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Tata Communications' recent price correction makes it an attractive buy

According to most analysts, the downside risk is now limited for the company as the correction has significantly brought down its valuation.

, ET Bureau|
Updated: Aug 05, 2013, 08.57 AM IST
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The consensus analyst rating has improved from 2.53 to 3.11 in just one month.
The consensus analyst rating has improved from 2.53 to 3.11 in just one month.
Tata Communications has underperformed the Sensex by more than 50 per cent in the past year, as is evident from the relative performance chart. According to most analysts, the downside risk is now limited for the company as the correction has significantly brought down its valuation. They have also started changing their rating from ‘sell’ to ‘hold’ or ‘buy’. With this, the consensus analyst rating has improved from 2.53 to 3.11 in just one month.

Besides the price correction, improving fundamentals is also a reason for the rating upgrades. The company reported a net profit of Rs 94.5 crore during the first quarter of 2013-14, compared with a loss of Rs 142.86 crore during the same period last year. The turnaround was helped by the exceptional item of Rs 216.2 crore towards recognition of prior period input credits.
Tata Communications is showing operational improvement and the recent price correction makes it an attractive buy.
The results were also aided by the fact that the company delivered Rs 7.9 crore as profit before tax and exceptional items in the first quarter, compared with a loss of Rs 89.3 crore during the same period last year. This improvement is clearly visible at the operational level as well. The company’s first quarter consolidated revenue grew 9.5 per cent on a year-on-year basis, helped by the 10.2 per cent rise in core business and 3.9 per cent rise in the Neotel revenue. In core business, the revenue from voice and data services grew 8.5 per cent and 12.4 per cent, respectively.

Its consolidated EBITDA grew at a 22.3 per cent y-o-y due to the improvement in margins, while EBITDA margin from its voice business improved to 11.3 per cent from 9.5 per cent during the same period due to the favourable pricing environment. On the other hand, the EBITDA margin from data services business fell to 16.7 per cent from 17.4 per cent due to cost rationalisation.

Though the start-up businesses, including Neotel, are still bleeding at the net profit level, there is a significant operational improvement worth mentioning. Its first quarter revenue and EBITDA grew 3.9 per cent and 69.5 per cent, respectively, on a y-o-y basis. Similarly, its first quarter EBITDA margin improved significantly to 21 per cent from 12.9 per cent a year ago, primarily due to the improving operational efficiency and employee cost rationalisation.

With the environment improving for the start-up businesses as well, Tata Communications is expected to grow profitably in 2014-15. Selection methodology: We pick the stock that has shown the maximum increase in consensus analyst rating during the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weightages to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in the rating indicates that the analysts are becoming more bullish on the stock.

To ensure that we pick only companies with a decent analyst coverage, this search is restricted to stocks that have been covered by at least 10 analysts.
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