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Tata Communications: Weak signals





Tata Communications posted disappointing consolidated results for FY08 due to lower realisations in the voice business and the appreciation of the rupee.

Revenues at Rs 8,263 were lower by 4 per cent while operating margins contracted 200 basis points to 10.2 per cent. Part of the reason for the weak operating profit of Rs 845 crore was a one-time cost of $75 million incurred in litigation and transition.

The March 2008 quarter numbers too were weaker than expected with standalone revenues falling a sharp 22 per cent to Rs 850 crore and the operating margin dipping by about 500 basis points to 17.3 per cent.

Volumes for both the data and the voice businesses were higher during the year but both segments faced pricing pressure,. The management expects revenues for the company to grow at 15 per cent in the next few years and believes operating margins will improve to about 15 per cent compared with an adjusted 14 per cent in FY08.

Over time, it is hoping margins will expand to 20 per cent levels with the share of the higher-margin data revenues increasing in the overall mix. This segment is expected to grow by 25-30 per cent compounded in the next few years. The voice business is likely to become less profitable.

Tata Communications is also banking on its broadband rollout which has been constrained by the delay in the auction for WiMax spectrum. The service, which is to be launched in 110 cities for companies and 15 cities for retail users, could face competition from players like Bharti and Reliance.

The company will incur Rs 2500 crore on capital expenditure in the next 2-3 years as its expands global connectivity, adds space at its data centres, upgrades the network to carry IP traffic and grows the broadband franchise.

It might not be easy, however, to raise debt at a reasonable cost. At the current price of Rs 350 the stock trades at 32 times estimated FY09 earnings is expensive.