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Tata Communications: Aiming for a larger global footprint

March 30, 2012
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From a pure-play long distance service provider in India to becoming one of the leading integrated communication solution providers globally, Tata Communications has come a long way since its incorporation in 1986. Today, the company operates in 52 markets with 75 per cent of its revenues coming from overseas markets.

This transition has been marked with both organic and inorganic growth. The company’s entry into the enterprise and data service market in the mid-2000s with an aggressive overseas business approach helped it come out of its state-run monopoly image. A major turning point came in 2005, when Tata Communications acquired Tyco Global Network. This was followed by the takeover of Teleglobe International Holding in 2006. These acquisitions added to the company’s revenue pool and provided it access to one of the world’s largest submarine cable networks. Tata Communications followed this up with strategic investments in South Africa (Neotel), Sri Lanka (Tata Communications Lanka Limited), Nepal (United Telecom Limited), the US (BitGravity) and a venture with BT, through which the UK-based operator largely outsources its wholesale voice business to the company.

Known for its inorganic mode of growth, the operator is currently evaluating a cash offer for UK-based Cable & Wireless Worldwide (CWW). The deal, for which the company faces competition from Vodafone, will add CWW’s marquee clients such as Tesco, Marks & Spencer, Axa, United Utilities and Aviva to its customer base. CWW owns fixed lines that are used by mobile operators to provide links to mobile transmitters and switching offices as well as an international cable network connecting more than 150 countries; and provides voice, data and hosting services to enterprise customers. Acquiring CWW (which has a market value of about $1.2 billion) will more than double Tata Communications’ annual turnover to nearly Rs 300 billion.

However, the deal may not come through that easily, even if the company is able to override Vodafone’s bid. Tata Communications’ plans could face opposition from the central government, which holds 26 per cent stake in the company. In the past, the company has faced problems in raising loans and requested the centre to relax the debt ceiling.

Moreover, the operator is on a weak financial wicket, having posted losses in 2009-10 and 2010-11. Its borrowing capacity may be limited as it already has a debt of Rs 84.65 billion. Tata Communications has reportedly appointed the Standard Chartered Bank for evaluating the CWW bid. The bank is also likely to be appointed as the lead arranger of the required loan. The company is planning to raise $2 billion through a term loan with a tenor of three-five years.

Market position

Tata Communications has a significant share in the global voice, data and managed services markets.

In the voice market, the operator has an estimated 16.2 per cent share of the international long distance (ILD) voice traffic as it owns and operates one of the largest international voice networks which covers over 200 countries. It has over 480 direct and bilateral relationships with international voice telecom service providers. Transporting more than 40 billion minutes annually of ILD and over 10 billion minutes of national long distance (NLD), Tata Communications has a wide customer base, which can be classified into three main categories - mobile, broadband and carriers.

As a Tier 1 internet service provider, the company operates one of the largest IP networks in the world with more than 400 points of presence. It offers a range of customised managed and connectivity solutions to cater to the business needs of multinational companies. In addition to international and national private leased circuits, the operator offers VPNs, associated managed services, Ethernet services, internet access and telephony, managed hosting and cloud-based services.

Tata Communications’ global IP network, the Tata Global Network, comprises one of the largest submarine cable networks, which connects over 240 countries with more than 210,000 km of terrestrial and submarine optic fibre. The company builds and operates its own global ring of cable systems and is part of 80 other consortiums that operate private submarine cables. The operator offers multiple services for small and medium enterprises as well. It provides Wi-Fi services in India through approximately 500 sites.

Performance so far

The company’s financial performance has been weak in the recent past. While its revenues have been growing every year, its margins have taken a hit.

In 2010-11, consolidated revenues increased by 8 per cent from Rs 110.26 billion in 2009-10 to Rs 119.32 billion, but the company reported a net loss of Rs 8.54 billion. A large part of this consolidated net loss comprised the Rs 5.51 billion losses accrued through the operator’s 49.01 per cent holding in Neotel, South Africa.

In the first three quarters of 2011-12, the company posted losses, which, however, showed a declining trend. The company reported a consolidated net loss of Rs 1.53 billion in the quarter ended December 2011, lower than the net loss of Rs 1.81 billion in the quarter ended December 2010. Net sales increased by 19.4 per cent to Rs 36.04 billion in the quarter ended December 2011 over the quarter ended December 2010.

One of the key reasons for declining profitability is the large investments made by the operator in building and strengthening its global assets, services and capabilities. The operator has invested over $2 billion in building capabilities and expanding its global footprint in the past five years. Also, over the past two years, Tata Communications has crossed several milestones – its partnership with Google for offering on-the-go business connectivity to enterprises in India (InstaOffice) and the opening of the $180 million state-of-the-art data centre, Tata Communications Exchange, in Singapore. The company has also launched InstaCompute, its cloud infrastructure and application services offering. It has signed a major international voice sourcing agreement with Videotron, one of Canada’s largest communication companies, and formed intercarrier partnerships with operators such as Orange Business Services and BT to provide a global meeting exchange across telepresence rooms.

The company has invested in cloud computing, and the media and entertainment space as well. In the media and entertainment segment, the service provider formed a strategic alliance with BitGravity, a content delivery network (CDN) company, in 2008. In February 2011, the company completed its acquisition of a majority share in BitGravity. This complements Tata Communications’ global media and enterprise strategy and would add enhanced CDN and streaming capabilities to the growing portfolio of value-added hosting, storage and security services, all of which leverage the company’s global IP network.

The way forward

Over the past several years, the global voice market has witnessed an increase in traffic volumes as a result of the growing teledensity in developing countries as well as the expanding cellular subscriber base worldwide. Tata Communications is likely to benefit from these trends.

The company is also in a strong position to leverage its infrastructure in the Indian market, which contributes about 25 per cent to its revenues. Indian businesses are increasingly adopting IT and networking technology for improving productivity and competitive advantage. Since these businesses are growing globally and international companies are expanding their footprint in the country, there is an associated need for greater connectivity to and within India. Also, the launch of 3G and broadband wireless access services in the country will present bigger business opportunities to the operator going forward.

Overall, the Tata Group company has been one of the frontrunners in the industry and enjoys strong relations with telecom carriers and operators worldwide, but it needs to devise stronger strategies to improve its profitability.

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