Tata Communications' share price surged by 3.95% on Wednesday following a positive initiation of coverage by Macquarie Equity Research.
The brokerage has given Tata Communications an 'Outperform' rating with a target price of Rs 2,300, citing the company's strong position in the digital transformation space.
Macquarie's report, titled 'Digital Highway Star,' highlights Tata Communications' role in enabling digital transformation for enterprises through one of the world's largest digital pipeline networks. "TCOM has transformed from a provider of passive digital connectivity to now an enterprise partner driving overall digital transformation agendas with its 'Digital Fabric' of solutions," the report stated.
The brokerage sees significant potential in Tata Communications' growing Digital Services segment, where the company is generally rated in the Leaders quadrant by industry analysts such as Gartner, IDC, ISG, and Juniper. "We see optionality in TCOM's growing Digital Services where the company is generally rated in the Leaders quadrant," Macquarie noted.
Macquarie also emphasised the large cross-sell opportunity for Tata Communications, which has improved its breadth of offerings from connectivity to cloud to communication services.
The brokerage forecasts a 11% revenue compound annual growth rate for the fiscal years 2025 to 2028. Additionally, they predict a 16% and 30% CAGR for earnings before interest, taxes, depreciation, amortisation and earnings before interest and taxes, respectively. This growth is expected as profit margins improve by 3 to 5 percentage points, benefiting from economies of scale in the currently unprofitable Digital Portfolio. "We see a bull-case path for the shares to double over three years," Macquarie stated.
Macquarie's analysis also pointed to a sharp turnaround in Tata Communications' Return on Invested Capital, which has fallen from an average of 16% in FY21-23 to 11% in FY25 due to acquisitions in its Digital Portfolio. "Assuming no further acquisitions, we project ROIC to recover robustly, exceeding 20% by FY28 and moving toward the company's target of 25%," the report added.
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