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Robust Digital Growth And Critical Expansion Set To Propel Telecom's Promising Future

WA
Consensus Narrative from 7 Analysts

Published

December 05 2024

Updated

January 01 2025

Narratives are currently in beta

Key Takeaways

  • Focus on digital services and strategic asset monetization is boosting revenue growth and enhancing financial stability.
  • Infrastructure expansion and strategic measures aim to improve efficiency, competitiveness, and capture regional market demand.
  • Muted core connectivity growth and rising costs from infrastructure issues challenge Tata Communications' margins, while asset sales and sales funnel concerns impact future earnings.

Catalysts

About Tata Communications
    Provides telecommunications services worldwide.
What are the underlying business or industry changes driving this perspective?
  • Tata Communications is seeing robust growth in its digital portfolio, with digital services revenue increasing by 52.4% year-on-year. This is likely to significantly impact future revenue as the company continues to focus on its digital transformation services and incubation of new businesses.
  • The company has improved win rates for large deals and has recorded its highest international quarterly order booking in five years. This uptick in order bookings is expected to drive revenue growth as these orders are fulfilled.
  • Tata Communications is actively engaging in asset monetization, including the sale of noncore assets such as a land parcel in Ambattur, Chennai. This is expected to enhance shareholder value and improve leverage ratios, positively impacting net margins and financial stability.
  • The company is expanding its network infrastructure in Tier 3 and Tier 4 towns in India, creating new growth opportunities in enterprise data networks. This strategic expansion is anticipated to support revenue growth as regional market demand increases.
  • Emphasis on strategic measures, such as cost structure simplification and a strategic review of subsidiaries, is likely to improve efficiency and competitiveness, which could lead to better net margins and long-term earnings growth.

Tata Communications Earnings and Revenue Growth

Tata Communications Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Tata Communications's revenue will grow by 9.2% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 4.1% today to 10.8% in 3 years time.
  • Analysts expect earnings to reach ₹32.0 billion (and earnings per share of ₹92.41) by about January 2028, up from ₹9.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹21.7 billion.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.6x on those 2028 earnings, down from 53.1x today. This future PE is greater than the current PE for the IN Telecom industry at 18.8x.
  • Analysts expect the number of shares outstanding to grow by 6.75% per year for 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

Tata Communications Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • Muted growth in core connectivity, which still represents a significant portion of Tata Communications' revenue, could weigh on future revenue prospects if not counteracted by growth in digital services.
  • Increased costs related to the Red Sea cable cut and other infrastructure repairs have negatively impacted margins, indicating vulnerability to unexpected operational expenses that could further pressure earnings and profitability.
  • The company's interest costs have risen due to higher short-term borrowings, which could strain net margins if borrowing costs continue to increase or leverage is not effectively managed.
  • There is uncertainty around the monetization and sale of noncore assets; while they are intended to increase shareholder value, any delays or unexpected issues could affect the company's financial strategy and capital allocation plans, impacting long-term earnings.
  • A subdued addition to the sales funnel in the first half of the year suggests potential challenges in maintaining a consistent pipeline of new business, which may impact future revenue growth and earnings sustainability.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of ₹1940.57 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 ₹2220.0, and the most bearish reporting a price target of just ₹1645.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹295.5 billion, earnings will come to ₹32.0 billion, and it would be trading on a PE ratio of 29.6x, assuming you use a discount rate of 12.2%.
  • Given the current share price of ₹1725.65, the analyst's price target of ₹1940.57 is 11.1% 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Read more narratives

Fair Value
₹1.9k
12.5% undervalued intrinsic discount
Analyst Price Target Fair Value
Future estimation in
PastFuture050b100b150b200b2014201720202023202520262028Revenue ₹243.8bEarnings ₹26.4b
% p.a.
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Current revenue growth rate
9.45%
Telecom Services and Carriers revenue growth rate
4.27%