Upside for Tata Communications hinges on data growth

Land monetisation can act as a short-term trigger

After falling 14 per cent on lower-than-expected results in the December quarter, the stock of Tata Communications has more than erased the losses, gaining 26 per cent since then. Half the gains came in the past two trading sessions due to an increase in target price -- the triggers being land bank monetisation and robust growth in data services.

With the government looking to offload its 26 per cent stake in the company through an offer for sale, the company will have the option to monetise 756-acre surplus land across the country. Analysts at CLSA peg gross value of the land at ~11,800 crore, with a net value after taxes, in case of sale, at ~9,400 crore. This will translate to a per-share value of ~331. The research firm has increased the target price of the stock to ~1,475 from ~1,365 per share earlier; there is an upside of 20 per cent from the current levels.

The key fundamental trigger, however, remains the prospects and pace of growth of its data services, especially newer segments. What should aid this are partnerships, such as the one the company announced recently with Google Cloud. This will enable businesses to deploy and access Google Cloud services through Tata Communications solutions, such as IZO Managed Cloud.

The partnerships are expected to reflect in the revenue of its data business, especially the growth services segment. This segment accounted for 18 per cent of data revenue in Q3 and is the growth engine for both data segment and overall revenue.

Given the disappointment in the December quarter, the Street will keep an eye on deal conversions, which took a hit due to Covid-19 and holidays. The other factor will be the ability of the company to sustain and improve its margins.

Despite the muted revenue performance in Q3, the company managed to improve margins by 680 basis points to 24.8 per cent. With some of the costs expected to reverse and higher maintenance expenditure, the margin could be under pressure.

While prospects are good, given the 3.5x gains in the stock price over the past year, there is little room for disappointment. While the valuation at 18x FY22 earnings estimates has discounted some of the upsides, analysts believe there could be more rerating if the company delivered on the revenue growth front.