Tata Communications gains 3% on robust data services despite operating margin shrink

Motilal Oswal with a netural rating on Tata Communications said the free cash flow and dividend yield remained healthy.

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Tata Communications shares gained 3 percent on April 20 after the company recorded strong topline and bottomline numbers for FY23, though there was a pressure on operating profit margin.

The digital ecosystem enabler has recorded a massive 21.2 percent growth in consolidated profit at Rs 1,796 crore for FY23, the highest in its history, compared to the previous year, with a profit margin expansion of 120 bps at 10.06 percent for the year.

The profit was driven largely by lower tax cost (down 43 percent). Higher other income, and exceptional income (including reversal of provision made for litigation and sale of few properties) also supported profitability for the year.

Consolidated revenue from operations for the year at Rs 17,838.3 crore increased by 6.6 percent compared to the previous year, with data services business, which contributed 80 percent to the topline, growing 10.2 percent in the year. The voice solutions business, however, declined 10 percent during the period and transformation services segment had a flat growth.

“We have witnessed healthy growth across core connectivity, digital platforms and services, and incubation services of data business,” Tata Communications said in its filing to exchanges.

On the operating front, EBITDA (earnings before interest, tax, depreciation and amortisation) in FY23 increased 2.2 percent to Rs 4,318, but margin dropped 107 bps to 24.2 percent over FY22.

The Tata Group company said its consolidated profit during the quarter ended March FY23 declined 10.7 percent on-year to Rs 326 crore with the margin falling 143 bps to 7.13 percent. A sharp fall in lower other income and subdued operating performance hit the bottomline but the decline was arrested by significantly lower tax cost.

Revenue for the quarter at Rs 4,569 crore grew 7.2 percent over a year-ago period, with the data business showing a 11.2 percent growth in same period at Rs 3,687.5 crore, but voice solutions business reported a nearly 14 percent decline YoY to Rs 462.4 crore for the quarter.

The quarterly EBITDA stood at Rs 1,034.22 crore, falling 1 percent and the margin declined 188 bps to 22.64 percent, compared to corresponding period last fiscal.

Tata Communications has announced a dividend of Rs 21 per share, for the year, following strong and consistent profitability.

Motilal Oswal with a ‘neutral’ rating on the stock said the free cash flow and dividend yield remained healthy. “Free cash flow increased 16 percent YoY to Rs 2,539 crore in FY23 from Rs 2,180 crore in FY22 due to a 10 percent reduction in cash capex (versus company guidance of increase in capex) and a 5 percent increase in operating cash flow. Free cash flow yields stood at 7 percent for FY23,” the brokerage said.

It said Tata Communications reported an RoCE (return on capital employed) of 28.3 percent for FY23, compared to 25.4 percent a year ago.

Technical View 

The stock has formed a bullish engulfing candlestick pattern on the daily charts with small upper and lower wicks, rising 3.3 percent to Rs 1,232 on April 20, at 2:32pm, after falling 6 percent in the previous three straight sessions. With today’s rally, the stock shot past the 200-day moving average (Rs 1,209), which is a positive sign if follow-up buying continues in coming sessions.

The stock has displayed a repeated upward bounce from the support level of Rs 1,170, which has been evident in recent price movements. This level has proven to be a strong support level for the stock, with Rs 1,100 being the lower support level, Vidnyan Sawant, AVP – Technical Research at GEPL Capital said.

On the upper side, he feels, there is an immediate resistance level of Rs 1,300, which the stock must surpass to continue its upward momentum. If the stock surpasses Rs 1,300 level, the next resistance level to overcome is Rs 1,415, he said.

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