Multibagger Stock: Tata Communications rallied over 100% in 2 years; is there more upside ahead?
During its recent annual investor meeting, the company's management reaffirmed its ambitious FY27 goals across four key metrics.
Shares of Tata Communications, a Tata Group stock, have delivered substantial returns to their shareholders over the years, demonstrating resilience in the face of market volatility. The stock, which was trading at ₹914 apiece two years ago, has jumped 104% to trade at the current level of ₹1,868.
Over the past 11 years, investors have enjoyed an impressive return of 1430%. In April, Tata Communications reached a new pinnacle, surpassing the ₹2,000 mark for the first time, touching an all-time high of ₹2,084 per share.
The company has been pivotal in shaping the landscape of digital services, playing a crucial role in enabling enterprise-level connectivity across the country. With its expansive global network, including the world's largest wholly-owned subsea fibre backbone and a Tier-1 IP network connecting over 190 countries and territories worldwide, Tata Communications facilitates around 30% of the world's internet routes.
The company serves as a critical link, connecting businesses to 80% of the world's cloud giants and reaching 4 out of 5 mobile subscribers globally.
Presently, it offers international and national voice and data transmission services, the sale and leasing of bandwidth on undersea cable systems, internet connectivity services, and other value-added services comprising telepresence, managed hosting, mobile global roaming and signaling services, transponder lease, television uplinking, and other related services.
Aggressive growth ambitions are sustained
During its recent annual investor meeting, the company's management reaffirmed its ambitious FY27 goals across four key metrics. They anticipate data revenue to soar to ₹280 billion, while maintaining a net debt-to-EBITDA ratio below 2x and achieving a robust return on capital employed (RoCE) exceeding 25%.
Management said it would continue to look for strategic acquisitions to address white spaces in its portfolio, but would not want to acquire only for revenue.
On the operational front, they remain committed to sustaining consolidated EBITDA margins between 23% and 25%, excluding impacts from acquisitions or growth-related investments.
The company is increasing the breadth and depth of market participation by focusing on new areas of participation, new buying centers, and chasing new customer segments.
Its digital portfolio has shown significant growth, increasing from 32% of data revenue in FY23 to 41% in FY24, with plans to expand this share to over 60% by FY27. Amid challenges in the Communication Platforms as a Service (CPaaS) industry's shift away from SMS, the company sees an opportunity to leverage its internal capabilities and synergies from the Kalyera acquisition to drive profitable growth in this segment, according to Nuvama Institutional Equities.
Management identifies margin expansion drivers in acquisition synergies, profitability of the digital portfolio, ongoing subsidiary reviews, and continuous operational enhancements. RoCE is expected to benefit from sustained margins, optimised capital utilisation, and efficient capital turnover strategies.
Mixed ratings
Following the company's reaffirmation of its aggressive growth strategy, domestic brokerage firms have expressed varied opinions. Nuvama Institutional Equities maintains a positive outlook, citing the company's strong positioning in technology and telecom. They reaffirmed a 'buy' rating on the stock with a target price of ₹2,200 per share.
Similarly, IIFL Securities also reiterated a 'buy' rating on the stock, setting a target price of ₹2,231 per share.
In contrast, Kotak Institutional Equities remains cautious, maintaining a 'Sell' rating with an unchanged Sum-of-the-Parts (SoTP)-based fair value of ₹1,525. The brokerage views the risk-reward profile unfavorably.
The brokerages have left their earnings estimates unchanged. They anticipate a 7.5% CAGR in underlying data revenue from FY2024 to FY2027, projecting data revenue to reach ₹240 billion by FY2027 (including acquisitions), compared to management's target of ₹280 billion).
Kotak Institutional Equities expects the company's EBITDA margins to improve to 23% by FY2027, driven by operational efficiencies that may offset challenges from the revenue mix.
"Tata Communications currently trades at 12.5X one-year rolling forward EV/EBITDA, representing a 25% premium to its long-term average. Given our profitability assumptions, we are awaiting a more attractive entry point for the stock," commented the brokerage.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.