On Thursday, Kotak reaffirmed its sell rating on Tata Communications (TCOM:IN), maintaining a price target of INR1,525.00. Tata Communications management has outlined a strategy to double its data revenue to Rs280 billion by the fiscal year 2027. Additionally, they aim to reduce their net debt/EBITDA ratio to 2X, down from approximately 2.2X, and to increase Return on Capital Employed (RoCE) to over 25% by FY2026, up from around 19% in FY2024. The company also plans to return to an EBITDA margin between 23-25% by FY2027.
The management expects that the majority of this revenue growth will come from the digital portfolio, with its contribution anticipated to rise from about 41% to over 60%. However, Kotak has expressed skepticism regarding the feasibility of doubling data revenue based on the current portfolio. The firm has projected approximately a 20% compound annual growth rate (CAGR) over three years for the digital portfolio revenue, which is lower than the approximately 34% rate that would be required.
Kotak also notes that the increasing proportion of digital services, which typically have lower margins, could continue to impact the company's overall margins negatively. Despite Tata Communications' ambitious targets, Kotak has chosen to maintain its sell rating with an unchanged fair value (FV) of Rs1,525, suggesting that the firm's goals may be challenging to achieve. The analyst's stance remains unchanged based on the company's recent reiteration of its financial goals and growth strategies.
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