Mumbai: Although Tata Communications Ltd will continue to remain in the red for the next four-eight quarters and its $1.4 billion (around Rs6,220 crore today) debt will rise further, it would turn to profit by four growth drivers amid a pickup in global demand for communications services, its new chief executive officer (CEO) said.
The company, part of the $67.4 billion salt-to-software Tata group, has piled up losses of Rs1,290 crore in the past four years even as it invested heavily to create infrastructure and capabilities to tap relevant growth areas.
“Over the past couple of years, we’ve gone into the red as we’ve consciously invested heavily in building assets, services and capabilities in line with our strategy; in the short-term, this impacts profitability,” newly appointed CEO and managing director Vinod Kumar said in a recent interview. “My focus is on putting the business on a profit path, but it’s not something that will happen overnight; it’s an exercise that will last four to eight quarters. We have a plan for that.”
Long-term view: Tata Communications’ CEO Vinod Kumar.
The 45-year-old, who until recently was chief operating officer, replaced N. Srinath at the helm in January. An insider, who has been with the company since April 2004, Kumar has been at the forefront of the firm’s transition from what was essentially an India and traditional network services-focused enterprise towards managed services and recently, cloud computing.
“Until 2005, we didn’t have any debt on our books, but since then we’ve borrowed about $1.4 billion, which from a telecom industry perspective, is still conservative,” he said. The debt wasn’t due to irresponsible spending or aggressive acquisitions by leveraging its balance sheet, but to change course after buying what was then international long distance (ILD) call carrier Videsh Sanchar Nigam Ltd.
After losing its monopoly in the ILD calls space within two months of being taken over by the Tatas as part of the government’s privatization policy, the firm had to re-invent itself.
It initiated a globalization drive fuelled by acquisitions and diversification away from the commoditized space of carrying voice, which contributed 98% of revenue in 2002. In 2003, it opened offices in the US, the UK and Sri Lanka, with the international division based out of Singapore.
A year later, it acquired Tyco Global Network with its undersea optic fibre cable network that spanned 60,000 kilometres for $130 million and began providing data services to global customers.
In 2006, it acquired Teleglobe International Holdings Ltd—a provider of wholesale voice, data, Internet protocol and mobile signalling services —for $239 million, making it among the world’s top five voice and data providers. The acquisition added at least $1 billion in turnover, tripling traffic carried to 18 billion minutes a year.
In early 2008, it integrated all operations under the Tata Communications umbrella, announcing that it’ll invest more than $2 billion over the following three years to drive its global expansion.
This was followed by the acquisition of majority stake in South African communications network operator, Neotel. The company then reorganized itself—setting up global business units based in Singapore (data services), Montreal (voice services) and India (Internet broadband).
Somewhere along the line, though it had the world’s largest submarine cable network, the company decided to get into the higher margin business of managed services.
“Particularly in the current economic environment, our customers want to move to scalable, pay-as-you-grow models for network, computing and application services even as they focus on their core competencies,” Kumar said. “Our strategy was designed to address exactly such customer needs.”
Company watchers, however, don’t believe that it’s going to be cakewalk for Tata Communications to just show up and deliver on a strategy.
“The biggest challenge is to decide where to get deep and play the game. They have to play it in a big way if they want to be successful as data prices are headed south and there is enough capacity globally,” said a telecom sector analyst with a global consultancy, who didn’t want to be named as he isn’t authorized to speak with the media. In fact, none of the analysts Mint spoke with wanted to be named either because they are advising Tata Communications on its turnaround or aren’t authorized to speak with the media.
The analyst said the main struggle would be to decide on the right price points to keep the business profitable. Still, implementing strategy wouldn’t be easy, especially with the government still holding board seats, which could get in the way of the organization’s nimbleness.
Another analyst with a local brokerage who tracks the firm said the proposition sounds challenging. “They will have to double their current Ebitda (earnings before interest, tax, depreciation and amortization) to even break-even,” the analyst said. “The company’s depreciation is higher than Ebitda and cover for that Ebitda will have to grow by 30%; another 30% growth will have to come for cover for interest costs while an additional 40% will have to cover tax expenses and other costs.”
Driving the company’s turnaround to profitability is a four-pronged strategy: growth in the enterprise business, growth in new segments and products, the maturing of its South African acquisition Neotel, and cost management of the overall business.
Having already invested $2.1 billion in building infrastructure like its submarine cable backbone, data centres and capabilities for new services such as tele-presence and managed services, it’s now ready to milk market opportunities.
“Most players in the enterprise data space globally are growing in the low single digits while our growth has been substantially higher at 15-25%. Of course, we are relatively smaller, but we have built momentum over the last two to three years,” said Srinivasa Addepalli, senior vice-president (corporate strategy and marketing).
Growth in this space is coming from large multinational companies that are buying either network services, tele-presence services, data centre services or virtual private network services, particularly connecting into Asia, Middle East, Africa and India.
Another driver in that space is selling multiple products to existing customers as acquiring newer clients is a more expensive proposition. A large global electronics firm that bought just one service from the company in the fiscal ended March 2010, today buys seven different services from Tata Communications. Similarly, a large Indian financial services company has moved from just one service in March 2010 fiscal to six services now.
“Today, we have more than a dozen enterprise customers that buy 10 or more services from us. Four years ago, we did not have 10 services to offer them,” Addepalli said.
The company is also betting big in the cloud services business, with an expected turnover of $250 million in the next two-three years. Unlike its enterprise business, which needs a dedicated sales force that markets to big multinational firms, the customer base for cloud computing is much larger and sales can be driven through the Internet, which leads to both more business and savings on the sales front.
Besides cloud computing, the company also has a major focus on the media and entertainment sector, latching on to the growth in digital as well as Web-based content, positioning itself as an end-to-end services provider with infrastructure capabilities, Internet protocol and content delivery network.
In India, Tata Communications also focuses on the explosive growth in banking and financial services, providing end-to-end automated teller machine management and outsourcing, and other forms of payment and transaction management services.
South African business
The third growth driver is its South African telecommunications network operator, Neotel. Since its acquisition in 2008, the company has accumulated losses of about $310 million, but the subsidiary aims to become profitable by the end of fiscal 2012.
“Today, Neotel losses are affecting our consolidated results, but in future, Neotel will boost us up as it turns profitable,” Addepalli said.
He explained that similar to the parent company, Neotel spent the past three-four years putting in place its infrastructure, but now after a recent restructuring in the organization and a finetuning towards market opportunities, a turnaround is in the offing.
“In fiscal 2010, Neotel’s contribution to Tata Communications’ overall revenues was under 10%, but in the next three to five years, Neotel will become an important part of our business and get to 20-25% of our revenues,” Addepalli said.
The final boost is set to come from overall cost management. Even as growth is expected to take off in the next few years, an emphasis on cost management through technology systems and good old sweating of existing assets is tipped to yield results. This may include identifying the next destinations to create operations capabilities even as India becomes more expensive to do business in, to reduce the overall cost structure.
The analyst with the local brokerage quoted earlier said that while Ebitda can grow 10% from current levels by efficiencies, the bulk of the turnaround will have to be driven by revenue growth.
“Apart from the Neotel turnaround, this is the same strategy that the company has persisted with. They can surprise on the data side, but I am not sure if the confidence in the turnaround is based on the explosion of third-generation spectrum in India, which will need an international backbone that they have,” the analyst said.