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

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

Provides telecommunications services worldwide.

• 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 Future Earnings and Revenue Growth

Assumptions

• 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 December 2027, 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 2027 earnings, down from 55.3x today. This future PE is greater than the current PE for the IN Telecom industry at 18.7x.
• 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

Risks

• 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

• 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 2027, 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 ₹1795.55, the analyst's price target of ₹1940.57 is 7.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.