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TATA COMMUNICATIONS LTD (TCL)
NEUTRAL
CMP: Rs.371.00 Market Cap.: Rs.105735.00mn.
Date: January 12, 2010
Key Ratios:
Particulars FY09 FY10E FY11E
OPM(%) 34 29 30
PAT Margin(%) 14 4 5
ROE(%) 8 2 3
ROCE(%) 19 16 18
P/BV(x) 1.60 1.57 1.52
P/E(x) 20.49 70.63 52.35
Key Data:
Sector Telecom
Face Value Rs.10.00
52 wk. High/Low Rs.651.00/Rs.335.00
Volume (2 wk. Avg.) 1,04,000
BSE Code 500483
SYNOPSIS
• Tata Communications, a member of the $62.5
billion Tata Group, is a leading global provider of a
new world of communications.
• The company also has large submarine capacity of
over 20 terabits per second. Within India as well,
the company has around 40,000 km of transmission
network reaching 300 major towns.
• Direct-to-Home (DTH) service operator Tata Sky
would add 3.5 million more subscribers by 2012 and
focus on adding customer-oriented innovative
applications.
• Tata Communications & China Telecom to build
500-km optical fiber cable network.
• During the quarter company has signed agreements
to build a new cable system in Gulf.
• Tata Communications and sugar CRM join hands to
provide on-demand CRM.
• NDTV selects Tata Communications CDN service for
live streaming.
• The topline of the company is expected to grow at
a CAGR of 4% over FY08 to FY11E.
Share Holding Pattern:
V.S.R. Sastry
Vice President
Equity Research Desk
91-22-25276077
Dr. V.V.L.N. Sastry Ph.D.
Chief Research Officer
2
Investment Highlights
• Result Updates (Q2 FY10)
Tata Communications, a Tata Group Company today announced a fall of 68.26% in the
net profit for the quarter ended Sep.30, 2009. During the quarter, the company
reported a profit of Rs 104.50 million as against profit of Rs 329.20 million for the
quarter ended Sep 30, 2008. In the same period, total income of the company was at Rs
13,001.9 million, a decline of 23.44% over the prior year period.
Quarterly Results - Standalone (Rs in mn)
As at Sep - 09 Sep - 08 %Change
Net Sales 7592.30 9838.90 (67.98)
Net Profit 104.50 326.40 (22.83)
Basic EPS 0.37 1.15 (67.83)
During the quarter, the operating margin of the company increased to 27.52% as
compared to 26.97% of corresponding quarter ended September 2008. Interest cost
increased 145.29% to Rs 635.80 million while depreciation cost rose 39.94% to Rs
1303.10 million over previous year period.
• To add 3.5mn more subscribers by 2012
Direct-to-Home (DTH) service operator Tata Sky would add 3.5 million more subscribers
by 2012 and focus on adding customer-oriented innovative applications. Currently,
company has 4.5 million subscribers and is aiming to achieve total subscriber base of 8
million by 2012.
• To build new cable system in Gulf
Tata Communications has signed agreements with operators in the Middle East to build
a new cable system for the region. The telecoms cable will connect the region to the
world`s major business hubs through the company`s existing Tata Global Network.
• Join hands to provide on-demand CRM
Tata Communications has signed a partnership agreement with Sugar CRM, a leading
provider of commercial customer relationship management (CRM) software, to provide
its award-winning CRM applications as the basis for Tata`s entry as a SaaS provider.
Since the beginning of this year, Tata Communications and Sugar CRM have worked
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closely together on a joint pilot program to build a CRM service that meets the needs of
businesses in India.
• Extends connectivity into Australia
Tata Communications will start delivering capacity into Australia via the privately owned
Pipe Pacific 1 (PPC-1) cable system. PPC-1 is a new two-fiber-pair cable system
connecting the US territory of Guam to Sydney. The cable system spans 6,900 km and
can provide up to 2.56 terabits a second of capacity to the rapidly growing Australian
market.
• NDTV selects Tata Comm’s CDN service
NDTV Convergence has chosen Tata Communications for its live-broad cast service, a
high - quality flash based streaming service, to broadcast three national channels in
India - two news channels and one business over the internet to a global audience.
• partners to offer security
Tata Communications and Mahindra Special Services Group (MSSG) have signed a major
security services agreement to leverage each others strength to offer a complete suite
of security services to Indian enterprises to enable security of their information assets
and data.
• Unveils secure internet solution
Tata Communications launched its internet clean pipe solution for the small and
medium business segments (SMEs).The solution will ensure clean internet traffic by
eliminating malware, spam and virus without the customer having to incur capital
expenditure on security hardware.
• Launch tier 1 internet PoP
Tata Communications and Access Kenya Group, Kenya`s first publicly listed ICT company
and leading corporate Internet service provider, have signed a partnership agreement to
establish a Tier 1 Internet Point-of-Presence (PoP) for Tata Communications in Nairobi,
Kenya.
• Arm to provide managed services
Tata Communications has floated a subsidiary company, Tata Communications Banking
Infra Solutions (TCBIL), to provide managed services for banks.
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• Launches More4Sure
Tata Communications launches `More4Sure` offers, a bouquet of irresistible offers
coupled with innovative tariff plans. With More4Sure offer, subscribers of any plan can
get a free laptop on making advance rental payment of 36 months or a free Linksys Wi-
Fi router on payment of 6 months advance rental.
• Launches new global mobile
Tata Communications launches of its new high quality `mobile video telephony service`.
This will offer mobile operators and international carrier customers a single point of
access for all their voice service requirements including our Voice Termination Service
(VTS Prime) and Mobile Direct.
• Segment Revenues (Rs. Mn)
• Global Voice
• Global Data
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• Others
Company Profile
Tata Communications Limited along with its global subsidiaries (Tata Communications) is a
leading global provider of the new world of communications. The company leverages its Tata
Global Network, vertical intelligence and leadership in emerging markets, to deliver value-
driven, globally managed solutions to the Fortune 1000 and mid-sized enterprises, service
providers and consumers.
The Tata Communications portfolio includes transmission, IP, converged voice, mobility,
managed network connectivity, hosted data center, communications solutions and business
transformation services to global and Indian enterprises & service providers as well as,
broadband and content services to Indian consumers. The Tata Global Network encompasses
one of the most advanced and largest submarine cable networks, a Tier-1 IP network,
connectivity to more than 200 countries across 300 PoPs and more than one million square feet
data center space. Tata Communications serves its customers from its offices in 80 cities in 40
countries worldwide. Tata Communications has a strategic investment in South African
operator Neotel, providing the company with a strong anchor to build an African footprint. Tata
Communications Ltd. is part of the $29 billion Tata Group; it is listed on the Bombay Stock
Exchange and the National Stock Exchange of India and its ADRs are listed on the New York
Stock Exchange.
Global Industry Recognition
• Best Market Strategy: Global Wholesale Telecommunications Awards
• Most Innovative Managed Service: 2008 Telephony Innovation Award
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• Best Technology Innovation: 2008 Pilot House Award
• #1 Enterprise Data Services Provider in India: Frost & Sullivan Awards, 2008
• Best Long Distance Operator; Best Internet & BB Services Operator: Tele.Net Awards
2008
Subsidiaries
Directly held subsidiaries of the company are:
• Tata Communications International Pte Ltd (Formerly known as VSNL International Pte.
Ltd.)
• VSNL Broadband Limited
• Tata Communications Transformation Services Limited (formerly known as VSNL Global
Services Limited)
• VSNL Internet Services Ltd. (formerly known as DIL Internet Limited)
• VSNL SNOSPV Pte Ltd.
• Tata Communications Lanka Limited (formerly known as VSNL Lanka Ltd.)
• Tata Communications Services (America) Inc. (Formerly known as VSNL America Inc.)
Business Areas
The Company operates under three main business segments globally. They are.
1. Wholesale Service Segment
The Wholesale Voice segment provides international long distance and national long
distance voice services.
Business Areas
Wholesale
Voice
Enterprise &
Carrier
Other
Services
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2. Enterprise & Carrier Segment
The Enterprise and Carrier Data segment offers corporate data transmission services,
such as international private leased circuits, frame relay, Internet leased line circuits,
and national private leased circuits. This segment provides IP networks and wholesale IP
transit services to tier-2 ISPS, and regional carriers. It also offers mobile signaling
services, such as signal conversion and managed roaming services; ethernet services;
and Internet protocol and managed services, including Internet telephony, multi
protocol label switching based virtual private networks, Internet access, managed
hosting, collaboration and conferencing services, managed security services, and other
professional services.
3. Other Services Segment
The Other Services segment provides global roaming, Internet, virtual private network,
and data centre services. This segment offers various Internet services, such as
connectivity, messaging, Internet telephony, and a range of content services. Tata
Communications serves the Fortune 1000 and mid-sized enterprises, service providers,
and consumers. The company, formerly known as Videsh Sanchar Nigam Limited, was
founded in 1986 and is based in Mumbai, India. Tata Communications Limited is a part
of the Tata Group.
Services Offered:
Enterprise Solutions
• Connectivity Services
• IP VPN Services
• Hybrid VNO Services
• Application-Aware Services
• Ethernet Services
• Internet Access Services
• Private Line Services
• Managed IT Infrastructure Services
• Collocation Services
• Managed Hosting Services
• Managed Storage Services
• Managed Application Services
• Audio and Web Conferencing
Services
• Business Messaging & Collaboration
Services
• Hosted Contact Center Services
• Managed Voice Services
• Managed Security Services
• CPE-Based Services
• Cloud-Based Services
• Professional Services
• Professional Services Outsourcing
Service Provider Solutions
• IP Services • Transit
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• Content
• India IP Transit (ILL)
• Voice Services
• Transport
• Access Services
• VoIP Link
• Mobile Direct
• Mobile Services
• Signaling
• Roaming
• M-Commerce
• Enterprise Mobility
Retail Solutions
• Broadband Services
• Wi-Fi Services
• Net Telephony
• Global Roaming Coverage
• Mail Services
• Global Calling Cards True roots
Peer Group Comparison
Name of the company CMP(Rs.)
(As on
January
12, 2010)
Market
Cap.
(Rs. Mn.)
EPS
(Rs.)
P/E
(x)
P/BV
(x)
Dividend(%)
Tata Communications Ltd 371.00 105735.00 18.10 20.49 1.60 45
Bharti Airtel 322.15 1223188.1 23.19 13.47 4.44 -
Idea Cellular 58.75 182130.6 3.78 15.54 1.61 -
Reliance
Communications 176.50 362443.1
8.67 20.25 0.70 16.00
Key Concerns
• The most important factor which restricts the company’s revenue growth is the lack of
end user relationship.
• Absence of a subscriber base is looking to be a major threat to the future growth of the
company.
• The growth in traffic volumes is being an offset by the pricing pressure faced due to
increased competition.
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Financials 12 Months Ended Profit & Loss Account (Standalone)
Value(Rs. in million) FY08A FY09A FY10E FY11E
12m 12m 12m 12m
Description
Net Sales 32,833.00 37,494.30 33744.87 37119.36
Other Income 1,660.40 1,728.50 1175.38 1292.92
Total Income 34,493.40 39,222.80 34920.25 38412.28
Expenditure -26,744.40 -26,549.00 -25139.93 -27097.13
Operating Profit 7,749.00 12,673.80 9780.32 11315.14
Interest -236.10 -1,286.20 -2315.16 -2546.68
Gross Profit 7,512.90 11,387.60 7465.16 8768.47
Depreciation -3,013.10 -4,252.70 -5230.82 -5753.90
Profit before Tax 4,499.80 7,134.90 2234.34 3014.57
Tax -1,455.20 -1,975.40 -737.33 -994.81
Profit after Tax 3,044.60 5,159.50 1497.01 2019.76
Equity Capital 2,850.00 2,850.00 2,850.00 2,850.00
Reserves 60,540.70 63,053.50 64,550.51 66,570.27
Face Value 10.00 10.00 10.00 10.00
Total No. of Shares 285.00 285.00 285.00 285.00
EPS 10.68 18.10 5.25 7.09
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Quarterly Ended Profit & Loss Account (Standalone)
Value(Rs. in million) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec-09E
3m 3m 3m 3m
Description
Net Sales 8869.30 8428.90 7592.30 7895.99
Other Income 396.60 73.50 337.60 344.35
Total Income 9,265.90 8502.40 7929.90 8240.34
Expenditure -3,623.30 -6245.40 -5840.40 -5921.99
Operating Profit 5,642.60 2257.00 2089.50 2318.35
Interest -442.20 -525.10 -635.80 -667.59
Gross Profit 5,200.40 1731.90 1453.70 1650.76
Depreciation -1,305.40 -1,233.90 -1,303.10 -1,368.26
Profit before Tax 3,895.00 498.00 150.60 282.51
Tax -871.30 -178.60 -46.10 -90.40
Profit after Tax 3,023.70 319.40 104.50 192.10
Equity Capital 2,850.00 2,850.00 2,850.00 2,850.00
Face Value 10.00 10.00 10.00 10.00
Total No. of Shares 285.00 285.00 285.00 285.00
EPS 10.61 1.12 0.37 0.67
E=Estimated
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Charts
1) Net Sales & PAT Chart 2) P/E Chart
3) EV/EBITDA Chart 4) P/BV Chart
12
1 Year Comparative Graph
TATA COMMUNICATIONS BSE SENSEX
Outlook and Conclusion
• At the current market price of Rs.371.00 the stock is trading at a P/Ex of 70.63x for
FY10E and 52.35x for FY11E.
• The EPS of the stock is expected to be at Rs.5.25 and Rs.7.09 for FY10E and FY11E
respectively.
• On the basis of price to book value, the stock trades at 1.57x and 1.52x for FY10E and
FY11E respectively.
• Direct-to-Home (DTH) service operator Tata Sky would add 3.5 million more subscribers
by 2012 and focus on adding customer-oriented innovative applications.
• Tata Communications and China Telecom Corp will jointly build a 500-km optical fibre
cable network between India and China over the next 12 months.
• Tata Communications has signed agreements with operators in the Middle East to build
a new cable system for the region.
• Tata Communications and Mahindra Special Services Group (MSSG) have signed a major
security services agreement to leverage each others strength to offer a complete suite
of security services to Indian enterprises
13
• Tata Communications has signed a partnership agreement with Sugar CRM, a leading
provider of commercial customer relationship management (CRM) software, to provide
its award-winning CRM applications as the basis for Tata`s entry as a SaaS provider.
• NDTV Convergence has chosen Tata Communications for its live-broad cast service, a
high - quality flash based streaming service, to broadcast three national channels in
India.
• We recommend a “NETURAL” on the stock.
Industry Overview
Indian telecom is more than 165 years old, beginning with the commissioning of the first
telegraph line between Kolkata and Diamond Harbour in 1839. In 1948, India had 0.1 million
telephone connections with a telephone density of about 0.02 telephones per hundred
population. As of June 2007, there were 225.21 million telephone (including cellular mobile)
connections in the country with a telephone density of 19.86 telephones per hundred
population. Out of total 225.21 million telephone connections, 185.13 million (nearly 82
percent) connections pertained to wireless and mobile phones.
Telecommunications is one of the prime support services needed for rapid growth and
modernization of various sectors of the economy. It has become especially important in recent
years because of enormous growth of Information Technology (IT) and its significant impact on
the rest of the economy. India is perceived to have a special comparative advantage in IT and in
IT-enabled services. However, sustaining this advantage depends critically on high quality
telecommunication infrastructure. It is equally important to speed up structural changes in this
sector in line with trends in other countries to ensure that telecommunication services are not
only made available on the scale needed to sustain rapid growth in the economy as a whole but
also that their cost are in tune with the expectations of a modernizing economy.
Telecom sector is considered to be one of the most vibrant sector with the highest growth rate
which has nearly more than 60 lakh customers added every month. Today the Indian
telecommunications network with over 270 million connections is the third largest in the world
and the second largest among the emerging economies of Asia. Over the last few years the
sector has witnessed high growth rates. The current addition of about eight million lines per
month plus the telecommunications sector is on a strong footing to achieve the target of 500
million connections by 2010.
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Year Ending Broadband Subscribers Internet Subscribers
2005 3 mn 6 mn
2007 9 mn 18 mn
2010 20 mn 40 mn
Source: Cris Infac, DoT
This industry offers a plethora of services. It is also easily accessible and easily available for
every individual today. One of the best advantages in this industry is its drastic reduction in
tariff compared to the prior periods. And it has a number of public as well as private sector
companies which give a world class service to their customers.
The major classes of services in this sector are:
Fixed – Copper, Optical Fibre, Wireless
Mobile – GSM and CDMA Based
Narrow band – Voice, Internet, Fax
Broadband – High speed Internet, Video
Key Indian Companies
• BSNL - Incumbent service provider and World's 7th largest Telecommunications
Company providing comprehensive range of telecom services in India
• Services include Wireline, CDMA mobile, GSM Mobile, Internet, Broadband, Carrier
service, MPLS-VPN, VSAT, VoIP services, IN Services etc.
• MTNL - State owned operator covering the cities of Mumbai an Delhi
• Provides both fixed and mobile services
15
• Bharti Airtel - Integrated operator with presence in all segments
• Leads the mobile segment in the country
• Reliance Communications - Largest player in India in the CDMA segment
• Plans a GSM network
• Tata Teleservices - Integrated operator (with VSNL) with presence in all segments
• Provides CDMA services in 20 circles
___________________________________________________________
Disclaimer:
This document prepared by our research analysts does not constitute an offer or solicitation for
the purchase or sale of any financial instrument or as an official confirmation of any transaction.
The information contained herein is from publicly available data or other sources believed to be
reliable but we do not represent that it is accurate or complete and it should not be relied on as
such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in
the information contained in this report. This document is provide for assistance only and is not
intended to be and must not alone be taken as the basis for an investment decision.
16
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