Tata Tele shows signs of coming out of the woods

In the first six months of the current financial year, its operating margin has doubled as cost controls and network optimisation yield results

For years, Tata Teleservices has been the laggard in the $100 billion Tata group. In spite of the huge investments made by Tata Sons, the unlisted company is way behind the trio of Bharti Airtel, Vodafone and Idea Cellular in the sweepstakes.

It started with CDMA services and expanded into the GSM platform in 2008 when it also tied up with NTT DoCoMo of Japan. Though it had got a licence to operate in all the 22 circles, it was allotted spectrum in only 18. One of those four circles where it didn't have spectrum was Delhi, a huge market.

In February 2012, the Supreme Court cancelled all the licences given out by the United Progressive Alliance government in 2008 under the first come first serve policy, after a report by the Comptroller & Auditor General said it had caused a loss of up to Rs 176,000 crore to the government. Tata Teleservices lost three circles.

That perhaps explains why the company's 62 million subscribers are far below those of Bharti Airtel (339 million), Vodafone (180 million) and Idea Cellular (162 million). Its average revenue per user of Rs 170 per month as against the industry average of Rs 200 means its customers are concentrated at the lower end of the market.

The company, which started operations around the same time as Bharti Airtel and Vodafone, has failed to pay any dividend to its shareholders till date. The matter has come to such a pass that the company's 26.5 per cent equity partner, NTT DoCoMo, will have to exit at a heavy loss on its investment.

But in the first six months of the current financial year, Tata Teleservices' operating margin has doubled to 19 per cent and analysts say the company will report cash break-even by the quarter ending June this year. This news will come as a big boost to the company which has been in the woods since its inception.

Mountain of debt
The numbers of the company paint a grim story. At the end of 2014-15, the company had debt of Rs 32,400 crore and its annual revenue for the year was Rs 10,900 crore. The group's holding company, Tata Sons, had to pump in Rs 6,100 crore into the company as quasi equity in the last five years so that it could repay its loans: its finance costs are in the range of Rs 2,500 crore per annum.

The fight among its shareholders further hurt the company.

Soon after DoCoMo expressed its desire to exit the company in April 2013, Tata Sons hired Price Waterhouse to determine the fair value of Tata Teleservices' shares. This was due to an agreement between the two partners under which Tata Sons will have to buy back the Japanese company's shares at a minimum of 50 per cent of the acquisition price. This agreement valued DoCoMo's stake at around Rs 7,200 crore.

But Price Waterhouse valued DoCoMo's stake at Rs 2,915 crore, or Rs 23.34 a share. The total value of Tata Teleservices, according to Price Waterhouse, works out to Rs 11,000 crore, almost 60 per cent below the pre-agreed valuation of Rs 27,000 crore.

The loss in the company's valuation was mainly due to the company failing to gain traction in the Indian telecom market and a skewed spectrum policy. But the gap was substantial and bound to cause disagreement.

The fight between DoCoMo and Tata Sons then went to the London Court of Arbitration, where it is currently pending.

The comeback plan
One of the first steps taken by the company in the last three years was to shrink its CDMA-based services which had failed to click with the customers. The company also bought spectrum in the Delhi circle - one of the most lucrative markets where it did not have any presence.

At the same time, the company also started selling its assets so that it could deleverage its balance sheet and cut jobs across the board. In October, Tata Teleservices reduced its stake in telecom tower company Viom Networks from 53 per cent to 33 per cent for Rs 2,800 crore. This money is expected to flow in by the first quarter of 2016-17 and the company will use the funds for its capital expenditure and debt repayment. It plans to sell the rest of the shares in Viom Networks at a later date.

The company also took steps to improve its operations. Last year, the company bought 3G spectrum in nine circles for Rs 5,864 crore. However, with data services growing at a faster pace than voice and action moving to 4G-LTE services, it is not clear if Tata Teleservices will be able to make a dent with 3G spectrum in just nine circles.

Investment bankers say the company has also initiated talks with Telenor of Norway to merge its India operations with itself. An announcement on the merger is expected shortly. The company did not reply to queries.

Analysts with CRISIL say Tata Teleservices' operating performance improved in 2015 mainly due to lower termination charges, scaling down of operations in loss-making circles, network optimisation through redeployment of cell sites from loss-making circles, and stringent cost control measures.

With all these measures in place, Tata Teleservices' operating margin was 12 per cent in 2014-15 as against 5.4 per cent reported in the previous year. During the first half of 2015-16, operating margins improved to 19 per cent from 8.9 per cent during the same period of the previous year.

It is this rise in margins which is giving confidence to the bankers that the company is on the comeback trail but they caution that it is still not out of the woods. Tata Sons, which has invested billions of dollars in its telecom company, is hoping that Tata Teleservices remains on the track to recovery so that it can survive in the extremely competitive market, which is all set to become tougher with the entry of Mukesh Ambani's Reliance Jio.