We maintain neutral on Tata Communications despite visible signs of business uptick as any equity upside gets diluted by high leverage.
We set a target price of R230 a piece based on the sum-of-the-parts valuations. We value core business, based on 6x September 2014e EV/ebitda (earlier June 2014e), decline to R110 a share (R 130) despite a 1-5% increase in FY14-15e ebitda on higher debt. Land NAV remains R100 and 10% stake sale in Tata Tele declines to R20 (R30) as high debt/losses have started to hurt mid-sized telcos.
We upgrade FY14-15e ebitda by 1-5%. Healthy top-line growth and steady margins (excl one-off) helped by contribution from enterprise (key focus) despite high market spend and Neotel-SA subsidiary, has seen steady improvement and achieved ebit break-even in Q4FY13.
The companys Q4FY13 results were in-line. Adjusted fourth quarter ebitda at R 5.7 billion (up 18% y-o-y, down 5% q-o-q) was broadly in line with expectations of growth. Neotel has now achieved ebit BE. Reported PAT at R741 million included one-off gains from land sale of R1.8 billion.
We refrain from assigning buy rating as the firm has been forced to rely on debt to fund capex given the business negative FCF, its inability to raise equity given lack of clarity on land and the governments 26% stake.
As a result, balance sheet has deteriorated with FY14e net debt/ebitda at 5.0x. Debt funding also limits upside to equity value despite healthy ebitda growth.
High leverage will remain a key concern as internal accruals, even with the fall in capex intensity, will not be enough to bring leverage to manageable levels (FY16e Net/ebitda will be at 4.6x).