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Tata Comm.: Tax write-back aids bottomline - Views on News from Equitymaster

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Tata Comm.: Tax write-back aids bottomline
Jan 29, 2010

Performance summary
  • Net sales fall by 23% YoY during the quarter ended December 2009, down by 17% YoY during 9mFY10.
  • Operating margins contract by 3.6% YoY during the quarter, leading to a 35% YoY fall in operating profits. For 9mFY10, margins are flat at 23.2%.
  • While network costs fell on a year on year basis, operating & other expenses and employees costs increased as percentage of sales.
  • Profit before tax down by 99% YoY during 3QFY10.
  • Net profits surge by about 243% YoY during the quarter. However, this is mainly due to a tax write back of Rs 2.8 bn.


(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 9,995 7,698 -23.0% 28,625 23,719 -17.1%
Expenditure 7,610 6,141 -19.3% 21,970 18,227 -17.0%
Operating profit (EBDIT) 2,385 1,557 -34.7% 6,655 5,492 -17.5%
Operating profit margin (%) 23.9% 20.2%   23.2% 23.2%  
Other income 320 537 68.0% 1,332 949 -28.8%
Interest expense/(income) 359 568 58.3% 844 1,728 104.8%
Depreciation 1,130 1,516 34.2% 2,947 4,053 37.5%
Extraordinary income/(losses) - -   (956)    
Profit before tax 1,216 11 -99.1% 3,240 659 -79.7%
Tax 395 (2,808)   1,104 (2,583)  
Net profit 822 2,818 242.9% 2,136 3,242 51.8%
Net profit margin (%) 8.2% 36.6%   7.5% 13.7%  
No. of shares         285.0  
Diluted Earnings per share (Rs)*         9.8  
P/E ratio (x)*         32.4  
* On a trailing 12 months basis; adjusted for extraordinary items

What has driven performance in 3QFY10?
  • Tata Communications’ (TCL) revenues dropped by 23% YoY during 3QFY10. This sharp fall was on the back of a decline in revenues of its two major businesses – wholesale voice (WV) and enterprise & carrier data (ECD). While revenues of the former dropped by about 37% YoY, the same for the latter were lower by 18% YoY. The company’s other business, which mainly consists of retail broadband business, reported a growth of about 10% YoY.

    Segment-wise performance
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Wholesale voice
    Revenue 4,668 2,960 -36.6% 13,319 9,375 -29.6%
    % share 46.7% 38.4%   46.5% 39.5%  
    PBIT margin 21.9% 27.2%   17.2% 19.8%  
    Enterprise and carrier data
    Revenue 3,989 3,268 -18.1% 11,207 9,797 -12.6%
    % share 39.9% 42.5%   39.1% 41.3%  
    PBIT margin 76.7% 72.7%   77.0% 82.7%  
    Others
    Revenue 1,338 1,470 9.9% 4,100 4,547 10.9%
    % share 13.4% 19.1%   14.3% 19.2%  
    PBIT margin 53.8% 51.8%   60.3% 54.2%  
    Total*
    Revenue 9,995 7,698 -23.0% 28,625 23,719 -17.1%
    PBIT Margin 48.0% 51.2%   46.8% 52.4%  

  • TCL’s operating margins contracted by 3.6% YoY during 3QFY10. This was on account of higher employee, operating & other expenditures (as a percentage of sales). Network costs, however dropped by 30% YoY in absolute terms and stood at nearly 42.8% of revenues as compared to 47.1% during 3QFY09.

  • TCL’s operating profits declined by 35% YoY during the quarter ending December 2009. However, at the PBT (profit before tax level), the figure was lower by a whopping 99% YoY. This was on the back of higher depreciation and interest costs, which stood at 19.7% and 7.4% of sales respectively as compared to 11.3% and 3.6% during 3QFY09. TCL’s net profits were up by about 243% YoY. This was mainly on the back of a about Rs 2.8 bn which it accounted for during the quarter. On excluding the same, the company has recorded a marginal loss during the quarter.

What to expect?
At the current price of Rs 318, the stock is trading at a multiple of 32.4 times its trailing 12 months earnings (adjusted for extraordinary items). We have a cautious view on the company given that its businesses are still to achieve stability. The company’s aggressive expansion streak also keeps us concerned with respect to the benefits that might not flow in as desired by the management.

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