Tata Communications
SELL
Price: Rs375 Target Price: Under Review

2QFY10 margins, net profit disappoint

* 2QFY10 consolidated revenues in-line; margins, PAT disappoint:
For 2QFY10, TCOM posted consolidated revenues, EBITDA and net loss of
Rs27.2 bn (up 6.2% qoq), Rs3.3 bn (down 8% qoq) and Rs1.56 bn (vs.
net loss of Rs551 mn in 1QFY10) respectively. At 12.1%, 2QFY10 EBITDA
margin was 240 bps below our estimate – the gap in EBITDA together with
lower-than expected non-operating income led to 2QFY10 net loss being
significantly exaggerated vs. our estimate (Rs580 mn).

* Margin decline attributed to qoq stagnation in non-voice revenues:
A mere 1.6% qoq rise in non-voice revenues suggests pricing pressure in
enterprise/carrier data business, albeit not as severe as in the domestic
market considering that stand-alone 2QFy10 non-voice revenues declined
8.6% qoq. As voice revenues, which entail significantly lower margins than
data revenues, grew 10.3% qoq, the change in revenue mix led to the
consolidated EBITDA coming in 16% below our expectations.

* Neotel’s 2QFY10 net loss up 13.8% qoq: Neotel’s implied 2QFY10 net
loss (based on TCOM’s 27% share of loss which it consolidates) was
Rs1.37 bn (up 13.8% qoq). Neotel’s 1HFY10 net loss of Rs2.57 bn is in line
with tour FY10E net loss forecast of Rs5.5 bn.

* Maintain SELL; placing earnings forecast, TP under review: Viewing
TCOM’s stand-alone and consolidated 1HFY10 results in perspective with
our full-year (FY10) earnings forecast, we infer – (1) Implied growth in
2HFY10 consolidated EBITDA is 47%, (2) implied decline in 2HFY10 net
loss is 76%, and (3) implied growth in 2HFY10 stand-alone EBITDA/net
profit is 61%/309% respectively – both scenarios appear unlikely.
Accordingly, pending a meeting with the management, we place our
earning estimates and TP for TCOM under review.