When the salt-to-software Tata group’s performance in the telecom sector is discussed, Tata Teleservices’ (TTSL) under-performance often overshadows the achievements of Tata Communications. Still, the Tata Group has done well to turn Tata Communications around. The company reported an annual net profit for the first time in FY14. It reported a net profit of R101.4 crore, against a loss of R623.3 crore in FY13.
Its revenues in the same period rose 14% to R19,619 crore. For the half year ended September 30, FY 15, Tata Communications’ net profit stood at R71 crore, even as revenues rose 7.7% to R10,183 crore.
The company which started off as VSNL – a state-run enterprise that was the sole provider of international wholesale voice services – was acquired by the Tata Group (in phases between 2002 and 2005) and renamed Tata Communications. The government remains invested in the company with a 26.12% stake as on September 30.
The company evolved from being only a carrier of bulk voice services to a provider of cutting-edge data and voice-based services, including cloud-based technologies, for large enterprises.
In the first half of FY15, revenues from Tata Communications’ data segment grew 12% year-on-year, while its Ebitda (earnings before interest, tax, depreciation and amortisation) margins stood at 20%. On the other hand, owing to lower realisations, revenues from the voice business declined 11% over the same period. Data is also clearly a higher margins business for Tata Communications. In the September quarter, the voice business reported an Ebitda margin of 5.7%, while the data business reported a margin of 20.3%.
Yet, the company has to keep operating the voice business as it is a source of significant free cash flows (FCF), defined as Ebitda minus capex, for the firm that has very little equity in it. Consequently, it is following a four-pronged operational strategy for future growth, led by Vinod Kumar, Tata Communications’ Singapore-based managing director and chief executive.
Kumar explained, in an interview, that the strategy involves rationalising operating expenses in the voice business and looking for outsourced contracts to continue generating free cash flows from this segment at the present run rate of $100 million per year; growing the data business with the launch of new technologies, including cloud-enablement platforms and virtual private networking solutions for companies around the world; investing in companies that offer access to niche technologies in domains such as artificial intelligence and enterprise security (it invested in a artificial intelligence firm called Sentient Technologies recently); and growing new managed
services businesses such as payment solutions.
The company’s current net debt (excluding the debt associated with its telecom subsidiary in South Africa, Neotel, which it is in the process of divesting) stands at $1.5 billion. Its debt to equity ratio stands at 5.5:1 and debt to Ebitda (earnings before interest taxes depreciation and amortisation) stands at 3.2:1. But the company has worked towards reducing the impact of its leverage on earnings by sweating its asset base harder and refinancing debt to bring down interest costs. As a result, Tata Communications’ cost of borrowing has come down from 7.36% in March 2011, to 3.96% at the end of September.
Kumar told FE that his aim was to bring the debt to Ebitda ratio further down to 3:1 over the next four to six quarters. Neotel’s divestment to Vodacom would help in easing its debt burden by a further $550 million, Kumar said, and added that he expected the deal to close by the middle of 2015.
Adding to the FCF (free cash flow) generated by the voice business, Tata Communications’ data business also turned FCF-positive and is increasingly contributing a greater share to the company’s consolidated operating profit.
In the September quarter, the data business contributed 78% to the company’s core Ebitda, up from around 57% in the first quarter of FY14.
The company intends to invest $250-300 million annually towards expanding its data centres, network expansion and rolling out its chain of Indicash ATMs.
“Over FY2014-17, we expect Tata Communications’ return on capital employed to improve 580 basis points and FCF yield to grow from 0.8% to 10.6%. We expect leverage to decline from 3.6x in FY2014 to 2x in FY2017” a Morgan Stanley report said.