Tata Communications hits over 2-year high; stock zooms 112% in 3 months

In FY20, EBITDA margins for data business expanded by 310 bps to 22.1 per cent
Shares of Tata Communications were locked in the 5 per cent upper circuit for the second straight day on the BSE at Rs 700.55 on Tuesday, hitting an over two-year high in an otherwise weak market.

The stock of the Tata group company was trading at its highest level since December 15, 2017. In the past three months, it had rallied 112 per cent after the company delivered strong operating performance during the January-March quarter (Q4FY20).  In comparison, the S&P BSE Sensex was up 18 per cent during the period.

In Q4FY20, Tata Communications EBITDA (earnings before interest, taxes, depreciation, and amortisation) grew 26.8 per cent year- on-year (YoY) at Rs 869 crore, while EBITDA margin improved by 360bps at 19.8 per cent during the quarter.

Q4 Data EBITDA increased by 39.8 per cent with margin expansion of 530 Bps YoY on the back of robust performance in traditional and growth services aided by an uptick in usage due to the Covid-19 pandemic and ensuing lockdowns.

The company witnessed strong profitable growth in the data business. In FY20, EBITDA margins for data business expanded by 310 bps to 22.1 per cent on the back of growth services delivering Rs 199 crore of EBITDA for the year. The management said the company continues to drive the business towards sustainable profitability and positive cashflows.

“The management is looking to achieve double-digit EBITDA growth, despite an estimate of flat global enterprise network spends over the next four years. Tata Communications plans to leverage sub-markets like Cloud Connect and SD-WAN managed services, which are expected to see healthy growth along with Enterprise Mobility. However, this is possible if Tata Communication restricts losses in new growth verticals, especially the Innovation segment,” Motilal Oswal Financial Services said in a note.

However, given the company’s volatile earnings in the past and sticky debt levels, consistency of its performance is a key factor, which could drive better valuation, the brokerage said. "We maintain a cautious stance on Tata Communications and would keenly watch the execution of its stated strategies to drive healthy revenue/EBITDA growth in a stagnant market," it said.

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