Tata Communications: Connecting the World

Tata Communications Ltd

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(A) About the Tata Communications Ltd

Tata Communications Limited is an Indian telecommunications company previously known as Videsh Sanchar Nigam Limited (VSNL). Moreover, Tata Communications is a leading digital ecosystem enabler that powers today’s fast-growing digital economy. Its registered office is in Mumbai (India).

The Tata communication portfolio includes various services such as Secure Connected Digital Experience, Network, Cloud, Security, Mobility & IoT, Unified  Communications, Carrier Services and Content Delivery Network etc

It provides services and solutions to Automotive, Banking & Financial, Manufacturing, Media & Entertainment and Sports industry.

Also, it is among the world’s largest providers of wholesale international voice services and operates one of the biggest global submarine cable networks.

Tata Communications is Present in 190+ countries and territories around the world. It Serves over 7,000 customers globally that represent over 300 of the Fortune 500. It Connects 4 out of 5 mobile subscribers worldwide. Moreover, it connects businesses to 80% of the world’s cloud giants.

Tata Communications Operates the largest wholly owned and most advanced subsea fibre network which underpins the internet backbone, where its network carries around 30% of the world’s internet routes

As on 31-Mar-21, Its Internet of Things (IoT) network in India is expected to be the world’s largest network of its kind, spanning nearly 2,000 communities and touching over 400 million people.

(B) Journey Since Inception

Tata Communications Limited is the new name of VSNL, since year 2008. Prior to year 2008 Tata Communications has a history of more than 135 years in handling the international telecommunications needs of the country.

Tata Communications (as VSNL) was incorporated on March 19, 1986 under the Indian Companies Act, 1956 to take over the activities of the erstwhile Overseas Communication Services (OCS).

In February 2002, the Government of India, as per their disinvestments plan, sold 25% of their holding in the company to the strategic partner. Consequently, the company was taken over under the administrative control of TATA. It is under the management of TATAs – that Tata Communications is now charting its future course.

Prior to this, The Eastern Telegraph Co (ETC) of 1872 and the Indian Radio Telegraph Co (IRT) of 1927 merged to form the Indian Radio and Cable Communications Co (IRCC) in 1932. The Government of India took over the IRCC, giving birth to the Overseas Communications Service (OCS), a Government Department.

Tata Communications Journey Since Inception

(C) Shareholding pattern Tata Communications Ltd

Tata Communications Ltd shareholding pattern
Tata Communications Ltd shareholders holhind more than 1%

In the Company, Promoters and promoters Group holding are 58.86%. Further, FPI i.e, Foreign Portfolio Investor’s are holding ~23.45%.

Tata Sons Private Limited

Tata Sons Private Limited is the principal holding company of the Tata group.

66% of the equity share capital of Tata Sons is held by philanthropic trusts, which support education, health, livelihood generation, and art and culture. However, each Tata company or enterprise operates independently under the guidance and supervision of its own Board of Directors.

On 16 and 17 March 2021, the Government of India had divested 16.12% of its stake in the Company under the offer for sale mechanism of the stock exchanges to non-promoter shareholders.

On 18 March 2021, Panatone Finvest Limited (‘Panatone’), a subsidiary of Tata Sons Private Limited (‘TSPL’) purchased the balance stake of 10% from Government of India through an off-market inter-se transfer of shares between promoters.

Consequently, the combined stake of TSPL in the Company increased from 48.87% to 58.87% and Government of India ceased to hold any shares in the Company.

Panatone Finvest Limited – a subsidiary of Tata Sons Private Limited

Panatone Finvest Ltd. is a Public Limited Unlisted company and subsidiary of Tata Sons incorporated on Mar 1992 and has its registered office in the State of Maharashtra, India.

Further, the Company is involved in the business activities of Activities by Trusts, funds and other financial holding companies.

(D) Executive Management: Tata Communications Limited

Mr. Amur S. Lakshminarayanan – Managing Director and CEO

Mr Amur S Lakshminarayanan is the current Managing Director and CEO of the company.

He holds a Degree in Mechanical Engineering from BITS, Pilani and is an alumnus of London Business School.

Additionally, He is also a long-standing member of IEEE.

He has over 35 years of experience in a broad range of leadership roles across regions and industries.

Prior to Tata communication, He was at the position of President and CEO Tata Consultancy Services Japan, Ltd. Moreover, in Tata Consultancy Services Japan, Ltd, he was in charge of accelerating the company’s market opportunity and developing the brand in the region.

Other leadership positions within TCS also include: Global Head of four P&L units (Telecom, Media & Information Services, HiTech and Utilities) that grew to contribute a combined revenue of over $2.4b under his leadership.

Further, he had also held the position of Head of UK & Europe where he brought significant growth of the business resulting in it being recognised as a major IT player locally in the market

During FY21, Mr Amur S Lakshminarayanan received remuneration of Rs 4.73 Crore which is 0.03% of the Net Sales and 0.38% of the Net Profit for FY21.

(E) Business of Tata Communications Ltd

Tata Communications Ltd business

Tata Communications is the data services industry leader in India and an emerging challenger globally.

Moreover, Tata Communications is one of the largest players worldwide in the wholesale voice industry. Despite the global decline of this market, the company continue to hold the leading position in this business.

i) Data Services

a) Connectivity services portfolio

Service Provider data: Tata Communications is one of the world’s leading wholesale providers of data, IP and mobile signalling services. The Tata Communications Global Network (TGN) and its investments in
multiple group submarine cables enable the Company to provide seamless global connectivity services across all major business hubs.

Enterprise data: The Company operates one of the largest wholly-owned and most advanced subsea fibre network which underpins the internet backbone, where its network shares around 30% of the world’s internet routes. This portfolio also includes Video Connect, Company’s flagship fibre based global media transport network to over 300 media hotspots across 125 cities supporting broadcast quality real-time video, optimised for enterprise demands.

b) Mobility and Internet of Things – Innovation data services portfolio

MOVE IoT: Tata Communications MOVE combines access to pervasive cellular connectivity with over 600 mobile networks across more than 190 countries, coupled with a programmatic API based platform as-a-Service communications model.

India IoT: Tata Communications’ Internet of Things has been focused on Indian market and is now poised
to explore international opportunities. Tata Communications is playing a pivotal role in the digital transformation of Enterprises/PSUs across sectors and smart utility services of the Government’s flagship Smart City programs.

c) Collaboration services – Growth data services portfolio

Tata Communications provides unified communications and collaboration solutions for enterprises, as well as communications service providers. Further, by Providing voice calling, SIP trunking, conferencing (voice, data, web, video), and cloud-based Contact Centre as a Service (InstaCC), Tata Communications has evolved into an Enabler of cloud strategies and digital transformation delivering secure and connected digital customer and employee experience.

d) Cloud, Edge and Security – Growth data services portfolio

In this segment Tata Communications’ IZO™ Cloud platform is the most comprehensive platform of its type available today. Further, a unique combination of innovative hardware and intelligent software topped with its ur industry awarded managed services, cloud platform solution is designed to bring together an agile IT ecosystem with hybrid multi-cloud environments, security and network.

e) Netfoundry

NetFoundry is a software and business developed as part of Tata Communications’ Shape the Future
innovation and entrepreneurship programme. Further, it became an independent subsidiary within the Tata Communications Group wef September 2019.

ii) Voice Services

a) International Long Distance (ILD)

Tata Communications is the world’s largest carrier of international wholesale voice traffic and has its most advanced intelligent routing platform to enable quality and differentiated voice services. Moreover, the Company has over 300 direct routes with leading international voice telecommunication providers. Also, the wholesale international voice business is mature and increasingly commoditised.

The Company intends to grow its leadership position while optimising traffic volumes, and maximising
margins and cash flows.

b) National Long Distance (NLD)

The Company has expanded its direct reach to over 320+ mobile operators, making Tata Communications one of the most trusted partners for the delivery of critical transactional traffic worldwide.

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(F) Tata Communications Limited : Revenue Segment

(i) Revenue Segment

Company generates revenue from mainly its 4 Segment which accounts Voice Solutions for 16.30%, Data And Managed services for 81.39%.

Whereas, Total Revenue of Payment solutions accounts for 1.26% and Real Estate accounts for 1.05%.

Tata Communications Ltd Revenue segment
  • Voice Solutions (VS) includes International and National Long-Distance Voice services
  • Data and Managed Services (DMS) include data transmission services, signaling, roaming services,
    television and other network and managed services.
  • Payment Solutions (PS) includes end-to-end ATM deployment end-to-end POS enablement hosted core banking end to end financial inclusion and card issuance and related managed services and switching services to banking sector carried out by Company’s wholly owned subsidiary Tata Communications Payment Solutions Limited.
  • Real Estate segment includes lease rentals for premises given on lease and does not include premises held for capital appreciation.

Revenue From Voice segment 

Voice Solutions includes international and national long distance voice services. A continuous decline is witnessed in revenue from the voice segment over the past 10 years. The reason for the same is intense competition from the cheaper voice over Internet protocol (VoIP) to traditional circuit-switch-based voice calling. 

Moreover, contribution of the voice segment % to the overall revenue reduced to 16% in FY21 from 32% in FY18 as a result of lower demand and realization. Revenue and profitability from the voice segment are expected to continue to shrink because of availability of cheaper substitutes

(ii) Products/Services wise Revenue Breakup

Tata Communications Ltd Revenue from major services

Companies major revenue comes from International Long Distance services which accounts for 16.48% for the overall revenue.

Moreover, Company’s internet Services accounts for ~16% and global virtual private Network accounts for ~13% in the revenue. Remaining Services such as Unified Communication and Collaboration, IPL Lease and National Long Distance accounts 9.39%, 6.59% and 0.21% respectively.

(iii) Segment revenues by Geographical market 

In FY21, Tata Communication Ltd generated 41% of revenue from India, 16% from USA, 7% from United Kingdom.

Whereas, From Singapore its generated revenue of almost 5% in both the Fiscals.

(G) Global Presence – Tata Communications Limited

Tata Communications Limited - Global Presence

Tata Communication Ltd, Through its global digital infrastructure enabled the digital transformation of enterprises, including 300 of the Fortune 500 companies.

Moreover, Its helping businesses by enabling borderless growth, boosting product innovation and customer experience, improving productivity and efficiency, building agility and managing risk.

Tata Communications has the largest wholly owned and most advanced subsea Fibre-network which underpins the internet backbone.

Additionally, Company has installed seamless Connectivity services across major business hubs through the Tata Communications Global Network (‘TGN’) and consortium investments.

Company IZO™ Hybrid WAN is available over 190 countries connecting to Top 9 global public Cloud platforms.

(H) Cost Structure of Tata Communications Ltd

(i) Cost Structure % of Net Sales

Tata Communications Ltd coast as % of net sales

In FY21, Company has incurred highest spending on Network operating Expense covering proportion of ~48% as a % of net sales.

Whereas, other expense such as Employee cost was 17.83% and selling and general and administration expense was 6.67%.

(ii) Cost Structure % of Total Expenditure

Tata Communications Ltd cost as % of total expenditure

In FY21, Company’s major expense was Network operating expense. This includes internet/bandwidth and port charges along with plant machinery expense.

Further, the Company spent very little percent on the Selling and Distribution which accounted mere 1.04% of the Total Expenditure.

However, Employee Cost accounted 23.64%, Power & Fuel cost accounted 2.09% of the total Expenditure.

(iii) Internet/Bandwidth and Port Charges as % of Net Sales

Tata Communications internet bandwidth and port charges

Over the years, Company’s expense on Internet/Bandwidth and port Charges has reduced. This is likely due to sharp fall in internet prices.

(iv) Employee cost as % of Net Sales

  • Company recognized that employee are the one of the major asset of the company. As the Employees brings continuity in innovation and new technologies which helps in building strong portfolio of services.
  • As on 31-Mar-21 Company has a Total of 12,815 employees in which 5999 are permanent employee. Further, the Voluntary attrition rate for FY21 was 11.7%.
  • Moreover, 50% of employees are between 25 to 35 Years age.

Over the years, Company’s Employee Cost as % of Net Sales has increased.

In FY12, Company incurred a cost on employee is 14.93%, whereas in FY21, it incurred a cost of 17.83% of the Net Sales.

(I) Clients of Tata Communications Limited

Tata Communications as on 31-Mar-21 has over 7,000 customers globally that represent over 300 of the Fortune 500 companies. Moreover, 80% Cloud giants are connected to their business through Tata Communications. Through its signalling services, Tata Communications connects 4 out of 5 global mobile subscribers.

Further, the Contribution of top 5 customers is at ~17% during FY21. Thus, the company has a well-diversified and established customer & supplier base.

(J) Financial Parameters Tata Communications Limited

  • Over the period of 10 Years, revenue of Tata Communication increased by mere 2% of CAGR.
  • Moreover 10 Years of Profit after tax shown Negative performance of -205%.
  • Further, as per Past 10 Years, Company cash flow situation has been very fluctuating. At the period ending 31-Mar-21, Company recorded Rs.1816 Crore of Cash Flow.
  • Moreover, ROCE i.e, Return on Capital employed is increasing.
  • Net Debt as on 31-Mar-21 stands at Rs 9800 crore+. This is basically to meet the need of Working Capital and to enrich the good margins. Further, for the half year ending 30-Sep-21, total debt outstanding was Rs 9000 Crore+.

(K) Management Discussion & Concall Highlights

  • 84% of the consolidated revenue was contributed by data services in FY 2020-21
  • Tata Communications includes one of the most advanced and largest subsea fibre cable networks, which shares around 30% of the world’s Internet routes, connects businesses to 80% of the world’s clouds, and enables businesses to reach more than 190 countries and territories.
  • Tata Communication’s Enterprise and OTT segments witnessed strong growth in FY 2020-21 with revenues from its Traditional Connectivity Services portfolio clocking in at Rs 9,065 crores in FY21, showing a growth of 5.6% year-on-year. Revenues from Traditional Services accounted for 63.4% of the total revenues from Data Services in FY21.
  • EBITDA for this portfolio increased by 20.7% as compared to FY20, coming in at Rs 3,908 crores as compared to Rs 3,237 crores in FY20.
  • In FY21, Tata Communications handled approximately 18.2 billion minutes of international voice traffic globally, a decrease of 19% over the previous year (22.6 billion minutes in FY20).
  • Also, the cash flows are expected to be invested back in the form of organic and inorganic growth.
  • The company does not intend to pay down its debt from current levels. Further, Tata Communications, in the normal course, is not expected to resort to raising any material long term debt in the near future.
  • FY20 includes an exceptional loss of Rs 346.15 Crores.
  • The Management intends to Participate in growth of STT Global Data Centers India Private Limited with ~26% stakes (STT is undertaking tripling of capacity from 130 MHz to 400 MHz over the next 5 years and would require overall capex outlay of | 6000-9000 crore). ICICI Report

Concalls Highlights Q2 FY22

  • In Q2 FY22 the Consolidated revenue came at Rs 4,174 crore, witnessing a growth of 1.7% Q-on-Q and a decline of 5.2% year-on-year.
  • EBITDA for the quarter was at INR 1,113 crore, with margins coming at 26.7%.
  • Profit for the quarter was at INR 425 crore, witnessing a growth of 10.6% year-on-year and 43.7% Q-on-Q
  • Company Net debt has gone down by INR 240 crore as compared to previous quarter, and reduced by INR 870 crore as compared to the same quarter last year.
  • CapEx for Q2 FY22 was at INR 392 crore as compared to INR 318 crore in the same quarter last year.
  • Additionally, the order book for Q2 increased by double digits on both Q-on-Q and year-on-year basis. Out of this order book about 80% of that will come from existing customers and the rest some of the new customers.
  • During Q2, core connectivity business grew by 0.4% year-on-year, whereas, Next-gen connectivity grew by 9.7% year-on-year.
  • On the other hand, Company’s Cloud hosting and security portfolio grew by 7.6% QoQ and 2.4% YoY.
  • Further, the media portfolio has shown a remarkable growth of 6.2% quarter-on-quarter basis.
  • Overall, Company digital platforms and services have grown 2.3% quarter-on-quarter.
  • CapEx, for FY22 is $250 million.

(L) Opportunities and strengths

(i) Increased Digitalization in the business

To scale and run overall operation of Business in Efficient manner enterprises need to shifting from Traditional activities to modern technology. However, Tata Communication is Sufficient and leader in such activities, which can serve all its expertise through proven records.

(i) Diverse business risk profile, backed by growing data business

The data business segment is expected to continue to benefit from increasing offtake of data and the strong position of TCL as one of the world’s leading providers of wholesale data, internet protocol and mobile signalling services. Further, growth in the data segment has helped partially offset the decline in revenue from the voice segment.

(ii) Financial flexibility from being a part of the Tata group

The Tata group’s shareholding in TCL increased to 58.87% from 48.87% following the sale of stake by the Government of India in March 2021. As TCL is an integral part of the Tata group’s telecommunications strategy, the latter also has management control. TCL will continue to enjoy significant financial flexibility and should receive need-based support from the group.

(M) Weaknesses

(i) Continuous decline in the voice business segment

Revenue and operating margin from the voice business segment have witnessed a protracted slump on account of intense competition from the cheaper voice over Internet protocol (VoIP) to traditional circuit-switch-based voice calling.

On the other hand, Contribution of the voice segment to the overall revenue halved to 16% in fiscal 2021 from 32% in fiscal 2018 as a result of lower demand and realisation. Revenue and profitability from the voice segment are expected to continue to shrink because of availability of cheaper substitutes

(ii) Exposure to regulatory and technological risks

Regulatory and policy changes have played a central role in defining the risk characteristics of the telecom sector in India. The sector is extremely dynamic structurally, and therefore, the risks pertaining to regulatory intervention will persist. Presence in multiple geographies also exposes TCL to international regulatory risks. The telecom industry remains susceptible to technological changes. New technology in the telecom industry could necessitate fresh investments or overhaul of the current networks.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry’s Publications.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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