Oswal Institutional Equities has placed a target price of Rs 1,340 on the stock of Tata Communications, implying a 20% upside from the current levels of Rs 1110.

Weakness in earnings

According to Motilal Oswal, the weakness in Tata Communications earnings persisted, with a 3% QoQ fall in EBITDA (9% below our estimate), on lower Data usage.

However, traction in FCF generation (Rs 26.2 billion) and deleveraging of the Balance Sheet continues (Rs 4.5 billion decline in net debt to Rs 67.4 billion) for third consecutive quarter.

"We have cut our FY23 EBITDA estimate by 4% to factor in 16% EBITDA CAGR over FY22-24, in anticipation of a recovery in usage-based revenue and new orders. Our estimates factor in risk from the continuation of the downward revision cycle as our expectation of double-digit earnings growth is largely dependent on the Digital platform and Services, which contribute 20% to total revenue, and has grown at 10% over the last three years. We maintain our Neutral rating," the brokerage has said.

Key takeaways from the management

According to Motilal Oswal Institutional Equities, the order book remained flat, despite a healthy deal funnel, due to slowness in decision making on account of supply-chain constraints.

"The management is confident of achieving double-digit growth going forward. It reiterated its margin guidance of 23-25%. Going forward, it will be operating at the lower end of this range as it invests in growth. Capex guidance has been enhanced to USD300-325m from USD250m in FY22. A large part of the capex is linked to growth in sub-sea cable payments and is included in its guidance figures," Motilal Oswal has said in its report.

Healthy growth likely on the back of rejig, digitilization

According to Motilal Oswal. "The recent rejig in business segments and focus on driving higher Digitalization deals are expected to translate into healthy growth. The management commentary on deal wins and demand for networking solutions has been bullish since the onset of the COVID-19 pandemic. However, revenue from Data (a major contributor) has seen muted growth in the last few quarters," the brokerage has said.

Lower leverage to drive healthy PAT growth

The continuous decrease in leverage should drive healthy net profit growth, Motilal Oswal has said. "However, the management's guidance of a 20% increase in capex from USD250m in FY22 to USD300m-325m going forward could curb any improvement in FCF. "Deal wins and a deal-to-revenue conversion will be key monitorables going forward to achieve its double-digit earnings growth," the brokerage has said.