Monetizing Noncore Assets And Launching Kaleyraai Will Strengthen Future Prospects

Key Takeaways

• Strategic focus on repositioning noncore assets and external investment seeks to improve operational efficiency and enhance earnings.
  
• Expansion in digital platforms and network upgrades aims to capitalize on AI growth, potentially boosting future revenue streams.
  
• Reliance on asset sales and challenges in international operations could impair future profitability amid investment needs, competition, and unfavorable macroeconomic conditions.

Catalysts

Provides telecommunications services worldwide.

• Tata Communications is strategically repositioning noncore assets, such as through the partial sale of subsidiaries like TCPSL and seeking external investment for NetFoundry, aiming to focus on core areas and improve margins. This strategic focus could enhance earnings with improved operational efficiency.
  
• The company is expanding its digital portfolio, launching new platforms like Kaleyra.ai to drive growth in high-demand segments like AI-powered communications. Successful adoption could significantly boost future revenue streams.
  
• Increased order book and sales funnel, particularly in large deal additions and international expansion, suggest robust future revenue growth potential. Strong deal pipeline indicates potential for substantial revenue increases in upcoming quarters.
  
• Investments in network upgrades and cloud connectivity, highlighted by strong growth in next-gen connectivity and cloud services, position the company to capture market shifts towards AI and cloud computing, potentially increasing revenues.
  
• Strategic monetization of noncore assets, such as land sales, is expected to improve leverage ratios and free up capital, which can be reinvested into high-growth areas of the business, potentially enhancing long-term earnings and improving balance sheet health.

Tata Communications Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tata Communications's revenue will grow by 8.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 10.7% in 3 years time.
• Analysts expect earnings to reach ₹31.4 billion (and earnings per share of ₹110.35) by about January 2028, up from ₹10.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.5x on those 2028 earnings, down from 41.7x today. This future PE is lower than the current PE for the IN Telecom industry at 35.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Tata Communications Future Earnings Per Share Growth

Risks

• The strategic measures involving noncore asset reviews and monetization, including the sale of TCPSL and restructuring of NetFoundry, suggest significant reliance on asset sales to improve margins, indicating potential underlying operational inefficiencies that could impact future earnings.
  
• International operations face challenges, such as issues with cable cuts, which have previously affected customer retention and revenue generation. This could lead to unreliable revenue streams and increase operational costs if similar issues arise again.
  
• The digital portfolio's margins, although improving, remain negative. The transition to profitability is challenged by high investment needs and volatile market conditions, such as price erosion and customer churn, which could hamper earnings in the near term.
  
• The macroeconomic environment, including currency fluctuations and geopolitical factors affecting working capital, pose risks to the financial stability and profitability of international operations, increasing the net debt and impacting the net margins negatively.
  
• Increased competition and price erosions in the core connectivity business might limit growth in market share, impacting overall revenue growth and making it challenging for Tata Communications to achieve its FY '27 revenue and margin targets.

Valuation

• The analysts have a consensus price target of ₹1839.43 for Tata Communications based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2070.0, and the most bearish reporting a price target of just ₹1600.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹292.7 billion, earnings will come to ₹31.4 billion, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹1555.1, the analyst's price target of ₹1839.43 is 15.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.