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Tata Communications Equity Research

HomeCompanyTata Communications Equity Research

Date of Research – 21 January 2016

Price – Rs. 398.50

Founded in 1986, Tata Communications Limited (“Tata Communications” or the “Company”) was formerly known as Videsh Sanchar Nigam Limited and changed its name to Tata Communications Limited in 2008.

The Tata Global Network includes one of the most advanced and largest submarine cable networks, a Tier-1 IP network, with connectivity to more than 200 countries and territories across 400 PoPs, and nearly 1 million square feet of data centre and collocation space worldwide.

The Company offers international and national long distance voice services. The Company also offers connectivity services comprising IP virtual private network, Hybrid VNO, application-aware, Ethernet, Internet access, and private line services; managed IT infrastructure services, which include co-location, managed hosting, and managed storage services; managed application services that comprise audio and web conferencing, business messaging and collaboration, hosted contact center, and managed voice services; managed security services that include cloud-based services, professional services, and CPE-based services; professional services and outsourcing services; and media and entertainment solutions to enterprise customers.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 17,212.95 19,665.90 19,913.34 20,605.53  17,619.73 
Expenses 15,153.24 16,577.94 16,919.29 17,521.33  15,213.83  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 2,059.71 3,087.96 2,994.05 3,084.20  2,405.90  
Depreciation 2,027.05 2,091.37 2,161.09 2,274.49  1,865.77  
Finance Costs 794.14 761.70 750.79 718.27  367.19  
Other income 226.59 143.30 396.46 213.13  360.29  
Exceptional items (104.18) (66.22) 105.22 258.60  1,063.33  
PBT (430.71) 444.41 373.41 45.97  (530.10) 
Tax 220.20 343.28 370.46 256.40  236.38  
PAT (before Minority Interest and share of Associates) (650.91) 101.13 2.95 (210.43)  1,230.38
Profit/ (loss) attributable to Minority Interest (27.35) 1.40 1.80 1.78  – 
Share of profit / (loss) of Associates (0.25) (1.69) (0.14) (0.37)  (5.08) 
Consolidated Profit / (Loss) for the year (623.31) 101.42 1.29 (211.84)  1,235.46  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 11.97 15.70 15.04 14.97  13.65 
Net Profit Margin Ratio (3.78) 0.51 0.01 (1.02)  6.98 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 285.00 285.00 285.00 285.00 285.00 
Reserves & Surplus 1,997.30 1,139.87 514.52 36.47 (703.16) 
Net worth (shareholders funds) 2,282.3 1,424.87 799.52 321.47 (418.16) 
Minority Interest 9.23 7.91 6.21 5.87 6.90 
Long term borrowings 9,469.27 9,194.58 9,750.55 7,606.78 10,051.38 
Current liabilities 7,048.05 8,911.78 9,861.88 11,684.85 10,932.05 
Other long term liabilities and provisions 3,636.37 4,168.46 4,423.04 4,576.28 4,708.06 
Deferred Tax Liabilities 47.17 28.70 35.73 48.41 46.81 
Total Liabilities 22,492.39 23,736.30 24,876.93 24,243.66 25,327.04 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 14,575.79 14,609.12 14,948.69 14,957.32 15,030.46 
Noncurrent Investments 758.71 753.21 753.80 879.03 906.98 
Current assets 3,738.46 5,362.57 6,152.72 5,727.38 6,743.45 
Long term advances and other noncurrent assets 2,640.62 2,127.37 2,294.79 2,045.14 2,179.40 
Deferred Tax Assets 1.91 11.09 108.47 249.95 201.13 
Goodwill on consolidation (net) 776.90 872.94 618.46 384.84 265.62 
Total assets 22,492.39 23,736.30 24,876.93 24,243.66 25,327.04 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 15.23 19.38 29.25 37.74 31.99 
ROE / RONW (34.35) (43.75) 12.69 0.40 – 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 17,212.95 19,665.90 19,913.34 20,605.53  17,619.73
Growth (%) 21.25 % 14.25 % 1.26 % 3.48 %  (14.49 %) 
PAT (Rs. Cr.) (650.91) 101.13 2.95 (210.43)  1,230.38  
Growth (%) 115.54 % (97.08 %) (7233.22 %)  684.70 %
Earnings Per Share – Basic (Rs. ) (21.87) 3.56 0.05 (7.43)  43.26 
Earning Per Share – Diluted (Rs. ) (21.87) 3.56 0.05 (7.43)  43.26 
Price to Earnings 80.24 –  15.74 

Dividend History

The Company has maintained an average dividend yield of 1.26 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Tata Communication’s average current ratio over the last 5 financial years has been 0.54 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Tata Communication’s average long term debt to equity ratio over the last 5 financial years has been 9.47 times which indicates that the Company operates with high level of debt and is not placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Tata Communication’s average interest coverage ratio over the last 5 financial years has been 3.03 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Tata Communications reported a promoter holding of 74.99 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 18.09 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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