Tata Tele: time to say hello

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This sleepy little company has been a favourite punching bag for analysts. A large foreign outfit has a vociferous sell on the company.

Another foreign bank lowered its target to Rs 24 from Rs 31 at the beginning of the year. Analysts of various hues that dot the electronic media these days have competed with each other to consign it to the dustbin.

And yet the stock has done pretty well post-rights issue. It has appreciated almost 45 per cent from the price of Rs 17 seen in December last.

I think the inclusion in the derivatives list helped the stock. But that wasn't the only reason. The 19 for 100 shares rights issue closed on December 20 and the fact that the promoters picked up the unsubscribed portion of the rights issue helped create an atmosphere of confidence for the company.

Before we look the horse in the mouth, it would be in place to understand that TTML, as we know it, operates in only Maharashtra and Goa. In all other circles where you find Tata services, it is under a different closely held company called Tata Tele Services (TTSL).

TTML's bouquet of services include CDMA-based mobile services, CDMA-based fixed wireless services, wired line services, public call offices and value-added services. Its suite of broadband data network and application services include leased lines, DSL, Wi-Fi, ethernet, managed gateway services and web conferencing services.

The company was formerly known as Hughes Telecom (India) and the Tatas renamed it when they bought the controlling stake in the company in December 2002.

The Tatas soon realised that considering the fancy price at which Hughes had imported the equipment from their German parent, it would take years before the red ink would dry in their books. It was not surprising, therefore, that the unromantic Andhra circle under TTSL was making money whereas the plum circle of Maharashtra and Goa, where TTML operated, was bleeding.

Operational performance at TTML is now improving, as the last quarterly numbers suggest. The OPM improved to 21.76 per cent last quarter from 11.42 per cent a year earlier and 18.53 per cent a quarter before. Black ink, however, will appear only by 2009.

While the performance of the company is improving , the stock has underperformed the Sensex in the last year. While the Sensex grew 45 per cent from February 1, 2006 to February 1, 2007, the stock shed some 6 per cent fat off its very fragile body. (Source: Capitaline)

I see this as an opportunity. While Corus's integration will need its own time, the attention of the group will shift to telecom, where the conglomerate has many companies: TTML, TTSL, VSNL and Tatanet, a Nelco subsidiary that has recently beaten Infinium and Bharti to emerge as the lowest bidder for Telecommunications Consultants of India's multi-million project to set up a pan-Africa e-network project which aims to connect all 54 countries in the continent.

The trigger for this consolidation could be the exercising of the call option by the Tatas for the residual government equity in VSNL. The options expire this February.

Buying the stock ahead of the consolidation has its own risk. You do not know when it will happen and what the ratio would be. But if you wait for those finer contours to emerge the price may also accordingly change. The time to move may be now. You are buying the stock at a lower price than what it was a year ago and that too when the financial performance is much better than what it then was. You can further reduce risk by averaging lower.

The telecom sector has tremendous visibility over the next three years. In the Tatas, you have one of the most ethical managements. And the stock has been a rank underperformer. You would need to have real bad luck to get this wrong.

As the stock has risen substantially in the past month, it may be a good idea to average the stock lower from the current level of Rs 24.65 to around Rs 20. Give yourself theluxury of two years' elbow room . I am sure it will not be a wrong number.