Tata Communications Ltd Upgraded to Hold by MarketsMOJO on Technical and Valuation Improvements

Quality Assessment: Management Efficiency Amidst Debt Concerns

Tata Communications continues to demonstrate strong management efficiency, as evidenced by its robust Return on Capital Employed (ROCE) of 18.37% for the latest period. This figure remains a positive indicator of how effectively the company utilises its capital to generate profits, placing it favourably within the telecom services industry. However, the company’s high leverage remains a significant concern. With an average Debt to Equity ratio of 12.62 times, Tata Communications is classified as a high-debt company, which poses risks related to interest obligations and financial flexibility.

Moreover, the company’s operating profit growth has been subdued, registering a modest annualised increase of just 2.06% over the past five years. This slow growth trajectory tempers the otherwise strong quality metrics and suggests challenges in scaling operational profitability. Additionally, the half-year ROCE has declined to 11.37%, signalling some erosion in capital efficiency in the short term. Cash and cash equivalents stand at a relatively low ₹327.43 crores, which may constrain liquidity buffers.

Valuation: Attractive Pricing Amidst Peer Comparisons

Despite the mixed quality signals, Tata Communications’ valuation profile has improved, contributing to the upgrade. The company’s ROCE of 12.5% combined with an Enterprise Value to Capital Employed (EV/CE) ratio of 3.8 indicates an attractive valuation relative to its historical averages and peer group. The stock currently trades at a discount compared to its telecom services peers, offering potential value for investors seeking exposure to the sector at a reasonable price point.

However, the company’s Price/Earnings to Growth (PEG) ratio stands at a high 9.5, reflecting the market’s cautious stance on its growth prospects relative to earnings. This elevated PEG ratio suggests that while the stock is attractively priced on some metrics, investors remain wary of its ability to deliver sustained earnings growth. Institutional investors hold a significant 32.95% stake, signalling confidence from sophisticated market participants who typically conduct rigorous fundamental analysis.

Financial Trend: Flat Quarterly Performance with Mixed Long-Term Returns

The company reported flat financial performance in Q3 FY25-26, with no significant growth in revenues or profits. Non-operating income accounted for a substantial 48.49% of Profit Before Tax (PBT), indicating reliance on ancillary income streams rather than core operations. This raises questions about the sustainability of earnings quality.

In terms of returns, Tata Communications has delivered a 13.62% gain over the past year, outperforming the Sensex’s 10.44% return in the same period. However, the year-to-date return is negative at -10.76%, underperforming the Sensex’s -3.51%. Over longer horizons, the stock has generated a 55.31% return over five years and an impressive 378.07% over ten years, outperforming the Sensex’s 256.13% over the decade. These figures highlight the company’s capacity for long-term wealth creation despite short-term volatility.

Technicals: Shift from Bearish to Mildly Bearish Signals

The upgrade to Hold was primarily driven by improvements in technical indicators. The technical grade shifted from bearish to mildly bearish, reflecting a cautious but more optimistic market sentiment. Weekly and monthly Moving Average Convergence Divergence (MACD) readings remain bearish and mildly bearish respectively, while the Relative Strength Index (RSI) on a weekly basis has turned bullish, signalling some upward momentum in price action.

Bollinger Bands indicate bearish trends on a weekly scale but only mildly bearish on monthly charts, suggesting reduced volatility and potential stabilisation. Daily moving averages continue to show bearish signals, but the KST (Know Sure Thing) indicator has improved to mildly bullish on a monthly basis. Dow Theory analysis also supports a mildly bullish weekly trend, although no clear monthly trend is established. On Balance Volume (OBV) remains neutral, indicating no significant accumulation or distribution by investors.

Currently, Tata Communications is trading at ₹1,628.30, down 3.09% on the day from a previous close of ₹1,680.15. The stock’s 52-week high is ₹2,004.00 and the low is ₹1,293.00, placing it closer to the lower end of its annual trading range. Today’s intraday range has been ₹1,591.05 to ₹1,679.95, reflecting some volatility but also potential support near current levels.

Comparative Performance and Market Context

When benchmarked against the Sensex, Tata Communications has shown mixed relative performance. While it has outperformed the Sensex over the one-year and ten-year periods, its year-to-date returns lag behind the broader market. This divergence underscores the importance of considering both short-term market dynamics and long-term fundamentals when evaluating the stock.

The telecom services sector remains competitive, with peers exhibiting varying degrees of growth and valuation metrics. Tata Communications’ discount to peer valuations may attract value-oriented investors, but the company’s high debt and flat recent financial results warrant caution.

Conclusion: A Balanced Hold Recommendation

The upgrade of Tata Communications Ltd from Sell to Hold reflects a balanced view of its current investment merits and risks. Improvements in technical indicators and attractive valuation metrics have offset concerns arising from flat financial performance and high leverage. The company’s strong management efficiency and institutional backing provide additional support for a Hold rating.

Investors should monitor upcoming quarterly results for signs of operational improvement and watch technical trends for confirmation of a sustained recovery. Given the mixed signals, a Hold rating is appropriate, signalling neither a strong buy opportunity nor a sell signal at this juncture.

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