Tata Tele: A mountain to climb

While the stake sale to NTT DoCoMo is positive, TTML will have to pull out all the stops to improve its share in a highly competitive marketplace.

Tata Teleservices Maharashtra (TTML), which has a 14 per cent market share in the lucrative Maharashtra and Mumbai circles, faces tough challenges as it gets ready to roll out its GSM-based telephony services in the second quarter of FY10. The biggest of them is to maintain and improve its stagnant market share in face of aggressive marketing by rivals, both existing and new entrants. In this context, the tie up with a leading Japanese player not only ensures technological inputs, but also cash infusion at a critical juncture.

Long-term benefits
NTT DoCoMo, which has 54 million customers in Japan and is a leader in mobile internet services, had acquired 26 per cent stake in Tata Teleservices Limited (TTSL) for Rs 12,740 crore in November 2008. In a subsequent open offer for TTML shareholders (TTSL has 37 per cent stake in TTML) that followed (closed on March 12), NTT-DoCoMo picked up about 12 per cent stake in TTML. Although the infusion of fresh funds (Rs 10,000 crore) is to TTSL, the deal is expected to bring in technological inputs on 3G W-CDMA network, roaming, handset co-development and corporate services for both, TTML and TTSL. While the Japanese mobile company has an edge in value added services (such as music downloads, video streaming) analysts expect that its contribution in the short to medium term will be limited to voice and SMS services.

Subscriber growth
While the company’s subscriber base in the December quarter grew at a decent clip in the Maharashtra circle (10.7 per cent to the sector average of 9.9 per cent) it lagged behind in the Mumbai circle (3.1 per cent to industry average of 8.1 per cent). In February, the company grew its subscriber base by only 1.8 per cent to 22 lakh in Mumbai where Vodafone is the largest with 43 lakh users and TTML ranks fifth. In the Maharashtra circle, which is dominated by Idea with 72 lakh subscribers, it grew by a respectable 5 per cent to 43 lakh users and is currently the fourth largest player.

The worrying factor for TTML is that GSM players with new launches such as Idea and Reliance Communications (RCOM) have notched by higher growth rates through aggressive pricing even as existing players continue to consolidate. Though players such as RCOM continue to surprise by clocking subscriber growth (combined numbers of GSM and CDMA) of 21 and 12 per cent in January and February respectively, with the wireless teledensity in Mumbai at a high of 95 per cent, there might be little scope for further growth in the city. On the other hand, Maharashtra with a penetration of only 27 per cent, offers good growth prospects both for TTML’s CDMA and soon-to-be-rolled out GSM-based services.

Data business and GSM rollout
To arrest the decline in ARPUs and improve its profitability, TTML is focussing on data and enterprise segments. These segments currently constitute about 13.4 per cent of wireless revenues and get much higher ARPUs than the voice segment (Rs 200). Wireline growth could be another area where the company could improve its financial performance. Despite the fact that the company’s 5 lakh wireline subscribers constitute just 7 per cent of the total subscriber base, they contribute to a third of the total revenues with ARPUs of Rs 1,100 per month.

STRETCHED
in Rs crore	FY08	FY09E	FY10E
Revenues	1,789	2,065	2,375
Ebdita	492	624	689
Net profit	-125	-174	-192

Analysts say that the company’s GSM rollout across Maharashtra and Mumbai faces structural disadvantages as higher frequencies (1800 Mhz band) require 1.5 times more base stations than those at lower frequencies to cover the same area. This means higher capex for TTML compared with players such as Idea, which has 900 Mhz in 9 circles and is among the top two players in these circles. With Reliance and Idea having launched their GSM services, the company will have an uphill task of adding subscribers to its kitty.

Outlook
If RCom’s experience is anything to go by, the GSM expansion will ensure healthy revenue growth of about 15 per cent for TTML in FY10. However, the company will have to invest substantially higher amounts to rollout its telecom network and its interest burden, which is currently at about 40 per cent of Ebidta, is unlikely to ease. Whether it will be able to improve its operating margins (currently at 29 per cent) will depend on its ability to control sales and marketing expenses and network operating costs. Given the rollout of its GSM network, it looks doubtful that these will trend down. While the company made cash profits of Rs 216 crore for the nine months ended December 2008, its ability to generate higher cash flows in the future will depend on the successful rollout of its GSM network and expansion of its datacard and enterprise subscriber base.

While the NTT DoCoMo deal is a positive, analysts believe that merger among group firms (TTML and TTSL in wireline and wireless service, Tata Communications in ILD and enterprise segment and Tata Sky in DTH) will be the biggest trigger for the stocks as it would help it match up to the fully integrated telecom offerings of Bharti Airtel and Reliance Communications. Invest at dips and have a time horizon of at least 15 months to see decent returns from this stock.