Tata Communications: 'Neotel deal termination setback to sentiment' - BUY
CMP: Rs333, Target: Rs480, Upside 44.1%
Neotel deal termination: a sentiment hit but we stay the course with BUY
In a disappointing end to the Neotel divestment, Tata Comm has announced that agreement between Vodacom and Neotel which had earlier concluded a modified transaction has lapsed due to "regulatory complexities in concluding the transaction as well as certain conditions not being fulfilled". We view the unraveling of the deal as sentimentally negative though the recent correction would limit further stock damage. The immediate impact would be removal of Rs24/share benefit from stake sale and inclusion of Neotel debt and EBIDTA in our SOTP calculations. For 9m FY16, Neotel performance has been volatile due to timing of project revenues and 11% ZAR depreciation yoy; that said base annuity business and underlying operations have been stable with 9m FY16 ZAR revenues up 3%. In INR terms, Neotel reported 30% decline in EBIDTA to Rs. 324cr and net loss of Rs. 97cr. We cut FY18E EV/EBIDTA multiple on core business to 5.5x (from 6x earlier) and retain BUY with revised 1-year target of Rs480 (earlier Rs525).
Warm Regards,
India Infoline Research Team
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