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Tata Teleservices Maharashtra is targeting the enterprise and data card segments to improve profitability.

Tata Teleservices Maharashtra (TTML), the CDMA-based telecom services provider of the Tata group in Maharashtra, Goa and Mumbai, has seen its subscriber base double in the last six quarters to reach 3.8 million users.

But despite this, the company is lagging behind competition. In Maharashtra and Goa, it is trying to catch up with Idea, Bharti and Reliance, while in Mumbai, it is fighting to keep its customers against larger players Vodafone, Bharti, Reliance and MTNL. To gain market share, TTML plans to expand its presence in smaller towns for basic telephony services and focus on the enterprise and data card segments to improve profitability.

Growth ahead
Till September 2007, the company had totted up 3.8 million subscribers, a growth of 65 per cent year-on-year and 6 per cent over August 2007. TTML has been steadily increasing its net adds per month from 80,000 four months ago to over 2.25 lakh in September.

While it will be a difficult task to sustain this momentum, if it manages to grow its net adds by half that number (about a lakh) then it is likely to hit the 8 million mark by 2010, say analysts. In the wireline enterprise segment, it is a formidable player in the circles it operates in, and claims to have a cumulative market share of about 60 per cent.

Thanks to these net adds, the company's market share too has improved by 250 basis points since the end of FY06 to touch 13 per cent in September 2007. For incremental adds, the company claims to have a market share of 19.5 per cent.

Analysts believe that the company could increase its share of the market to about 16 per cent by 2010. While there is substantial growth in market share, subscription and revenues, the same cannot be said of average revenue per user (ARPU).

Data driven
Over the last 11 quarters, blended ARPUs have halved to Rs 387. With the company planning to expand its operations into smaller towns and get more customers, and prepaids forming a substantial chunk of new customers, that figure is likely to go down further. To arrest the decline in ARPUs, the company is targeting the enterprise segment and data products market which contribute 13 per cent to its revenues.

The focus on this value added segment is apparent, say analysts, as operating margins are a hefty 50 per cent in data products and the infrastructure requirement is considerably lesser than that for its other revenue earner---telephony services.

Moreover with each data card contributing between Rs 700 and Rs 1,000 a month, the ARPU is equivalent to adding two telephony customers.

Analysts are optimistic about this segment, which could become a major contributor to the company's bottom line. At present, TTML sells 3,000 data cards a month. "If one customer of every 10 new customers buys a data card, the company could see a huge upside," says an analyst

Cutting costs
TTML is still grappling with losses at the operational level. "It lost Rs 1,175 per subscriber in FY07," says Deven Choksey, managing director of K R Choksey. A large part of this is due to the Rs 700 subsidy given by the company on handsets to broaden its user base.

The company is in talks with manufacturers to bring down the cost of handsets and offer attractive schemes to distributors to boost sales. Operating profit margins at 21 per cent have been moving up y-o-y but are flat q-o-q for the June 2007 quarter.

Adds Choksey, "The improvement in operating profit margin on a y-o-y basis is due to lower network expenses, as fixed network cost is distributed across a larger user base."

The flat growth on q-o-q basis, according to TTML, is due to its focus on increasing market share which requires a higher spend on marketing and business promotion expenses. The company has been able to reduce its expenses by sharing 50 per cent of its towers with other operators and benefits in terms of cost sharing and effective utilisation of investments.

Though the company has no plans at present to demerge its tower arm, it might take that route once it reaches a certain size and is thus able to achieve minimum number of tenants on its towers. 
 

STEADY GAINS
(Rs in crore)	Q1FY08	FY07	FY08E	FY09E
Net Sales	393	1406	1827.80	2284.75
% change (yoy)	21.67	28	30	25
Operating profit	85	287	477.05	691.72
% change (yoy)	72.41	187	66.22	45
OPM (%)	25.45	20.41	26.10	30.28
Net profit/loss	-28.40	-310	-109	114.24

Valuations
The company is expected to turn around by FY09 and begin to post net profits. Growing at 30 per cent a year, TTML is likely to hit revenues of Rs 2,200 crore and an operating profit of Rs 700 crore in FY09.

While the stock has doubled in the last six months, value unlocking could happen if tower assets are demerged and it gets the kind of valuations that Reliance Communications got for its strategic sale, and the much talked about three-way merger between TTML, TTSL and VSNL comes about. Otherwise, at Rs 42, the stock is expensive at 60 times its estimated FY09 earnings.