Tata Communications switches focus for growth

Tata Communications is going beyond carriage of voice calls to drive growth.

As traditional sources of revenue -- voice and data -- show signs of waning, the telecom and IT services company is gradually switching into a new role -- that of an end-to-end service provider.

While the company reported a loss of Rs 623 crore (Rs 6.23 billion) in 2012-13, its revenue from this new stream, called managed services, nearly doubled to Rs 1,946 crore (Rs 19.46 billion) from Rs 1,022 crore (Rs 10.22 billion) a year ago.

Though most of the increase came from its cloud computing solutions in Asia, including India, video conferencing and ATMs too feature in its plans.

In both these areas, it wants to take control of the end-to-end responsibility of its clients, instead of the earlier practice of just leasing out its infrastructure and data storage systems.

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The current financial year has seen the company open over 100 white label ATMs, and plans are afoot to take this number to 15,000 in the next three years.

Once all the ATMs are in place, it expects 15 million people to use them every month.

The ATMs are likely to be a source of quick cash for the company as it hopes to lease out the screen to third parties for advertisements and offer a whole range of utility services such as bill payments.   

The other plank of its future growth -- video conferencing -- also saw a new solution called Jamvee that bridges calls between different platforms and devices.

In other words, if an employee of a global company wants to connect to his office video conferencing from his mobile phone, he can do so without being present in the office.

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Challenges to business

With these moves, Tata Communications hopes to bring back some of the glory of erstwhile state-owned Videsh Sanchar Nigam Ltd, which is now in the Tata fold.

The company has the largest and the only round-the-world sub-sea cable network, which makes it the number one international wholesale voice carrier by minutes.

Among its clients are 3,000 large global enterprises, 1,600 carriers (companies that take its bandwidth on lease and then further lease it out to others) and 700 mobile operators.

But recent years have seen a drop in its profitability as it was forced to cut international call rates to counter the growing popularity of video-calling solutions such as Skype and Google Talk.

In 2012-13, while the company’s international long distance voice traffic grew 14 per cent to 53.4 billion minutes, its gross margin from the business fell 11 per cent to 0.003 cents per minute.

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The dent to its profitability as a result was significant as voice contributed 50 per cent of its Rs 17,213-crore (Rs 172.13-billion) revenue.

The rest -- 39 per cent and 11 per cent of the revenue, respectively -- came from data services and its South African subsidiary, Neotel.

The company in recent years has been consciously trying to widen its focus from India to newer countries.

“If you look at the last five years, we have been transforming our business from a very India-centric one to a global scale, and are also expanding the scope of our offerings from traditional network or telecom services to IT infrastructure as well as other kind of managed services which are relevant to both service providers as well as larger enterprise customers,” says Vinod Kumar, managing director, Tata Communications.

However, the transformation has not been without a price.

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Tata Communications has spent Rs 15,476 core (Rs 154.76 billion) in the last five years on foundational elements such as laying new network, building data centres, switching fabrics (equipment for building optic fibre network) and so on. 

Increased focus on emerging markets -- Southeast Asia, West Asia and Africa -- also created a need for acquisitions.

The company bought 30 per cent in South Africa’s second largest telecom network operator, Neotel, from state-owned enterprises Eskom and Transnet in 2008.

However, this expansive, acquisitive mood has led to its net debt ballooning to Rs 11,439 crore (Rs 114.39 billion) at the end of 2012-13 from Rs 3,094 crore (Rs 30.94 billion) in 2007-08.

The company reported a net loss of Rs 623 crore (Rs 6.23 billion) in 2012-13, including Rs 246.9 crore (Rs 2.46 billion) from Neotel, as it was weighed down by debt and depreciation costs.

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The company incurred heavy capital expenditure even as its revenue nearly doubled to Rs 17,212.9 crore (Rs 172.12 billion) in 2012-13 from  Rs 9,963 crore (Rs 99.63 billion) in 2008-09.

The capital expenditure got a thumbs down from the shareholders as well and the company's stock tumbled to Rs 233.9 apiece at the end of 2012-13 on BSE from Rs 516 at the end of 2008-09, even as the benchmark index,
Sensex, gained 94 per cent and climbed to 18,835 from 9,708.

A long call

However, the company believes its strategy will pay off in the long run.

“If you ask me now if I had to re-do it overall would I change anything, I would say I would do exactly the same thing,” says Kumar, emphasising the importance of the capital expenditure incurred by the company.

“We can’t do anything that we are attempting to do right now unless we have the foundation of network of data centres, global internet protocol, conversed internet protocol network and so on,” he says.

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As positive results of this long-term bet start to trickle in, the company says it has cut down its capital expenditure to 9 per cent of its gross revenues from 25 per cent at the peak. In absolute terms, it plans to spend $300 million a year now, compared to $600-$700 million earlier.

“Capex discipline should drive net debt reduction even on our conservative EBITDA (earnings before interest, tax, depreciation and ammortisation) estimates,” says domestic brokerage Kotak Securities in its recent report.

The brokerage estimates $200 million reduction in the company’s debt by the end of the next financial year.

More services

While reducing its capital expenditure, the company is also looking at creating new products and services under managed service portfolio that can provide better profit margins.

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In the current financial year, it has launched a cloud-based broadcast-quality video trans-coding and delivery service, international HD voice termination service network and voice business application to drive efficiency of international voice business management.

Forging ahead on this innovation path, the company has built teams around cloud enablement, business video collaboration and mobile broadband enablement services. With the structural changes in place, the company expects managed services to account for 50 per cent of its data revenue in about a couple of years from 29 per cent in 2012-13.

Managed services could also serve as an engine of growth for its data business as clients for its managed services could also end up subscribing to its bandwidth and other storage devices.

This, the company says, will help it build  a long-term relationship with its clients and, in the process, bring predictability to its revenue streams.

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As of now, the network leases are usually for 12 months which are renewed every year, but for managed service customers prefer a contract for three or five years at the least to ensure there is no disruption in the services due to frequent changing of the service provider.

Tata Communications' bright outlook also stems from the fact that its South African subsidiary, Neotel, has now turned profitable at the EBIT (earnings before interest and tax) level and is expected to turn profitable in the current financial year.

“Neotel had to go through that phase of building its infrastructure, getting customers, increasing utilisations, something that each of our businesses has gone through,” says Kumar. 

Neotel now has a 16 per cent share in South Africa. 
Kumar, surely, is buzzing with excitement on the promise that managed services hold for the company.

In the future, he is looking to enter a whole new gamut of sectors from healthcare and education to media & entertainment.

“The price points of all these things will come down so dramatically that I can guarantee you in three to five years you will have at least one health-related censor on your body; for me, it is a very exciting opportunity for business,” he says.