ICICI Securities Upgrades Tata Communications to “Buy” with a Target Price of ₹1,840
Tata Communications (TCom) has recently witnessed a significant drop in its stock price, driven by near-term revenue weaknesses. However, ICICI Securities sees this as a strong buying opportunity and has upgraded the stock from “Hold” to “Buy,” setting a target price of ₹1,840. The research report highlights TCom’s potential for recovery and growth, particularly with its robust digital services portfolio, easing supply chain issues, and strong order book growth.
Why ICICI Securities Upgraded Tata Communications
ICICI Securities’ decision to double-upgrade Tata Communications is rooted in multiple factors, including:
1. Short-Term Challenges Creating a Buying Opportunity
The company has faced revenue challenges due to a slowdown in order book growth and disruptions from the Red Sea cable cut. These factors negatively impacted its performance in FY24. However, with these issues now resolved and a double-digit growth in order books in FY25, TCom is set for a strong recovery.
2. Strong Growth in Core Business
Tata Communications’ data revenue is expected to increase significantly as the company continues to strengthen its core connectivity business. The company is projected to generate ₹3,300 crore (INR 33 billion) in free cash flow (FCF) by FY27 from its core operations.
3. Focus on AI and Cloud-Based Solutions
TCom has been actively expanding its digital portfolio by launching multiple cloud and AI-based solutions. This strategic move positions it well to capitalize on the growing demand for digital transformation services.
4. Attractive Valuation and Growth Potential
ICICI Securities has valued Tata Communications using a Sum-of-the-Parts (SoTP) method and assigned an 11x FY27E EV/EBITDA multiple to the core business. This implies a 7x multiple for core connectivity and 2x sales for digital services, leading to a fair valuation of ₹1,840 per share.
Tata Communications: Financial Performance and Key Ratios
To better understand Tata Communications’ financial strength, let’s look at some key ratios:
| Metric | Value |
|---|---|
| Current Market Price (CMP) | ₹1,550 (approx.) |
| Target Price (TP) | ₹1,840 |
| Price-to-Earnings (P/E) Ratio | 19.2x (FY24) |
| Enterprise Value/EBITDA (EV/EBITDA) | 11x (FY27E) |
| Free Cash Flow (FCF) Projection | ₹3,300 crore (FY27E) |
| Order Book Growth (FY25-TD) | Double-Digit Growth |
| Digital Services Valuation | 2x Sales |
| Core Connectivity Valuation | 7x EV/EBITDA |
Investment Outlook for Tata Communications
- Revenue Revival Expected: With strong order book growth, TCom’s data revenue is expected to improve significantly in FY25.
- Digital Expansion: The company is focusing on digital services, including AI integration and cloud-based solutions.
- Attractive Valuation: The stock’s recent price correction presents an opportunity for investors to buy at a discounted valuation.
- Risk-Reward Ratio Favors Investors: Given the potential upside, the risk-reward ratio appears highly favorable.
FAQs: Understanding Tata Communications’ Growth Potential
Q1: Why has ICICI Securities upgraded Tata Communications to a “Buy”?
A: The brokerage firm sees strong growth potential as revenue challenges from the past year are now easing. With a double-digit order book growth and increasing demand for digital services, Tata Communications is well-positioned for future expansion.
Q2: What is the target price set by ICICI Securities?
A: The target price is ₹1,840, which reflects an upside potential from current market levels.
Q3: How is Tata Communications leveraging AI and cloud services?
A: The company has launched multiple cloud-based products and integrated AI into its internal processes, enhancing efficiency and future revenue potential.
Q4: What are the key valuation metrics for Tata Communications?
A: The stock is valued at 11x FY27E EV/EBITDA, with core connectivity at 7x EV/EBITDA and digital services valued at 2x sales.
Q5: What are the main risks for Tata Communications?
A: While the company has strong growth potential, risks include competition in digital services, potential global economic slowdowns, and operational execution challenges.
Conclusion
Tata Communications presents a strong investment opportunity with its digital transformation strategy, AI-powered solutions, and increasing order book growth. The company has overcome recent revenue challenges and is on track to achieve significant financial growth in the coming years. ICICI Securities’ double-upgrade and a target price of ₹1,840 indicate a bullish outlook for the stock. Investors looking for a long-term growth opportunity in the digital and connectivity space should consider adding Tata Communications to their portfolio.
For more market insights, follow our news.
Stay tuned for more updates and insights on the stock market! For more insights on investing in the Indian stock market, check out resource like MoneyControl, ET, NSE India.
Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.