Lower costs and improving operating efficiencies are fuelling Tata Communications Ltd’s stock even higher. After rising on improved consumption of data throughout the year, the scrip further advanced 5% on Monday. The stock is already up about 103% from its pre-covid highs.

                                           

Second-quarter revenues grew about 3% year-on-year, in line with the expectations. However, there was a marginal sequential contraction in the revenues, led by a 5% decline in the voice revenues. Operating profits in this division contracted as well.

While covid-19 is said to be driving the internet usage, Tata Communications’ data consumption grew just 1%. According to the analysts, data revenue was impacted by slower deal conversion due to covid-19, forex and moderation in growth services. Of course, it’s not a major cause of concern. The company's traditional data segment grew about 2% sequentially. Revenues in the transformative segment came in flat, but with the termination of one contract, margins have been better here.

Margin beat

Tata Communications Q2 margins jumped on sharp cost cuts, some sustainable

Despite some of its segments not doing so well, it still beat the Street's estimates on operating profitability, thanks to sharp cost savings in the data segment. The company's overall operating profits grew 11% sequentially. Administrative expenses were considerably lower.

Of course, the firm also got a one-time benefit as some of its costs have been pushed to the second half, but some of its costs savings are sustainable.

“Out of total 160 crore Ebitda increase, 70 crore due to covid and other one-time benefit should be reversed over the next couple of quarters. Thus, adjusting for the same sustainable Ebitda growth is about 4%," said analysts at Motilal Oswal Financial Services in a note to clients.

The stock’s recent surge has started to stretch valuations considerably. On a trailing 12-month basis, the stock price appears quite stretched at about 61 times the earnings. However, due to an earnings expansion expected during the coming quarters, the one-year forward price-earnings multiple stands close to 29 times as per data from Bloomberg. For a data company, more may still need to be done on the costs growth and cost front to justify these valuations.