Mumbai: In early 2001, Srinivasa Addepalli, then a senior consultant with the Tata Strategic Management Group—the consulting division of Tata Industries Ltd—was among those asked by Tata Sons Ltd, the holding company of the $83.3 billion Tata group, to list why the group should not bid for the state-owned Internet and international long-distance company Videsh Sanchar Nigam Ltd (VSNL) and instead build its own international long-distance business. After all, this would be less expensive to roll out since licences were cheap.
“It was tough since I was in favour of bidding for the deal,” recalls Addepalli. The group did bid for VSNL and bought a controlling stake in VSNL in the following year. On 13 February, as the Tata firm prepares to celebrate a decade of this public-private partnership in which the government owns a 26% stake, Addepalli—now senior vice-president (corporate strategy and marketing) of Tata Communications Ltd. (the new avatar of VSNL)—is busy charting out the company’s growth strategy.
Addepalli is glad the company has expanded with about 75% of its revenue coming from overseas, while getting into new areas like video services, cloud services, mobile broadband and Internet Protocol-, or IP-, based services—the new big bets. This, even as Tata Communications was saddled with around Rs 7,350 crore net debt as on 31 December and is yet to resolve the 773 acres “surplus” land issue with the government, which prevents it from raising fresh equity.
N. Srinath, managing director, Tata Teleservices
Till 2002, VSNL had a monopoly in the international long distance (ILD) market (the commoditized voice business contributed 98% of revenue in 2002), which guaranteed profit. But that changed when the monopoly was terminated two years ahead of schedule in April 2002, forcing the management to change its business model, both in India and overseas as companies such as Bharti Airtel Ltd and state-run Bharat Sanchar Nigam Ltd started denting the market.
The new VSNL management started a “clean-up” act by trimming the workforce, ushering a cultural change to sync it with the Tata group, empowering senior employees to shed their “bureaucratic” way of thinking and creating new revenue streams.
Indeed, VSNL had its strengths. By virtue of being listed abroad, the company had financial discipline and transparency. It also had a pool of young talented engineers with knowledge of Internet-based technologies. What VSNL lacked was marketing skills, a much stronger customer focus and market orientation, and determination to compete in the market place—things the Tata group had.
Srinivasa Addepalli, senior vice-president (corporate strategy and marketing)
The company initiated a globalization drive, fuelled by acquisitions and diversification away from voice. 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 International Ltd’s global network with its undersea optic fibre cable network that spanned 60,000km 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 one of the world’s top five voice and data providers. The acquisition added at least $1 billion in revenue, tripling traffic carried to 18 billion minutes a year.
In early 2008, it integrated all operations under the Tata Communications umbrella, announcing it would 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 (Pty) Ltd. The company then reorganized itself—setting up global business units based in Singapore (data services), Montreal (voice services) and India (Internet broadband).
Vinod Kumar, managing director and chief executive officer, Tata Telecommunications
Also, partnering with Tata Consultancy Services Ltd (TCS), the company got into managing hardware, software, networks and applications for companies. It drew upon the resources of TCS for IT and Tata Teleservices Ltd (TTSL) for domestic wireless networks.
N. Srinath, who headed Tata Communications till January 2011 and currently is the managing director and chief executive of TTSL, played a major role in transforming VSNL from a domestic monopoly to a global telecom major in just five years.
“Being part of the transformation of VSNL was one of the most exciting and challenging periods of my life. Tata Communications has built the assets, capabilities and reputation to be regarded as a global challenger,” Srinath says.
From being predominantly an Indian wholesale voice business to a global one, it has become a diversified provider of connectivity and managed services to service providers and corporate customers. In several key segments such as wholesale voice, submarine cable capacity and Internet bandwidth.
Tata Communications has a global footprint now. VSNL had just 80 carrier customers in 2002. Ten years later, Tata Communications has around 1,600 clients, at least 50,000 enterprise customers and nearly 7,500 employees—1,000 of whom are in South Africa. Its ILD traffic has increased to around 45 billion minutes per annum, from 3 billion minutes in 2002, and bandwidth has increased from 500-700 megabits per second or Mbps to 20 terabytes (almost 3,000 times more).
According to Vinod Kumar, managing director and chief executive officer of Tata Communications, in a world that is seeing several disruptions—be it in geopolitics, economy or business— technology is bound to make a huge difference. “What I find fascinating is the impact that high-definition video conferencing is making on the one end and 140 characters are making on the other end. The Tata Communications story is a great example of how a public-private partnership can create real business value, not just in the Indian market but globally.”
The company is betting big on the cloud services business, expecting a turnover of $250 million in the next couple of years. Another major focus is on the media and entertainment sector. The third growth driver is its South African telecommunications network operator, Neotel.
Partnerships are helping, too. In July 2010, Tata Communications and Google India announced a collaboration to increase the managed services portfolio. “Tata Communications is betting on a future that will be significantly in variance to the current technology paradigm. As the new trends, such as cloud computing, emerge and establish themselves as the new orthodoxy, it will be well poised to dominate the new market structures,” says Alok Shende, founder of research firm Ascentius Consulting. Describing Tata Communications’ partnership with Google for Google Apps as the right move, Shende says the market has turned to close to 200,000 licences per year in 2011.
More recently in January, Tata Communications, together with nine global service providers, announced the launch of the Global Meeting Alliance of leading telecom providers that have aligned to interconnect (on a revenue-sharing basis) their respective business video communities. Leveraging Tata Communications’ industry-leading number of inter-carrier agreements, customers of the Global Meeting Alliance members now have access to an international Telepresence network of third-party video endpoints, as well as the largest global public Telepresence room network consisting of 40 public Telepresence suites in 22 countries.
Graphic By Yogesh Kumar/ Mint
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“By making B2B calls easier and interconnecting different carriers, the Global Meeting Alliance will drive the usage of videoconferencing and Telepresence systems, enabling customers to see faster and higher returns on their investments,” says Andrew W. Davis, senior partner and co-founder of market research firm, Wainhouse Research.
Nevertheless, analysts remain concerned. For the year ended 31 March 2011, Tata Communications posted a consolidated revenue of Rs 11,932 crore but a net loss of Rs 854.19 crore (it was Rs 597.74 crore for year ended 31 March, 2010). The company’s consolidated reserve and surplus for the same period stood at Rs 3,307 crore.
A November 2011 J.P. Morgan Chase & Co. report, after Tata Communications’ Q2 (July-September) results, stated that “Neotel—which had so far been a drag on earnings before interest, taxes, depreciation, and amortization (Ebitda) (operating profits) has turned around and profitability in the core business, too, improved in the quarter (Q2, 2011). However, continued weakness in the voice revenue (47% of total), which is just about offset by the strong growth in data, keeps us from turning more positive on the name. Furthermore, we await evidence of sustainability of and increase in cost efficiencies.”
The report listed the key upside risks as monetization of stake in Tata Teleservices and sale of surplus land. It listed the key downside risks as “meaningful slowdown in voice not offset by growth in data, and increase in expenses reversing the margin improvement”.
The scene improved in the third quarter when Tata Communications’ consolidated gross revenue at Rs 3,604 was 19.5% higher than in the same quarter last year. But it reported a consolidated loss of Rs 153.06 crore, against a loss of Rs 181.38 crore during the same period last fiscal. The company’s global voice services contributed 55% to its total revenue. Global data services contributed 45% to the revenue in Q3.
Besides, the unlocking of the “surplus” land holdings of VSNL hasn’t happened for a decade because of which returns to shareholders, too, has been poor. The stock has underperformed the benchmark Sensex in the past 10 years, offering a 2.88% annual return against 17.7% of the Sensex. Till the time issues related to “surplus” land get resolved, the company will not be able to raise funds by issuing fresh equity and tackle its high debt.