Valuation Metrics and What They Indicate
Tata Communications currently trades at a price of ₹1,849.90, close to its 52-week high of ₹2,004.00 and well above its 52-week low of ₹1,293.00. The company’s price-to-earnings (PE) ratio stands at 50.53, which is notably high compared to typical telecom sector averages. This elevated PE ratio suggests that investors are pricing in significant future growth or premium earnings quality. However, the price-to-book value of 18.51 further indicates a steep valuation relative to the company’s net asset base.
Enterprise value multiples provide additional insight. Tata Communications’ EV to EBITDA ratio is 14.22, which is moderate but higher than some peers, reflecting a fair valuation stance. The EV to EBIT ratio at 33.48 is on the higher side, signalling that operating earnings are being valued at a premium. Meanwhile, the PEG ratio, which adjusts the PE ratio for earnings growth, is also elevated at 50.53, implying that the stock’s price growth expectations may be aggressive relative to its earnings growth trajectory.
Profitability and Returns
From a profitability standpoint, Tata Communications demonstrates robust returns on equity (ROE) at 36.64%, indicating efficient utilisation of shareholder capital. Its return on capital employed (ROCE) is a respectable 12.46%, reflecting decent operational efficiency. The dividend yield of 1.35% is modest, suggesting that the company prioritises reinvestment or growth over high dividend payouts.
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Peer Comparison: Contextualising Tata Communications’ Valuation
When compared with its telecom peers, Tata Communications’ valuation appears fair but not cheap. Bharti Airtel, for instance, is considered expensive with a PE ratio of 38.08 and a lower EV to EBITDA of 12.69, alongside a much lower PEG ratio of 0.31, indicating more reasonable growth expectations relative to price. Bharti Hexacom is classified as very expensive, with a PE ratio of 53.5 and an EV to EBITDA of 19.77, suggesting a higher premium valuation than Tata Communications.
Several other telecom companies, including Vodafone Idea and Tata Tele. Mah., are currently loss-making and thus carry risky valuations or do not qualify for standard valuation metrics. This positions Tata Communications as a relatively stable and fairly valued option within a sector facing significant challenges.
Stock Performance Relative to Market Benchmarks
Examining recent returns, Tata Communications has outperformed the Sensex over the past week with a 1.29% gain versus the benchmark’s 0.65%. However, over the last month, the stock declined by 1.37%, underperforming the Sensex’s 1.43% rise. Year-to-date, Tata Communications’ return of 8.59% closely trails the Sensex’s 8.96%, while its one-year return of 3.54% lags behind the Sensex’s 6.09%. Over longer horizons, the stock has delivered strong gains, with a 3-year return of 40.11% surpassing the Sensex’s 35.42%, and a remarkable 10-year return of 337.64% well ahead of the benchmark’s 225.98%.
Balancing Valuation and Growth Prospects
The elevated valuation multiples reflect market optimism about Tata Communications’ growth potential and operational strength. Its strong ROE and consistent returns over the long term support this positive outlook. However, the high PE and PEG ratios caution investors that the stock is priced for perfection, leaving limited margin for error if growth slows or sector headwinds intensify.
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Conclusion: Fair Valuation with Growth Premium
In summary, Tata Communications is currently valued fairly within its sector, having moved from an attractive to a fair valuation grade. Its premium multiples reflect strong investor confidence in its growth and profitability, supported by solid returns on equity and capital employed. While the stock is not undervalued, it is not excessively overvalued either, especially when considering the challenges faced by many peers in the telecom space.
Investors should weigh the company’s growth prospects against its high valuation multiples and consider sector dynamics before making investment decisions. Those seeking exposure to a relatively stable telecom services provider with a history of solid returns may find Tata Communications a reasonable choice, albeit at a premium price.
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