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High hopes around Tata Communications

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Munira Dongre | 15/07/2010 02:58 PM | 

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From delisting to potential restructuring, investors are betting on a variety of triggers for the stock to rally

A host of hopes such as delisting, settlement with the government, quicker turnaround of its South African business (Neotel), potential restructuring of Tata Group's telecom business, and the fact that it opted out of expensive broadband wireless auctions is creating interest around this company.

Tata Communications' stock price is in a good positive trend. Market punters are talking about a target of Rs450 (which means they expect more than 63% retracement from its previous high of Rs540 in August 2009). For now, from a low of Rs230 in early June, the stock has retraced almost 24%. The general consensus among punters is that if it crosses Rs303 and holds, it will be on its way to Rs350. The stock has already run up to Rs292.

The big rumour around Tata Communications is delisting (despite the government dithering on the 25% public holding norm). Promoters including the government hold about 76% of this company while LIC holds 9%. Market players have accepted that the land bank (773 acres, worth Rs8,000 crore-Rs10,000 crore inherited when it purchased VSNL) that is with Tata Communications will go to the government (although broker research indicates that the government is entitled to 51%). So the speculation is that Tata Communications will work out a deal with the government whereby they get the government's stake at a reasonable rate with minimum fuss and let go of the land bank claim in return. In any case, if the government and Tata Communications do arrive at a settlement on the land as well, this will be a further upside. The dispute has been on for almost eight years now and has remained in limbo. In 2002, the government decided to keep out 773 acres of surplus land owned by VSNL out of the sale.

The fact that Tata Communications has moved away from the Broadband Wireless Access (BWA) auctions is also seen as a big positive by investors. Tata Communications is planning to spend Rs10,000 crore over FY11 on voice and data solutions. But now that BWA is not in the picture, capex should stay at previously-announced levels and the next big trigger is expected to be Neotel's turnaround, in which Tata Communications has a majority stake.

Neotel is a South Africa-based communications network operator. It provides voice and data services for businesses, wholesale network operators and providers and consumers.

Another potential trigger for this stock is the restructuring of all the telecom businesses in the Tata Group. Rumours about a merger, between Tata Teleservices (Maharashtra) and Tata Teleservices, has been doing the rounds already. However, Tata Communication's management has said that there is no fixed targeted time for such a restructuring, if at all.

For Q1FY11, Kotak Mahindra Group expects Tata Communications (standalone) to post net sales of Rs870 crore and a profit of Rs14.6 crore while CLSA Asia-Pacific Markets expects this to be Rs880 crore and Rs29.9 crore respectively. HSBC expects it to post (consolidated) net sales of Rs2,860 crore and a net loss of Rs200 crore while Bank of America Merrill Lynch expects Rs3,000 crore and Rs390 crore. In general, long distance services core business pressures are expected to continue. In addition, this company is still plagued with high interest costs.

Tata Communications' business includes submarine cable networks, a Tier-1 IP network with connectivity to more than 200 countries across 400 points-of-presence (PoP), and nearly one million square feet of data centre and co-location space worldwide. It operates in enterprise data services, global international voice, has investments in operators in South Africa (Neotel, loss making), Sri Lanka, and Nepal (United Telecom Ltd).

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