Tata Teleservices: Wired for growth

Tata Teleservices stock rises on merger hopes

Tata Teleservices Maharashtra (TTML), which holds the cellular licences for Maharashtra and Mumbai circles, has seen its share price gain more than 80 per cent between June when the price was around Rs 18 and now.

On Tuesday the stock was up more than 10 per cent at Rs 35. The company is the former Hughes Telecom in which the Tatas bought a controlling 51 per cent stake in December 2002, and has totally around 7.5 lakh subscribers.

What's the reason for the euphoria? TTML is a 50.7 per cent subsidiary of Tata Teleservices Ltd (TTSL) which has unified telecom access to virtually the rest of the country. Since both firms have the same promoters and are in the same business, the assumption is that the two will be merged sooner rather than later.

Currently, the two have a market share of about 1.5 per cent in the cellular space. But then, the national launch, by which around 1,000 towns are to be covered by March 2005, has just happened in November.

For the quarter ended September, TTML turned in losses of Rs 105 crore, up from Rs 65 crore in the same quarter of the previous year. Though income from telecom services was up nearly 40 per cent, interest costs were up 80 per cent because of the huge investments that the company has made and will need to make in the future.

However, some of the past debt in both companies has been repriced and the weighted average cost of borrowings should come down by about 200 basis points.

Nonetheless, it will take time for the companies to scale up and gain some market share especially since they are up against some formidable competition from Reliance and Bharti. TTML, according to analysts, is expected to make profits only in FY07. Investors , however, seem to be in a hurry.

REL buyback: uncertainty ahead

Besides Reliance Industries, Reliance Energy (REL) too has a buyback programme in hand. Since the "ownership issue" came to light, the REL stock has fallen approximately 16 per cent, and the management is anxious to support the scrip.

It had traded below the offer price for only eight days since the buyback was first announced on June 9. However, the management had taken a decision not to buy back during those days, as nervous investors offloaded shares in response to news flows from the Reliance group.

Despite REL earlier placing a preferential issue with Capital International and Sloane Robinson for 56 lakh shares at Rs 640 each, a higher buyback price has not been fixed for shareholders, largely owing to the large capex plans being undertaken by it.

The REL stock continues to have a higher price-earning ( trailing 12 months' net profit ) of around 22 vis-a-vis 15.6 for its nearest rival Tata Power.

Apart from the gas-fired plant being set up in Dadri, Uttar Pradesh (anticipated to be completed over the next 2 - 3 years), the REL management has indicated its interest to expand aggressively in this power-starved northern state, via bids for five power distribution companies that are expected to be privatised shortly.

If REL could acquire these distribution companies, it could help to substantially grow profits.

Expansion opportunities such as the Dadri project are, however, being tapped through special purpose vehicles in which other Reliance group companies have stakes.

Clearly, Reliance Energy is to a large extent dependent on RIL and given the fractious relationship among the Ambani brothers, uncertainty will continue to plague the stock.

FII inflows drive bond yields lower

The yield on the government's 10-year bond moved up from around 6.75 per cent in mid-October to 7.25 per cent in mid-November, before falling back to around 6.75 per cent by mid-December.

The explanation for the fall in yields has been the government's decision to cancel some of its bond issues, thereby adding to liquidity. A look at the incremental credit-deposit ratio during these two months shows the reason for the widely differing trend in liquidity.

As the table shows, during October 15 to November 12, aggregate deposits with banks fell by Rs 8,616 crore, while credit offtake rose by Rs 24,499 crore.

In the following month, from Nov 11 to December 12, aggregate deposits rose by Rs 25,042 crore, while credit growth slowed to Rs 17,849 crore. The far lower incremental credit-deposit ratio illustrates the better liquidity position.

Why did liquidity improve? One reason is the growth in money supply. While M3 growth between October 15 and November 12 was Rs 9,166 crore, M3 growth in the succeeding month was Rs 19,357 crore. One of the main reasons for higher money supply growth was the rise in net foreign assets with banks.

As foreign institutional investors (FIIs) stepped up their purchases, net foreign assets with banks grew by Rs 19,930 crore between November 12 and December 10, compared with a growth of Rs 9,665 crore in the previous month. Clearly, it's the rise in FII inflows that has brought yields down in the debt market.

With contributions from Shobhana Subramanian and Amriteshwar Mathur