Tata Comm shares down 4% on acquisition of US-based company; Motilal Oswal ‘Neutral’ on stock

This transaction has been unanimously approved by the boards of directors of both Tata Communications and Kaleyra.

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Tata Communications share price fell more than 4 percent in the early trade on June 30 as company is going to acquire US-based Kaleyra Inc.

At 09:26 am, Tata Communications was quoting at Rs 1,557.35, down Rs 24.75, or 1.56 percent on the BSE.

Tata Communications has agreed to acquire Kaleyra, Inc. in a cash only transaction, at a price per share of USD 7.25 for a total consideration to Kaleyra shareholders of approximately USD 100 million and the assumption of all outstanding debt.

This transaction has been unanimously approved by the boards of directors of both Tata Communications and Kaleyra.

Consummation of the deal is subject to approval by Kaleyra’s stockholders, certain regulatory approvals and other customary closing conditions.

Upon closing of the transaction, expected in six to nine months, Kaleyra Inc. will become a subsidiary of Tata Communications Limited.

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Kaleyra Inc. has subsidiaries in United States of America, Italy, India, UAE, Germany, UK, Dominican Republic, Mexico, Africa and Canada.

Kaleyra is a global group providing mobile communication services to financial institutions, e-commerce players, OTTs, software companies, logistic enablers, healthcare providers, retailers, and other large organizations worldwide.

“With this investment in Kaleyra, we will accelerate our push into the customer interactions platform market and fortify our global CommTech position. We are excited about Kaleyra’s remarkable talent and their demonstrated capabilities in next-gen technologies. With this acquisition, we will further build intelligent, intuitive and innovative multi-channel communication solutions to unlock new growth opportunities for our customers,” said A S Lakshminarayanan, MD and CEO, Tata Communications.

Motilal Oswal keeps Neutral Rating

The ambitious growth targets stated in the analyst meet may require near-term high capex and opex, the acquisition could increase net debt by 22% to Rs 68 billion, along with margin dilution.

Motilal Oswal likes two things about this acquisition: 1) TCOM is upping the ante on growth efforts as it has seen limited growth in the last few years; and 2) a reasonable price for a value-creating company.

Its build in revenue/EBITDA CAGRs of 12/10 percent over FY23-25E, without factoring growth from recent acquisitions, which could drive healthy growth in the long term but may dilute near-term earnings.

Company’s strong FCF of Rs 12-14 billion, despite an increase in capex, could allow it to scout for growth opportunities with a healthy ROCE target of over 20 percent.

Broking house maintain its Neutral rating with a revised Target Price of Rs 1,450/share (earlier Rs 1,350), due to improved growth visibility, led by the Kaleyra acquisition (assigned 8x/3x EBITDA to the Data/Voice business). Sustained improvement in earnings growth visibility will be vital for valuation rerating.