Deal with DoCoMo won't end Tata Tele's woes

Its prospects as an independent player appear dim as the industry heads for a shakeout

In a statement that received much publicity a few days ago, Tata Sons and NTT DoCoMo announced that the Tata flagship would buy back the Japanese company’s 26.5 per cent stake in Tata Teleservices for $1.2 billion. 

This would end all the pending litigation between the two. Docomo and Tata Sons were sparring over a 2009 contract that made it mandatory for the Tatas to buy back Docomo’s stake in Tata Tele at half the value that Docomo paid.  In 2014, Docomo decided to exit the company and asked Tata Sons to buyback the shares, but Tata Sons did not do so, citing a new government rule that barred pre-determined valuation of shares. Docomo then sued Tatas in the London Court of Arbitration and won. It also moved the Delhi High Court to enforce the award.The matter is currently pending and the Delhi High Court is expected to give its order after hearing the Reserve Bank of India’s version on Wednesday.

While this is a not-so-happy ending to DoCoMo’s Indian adventure, the prospects for Tata Teleservices as an independent player remain dim as competition in the market has intensified manifold with Reliance Jio’s aggressive entry with dirt-cheap data tariff. Analysts have started to say that the industry is headed for a final shakeout, at the end of which not more than four or maximum five networks will be left in the game.

Merger plans

Though Tata Teleservices, according to a media report, was looking for a merger with Reliance Communications and Aircel, which had announced their intention last year to merge, there is no clarity on this as yet. This is not the first time Tata Teleservices is dialling a rival for a merger. Earlier, when Cyrus Mistry was the chairman of Tata Sons, Tata Teleservices was in talks with Vodafone for a merger but the British telecom giant walked away from the table citing its own IPO plans. Vodafone is now in talks with Idea Cellular for a merger that would make it India’s number one player with a revenue market share of over 40 per cent. At the moment, Bharti Airtel leads the pack with a share of over 30 per cent. 

Tata Teleservices is a bit player with a market share of 5.81 per cent, and if it has to survive in the current scenario, it needs to make massive investments in passive as well as active infrastructure. 

Analysts say Tata Sons cannot perpetually invest in the company.  Though the company’s financial metrics are expected to improve in the current financial year, this is not enough for the company. Its net worth has eroded by Rs16,546 crore in the fiscal ending March 2016, it has a massive debt of Rs35,204 crore (see Not looking up) and its finance cost is eating into its profitability.  

“The Tatas have to take a call whether to sell Tata Teleservices’s assets like spectrum and (26 per cent) stake in (tower company) Viom Networks and then shut down the operations. Another solution is to ask the parent company (Tata Sons) to take over part of the debt so that the company can turn around,” says a telecom analyst. 

Bankers says they are not worried over Tata Teleservices’s debt servicing capacity as it’s backed by Tata Sons which has got a good record of repaying loans.

Soon after his removal, Mistry had warned if Tatas have to exit the business via fire sale or a shutdown, it would cost $4-5 billion. As of now, Tata Sons has to invest another Rs10,000 crore in the coming years just to keep Tata Teleservices’s operations going. Tata Sons has already invested Rs6,700 crore since January 2014 so that the company can buy spectrum and repay its debt.

In the last three years, the company was able to increase its EBITDA (earnings before interest, tax, depreciation and amortisation) from Rs400 crore to Rs2,500 crore, in the hope of being a potential player in the consolidation of the industry. Its operating margin improved to 18.6 per cent in fiscal 2016, from 12 per cent in fiscal 2015, mainly due to the drop in termination charges and cost rationalisation measures, and lowering overhead expenses.  

Analysts say the company can even look at a deal with Bharti Airtel for a merger on the lines of the Telenor deal where the Sunil Mittal company took over the Norwegian company’s first-rate infrastructure for a song.  

Tata Teleservices, along with its listed subsidiary, Tata Tele Maharashtra, provides CDMA services in 19 telecom services, GSM services in 18 telecom circles and has launched 3G services in nine circles. As on March 31, 2016, it had a total wireless subscriber base of 61 million. In contrast, Reliance Jio which started its operations in October last year has already garnered 100 million subscribers.

Now or never

Analysts say in the coming quarters, the company’s debt protection metrics will remain stretched, with high debt-EBITDA ratio and negative net cash accrual. The company’s capital structure is also weak, despite funding support received from Tata Sons, and debt may increase in fiscal 2017, as compared to fiscal 2016, partly on account of deferred payment liabilities of Rs2,300 crore towards spectrum purchased in the October auctions.

In the current fiscal, its liquidity improved mainly due to cash inflow of  Rs2,800 crore through partial stake sale in Viom Networks and Rs900 crore through refund of tax deducted at source, which was under litigation previously, a Crisil analyst had said in November last year while downgrading the company’s debt facility.

“Notwithstanding the timely funding support that we expect Tata Tele to receive from the Tata group over the medium term, the business and financial risk profiles will continue to be constrained by intense competition and limited presence in the mobile broadband segment. The ratings may be downgraded if the company’s inability to sustain its subscriber base, leads to moderation in revenue and operating profit, or if the financial risk profile weakens further,” Crisil had warned.

Another analyst says that it’s now or never for the company: either it merges with a healthy player or sinks like Loop Telecom.

For DoCoMo, the future is uncertain. No overseas telecom company in the country has made money. Some like Vodafone and Telenor have also had to write off investments. As the competitive intensity rises, it will be a leap of faith if DoCoMo decides to stay on in India.