As the Videsh Sanchar Nigam Limited (VSNL) logo on the company headquarters in Prabhadevi, Mumbai made way for the deep blue Tata logo, it marked more than a symbolic change in brand name. It reflected the changing ambitions of the company, now known as Tata Communications Limited, as well as a new corporate identity for VSNL, VSNL International, Teleglobe and Tata Indicom Enterprise Business Unit.
The change in identity is indeed part of a bigger rebranding exercise that aims to give a sharper, more ambitious and corporate focus to the company. The transition was planned in 2007, the fifth year of the partnership between the Government of India and the $29 billion Tata Group, which now holds nearly 50 per cent stake in the company.
In many ways, 2007 has been a significant year for Tata Communications. Its performance and financials have started looking up after a rough run marked by intractable difficulties in the early years of the association. As Kishor Chaukar, managing director, Tata Industries, puts it, “VSNL has gone through one of the most remarkable turnarounds in recent times and has enhanced the interests of its shareholders by reengineering and de-risking its business model.”
The next step is to consolidate all its advantages ?? the biggest being the Tatas’ brand equity ?? in order to give a fillip to the company’s growth plans and global aspirations. “The Tata Group reflects a 130-year strong heritage of trust and leadership to its customers. The new identity, therefore, is a major step in our commitment to build long-lasting relationships with our customers, partners and stakeholders,” says Subodh Bhargava, chairman, Tata Communications.
N. Srinath, CEO and managing director of Tata Communication reiterates the point: “We are tremendously pleased with the launch of the new brand. The Tata Group has a long and highly respected history of achievement and contribution to the many markets, industries and communities it serves.”
However, shedding VSNL’s over 20year-old mantle will be neither easy nor exactly cheap. The company will have to incur an expenditure of $4-$5 million in direct marketing initiatives this fiscal year to communicate the integration of the businesses to the market. Besides, it has to pay 0.25 per cent of revenues or 5 per cent of profit before tax, whichever is lower, to Tata Sons as royalty for using the Tata name.
Repositioning moves
Over the past few years, Tata Communications has been consciously restructuring its data operations with an eye on tapping the high-growth services market. With the enterprise and carrier data segment growing at a rate of 30-40 per cent year on year and accounting for about 28 per cent of Tata Communications’ total revenue, the move seemed prudent. To streamline its operations further, in 2007, Tata Communications separated its business into three distinct revenue lines: transmission, global IP and VPN services, and managed and value-added services.
Building on this, the company has devised a three-pronged strategy. First, it aims to enhance both its investments and operations in India, with a clear focus on expanding its national long distance (NLD) network, and strengthening its metropolitan area network and Wi-Max network for retail and enterprise customers.
Second, it plans to expand its global footprint in the submarine cable and wholesale voice businesses. Third, it intends to focus on managed services as it moves beyond traditional telecom services into application services to meet the communication needs of enterprises.
Global aspirations
The company is focusing strongly on establishing a global identity. In line with this, the Tatas (through Tata Communications) have picked up an effective stake of 26 per cent in Neotel, South Africa’s second telecom operator, and are the largest shareholder in the company. Tata Communications also has stake in United Telecom Limited, which offers services in Nepal.
Its most recent acquisition is that of South Africa’s Transtel Telecom. This year, Neotel acquired Transtel for Rs 1.2 billion. Transtel, which has annual revenues of over Rs 3.5 billion, has an established telecommunications infrastructure across South Africa, connecting every railway line, pipeline, harbour and airport. The acquisition thus provides Tata Communications with a platform for introducing next-generation services for businesses and gaining a nationwide presence.
On the sub-sea cable front, Tata Communications has been trying to ride the communication boom in Asia, which has triggered an investment frenzy in submarine cables across the continent. A significant portion of revenues in the global communication space is expected to come from Asian telecom companies whose bandwidth requirements are growing by the day.
In 2007, Tata Communications decided to build the new TGN Eurasia Cable System, which will link Mumbai to Paris, London and Madrid via Egypt, thus providing express connectivity between India and Europe. This cable will give Tata Communications 1.28 terabit of new capacity on this route by 2009. It will also provide future options for additional connectivity to the Gulf region as well as to multiple locations in Europe.
The company is also building the TGN Intra Asia cable. The 6,500 km cable link will cover Hong Kong, Japan, Singapore, the Philippines and Vietnam, and provide 3.8 terabit of capacity, which would allow the company to service the rapidly growing Asia-Pacific markets.
With its growth strategies defined, company officials expect investments of about $2 billion over the next three years. Of this, $500 million each would be spent on completing the additional submarine cable systems and rolling out its Wi-Max operations, the company’s other key focus.
Wi-Max plans
Tata Communications is aggressively pursuing its Wi-Max plans. To this end, it has tied up with US-based Telsima to provide wireless broadband services across the country. While the service is currently limited to Bangalore, the company hopes to offer it in over 100 cities and towns once the network is in place. Says Srinivas Addepalli, vice-president, strategy: “We will offer Wi-Max broadband services to consumers in the major metros by the end of this calendar year. We are currently in the process of rolling out the network in 10-12 cities, including Delhi, Hyderabad and Chennai.”
Looking back
While the company is now on firm ground, it has been a long journey to get there. In February 2002, when the former VSNL became a part of the Tata Group, it was a single-country, single-business entity with nearly 90 per cent of its revenues coming from wholesale international long distance (ILD) operations.
Shortly after the Tatas acquired a stake in the company, the government deregulated the long distance sector, bringing the company face to face with stinging competition. The ensuing years saw VSNL touch an all-time low. Growth pushed red while running costs remained high. The burgeoning grey market in international calls along with the company’s own structural defects left it badly bruised.
This was a lesson for the Tatas. To make the VSNL venture pay off, they needed to reduce its dependence on the ultra-price-sensitive voice segment. Though it continued to be the carrier for most operators, VSNL was fast losing its most-preferred-carrier status to new rivals like Bharti, Reliance Communications and BSNL. It was clearly time to look at new revenue streams in order to survive.
The turning point came when the company saw an opportunity to buy international telecom companies going cheap. Tata Communications acquired Tyco Global Network in 2005 and followed it up with the high-profile takeover of Teleglobe International Holding in 2006.
The acquisitions brought to the table many advantages. The Teleglobe acquisition straightaway added $1 billion to Tata Communications’ annual revenue following its integration with the company, while Tyco brought with it the world’s largest submarine cable network. Tata Communications also inherited a clutch of holding companies and subsidiaries across the world, giving it its current presence in over 37 countries.
For the Tatas, acquisitions were clearly the way forward. Riding on the back of overseas acquisitions and strong leadership from the top management, the company reinvented itself. Fortunately for VSNL, shortly after the buyouts, the margins in the long distance segment too began improving as excess capacities dried up with an increase in voice traffic. It gave the company some respite to plan for the future and start thinking big.
Meanwhile, over the years, it carefully put together a network spanning 200,000 route km, making it the world’s largest owner of submarine cable bandwidth. It also strategically positioned itself to become a global provider of international wholesale voice services, on the lines of AT&T and Verizon, carrying about 25 billion minutes of annual traffic.
Besides, its IP core network with 200 points of presence allowed the company to offer a range of services, including voice, private leased circuits, IP VPN, internet access, global Ethernet, hosting and mobile signalling.
Today its customer base includes 1,500 global carriers, 450 mobile operators, 10,000 enterprises, 500,000 broadband and internet subscribers, and 300 Wi-Fi public hotspots.
VSNL’s dependence on voice traffic has declined from 85 per cent in 2002 to the current 65 per cent and is expected to fall to 40 per cent by the end of the decade. At the same time, its enterprise business is expected to grow to a similar size and broadband will make up the rest.
Finances
Tata Communications’ financial performance in the quarter ended December 2007 showed a marginal improvement over the previous quarter. It registered sales of Rs 10.4 billion compared to Rs 9.47 billion in the quarter ended September 2007. Operating profit stood at Rs 1.53 billion as against Rs 1.52 billion in September 2007. Net profit, however, declined to Rs 90 million from Rs 610 million in September 2007.
Outside view
With a 17 per cent market share and 25 billion minutes of wholesale voice traffic, which is growing at an impressive 8 per cent a year, market analysts are unsure whether the company can sustain its growth. While the company has undoubtedly made steady progress in many areas, there are a few areas where it is vulnerable.
Telecom analyst Mahesh Uppal observes: “The transformation to a more aggressive, new-age company is taking time. It has undoubtedly inherited a fair amount of legacy problems and old staff, which is probably not as savvy in the new markets as some of the company’s other staff. This is an area which, if not addressed immediately, may slow down the performance of the company vis-? -vis its rivals.”
Though Tata Communications has had a long innings in the telecom industry and enjoys strong relations with carriers and operators worldwide, analysts feel that it may not be able to hold its own in the face of fierce competition, especially in the data market. Players like AT&T and Cable & Wireless, which earlier used Tata Communications to carry their traffic, no longer need to piggyback on it. Also, with as many as 20 operators, both domestic and international, lining up for ILD/NLD licences following the reduction in licence fees, Tata Communications’ revenues from long distance services could get impacted in the long run.
However, Tata Communications is quite unfazed by the competition and the entry of new players into the fray. “A licence gives them one part of the business, but they would still need infrastructure. Either they invest in infrastructure or they use ours. We have robust infrastructure across the country and overseas, and make this available to operators who wish to optimise their cost. We make it more attractive for them to use our infrastructure rather than their own,” says Addepalli. Essentially, as more operators get NLD/ILD licences, for Tata Communications, the source of revenue will shift from providing services to providing infrastructure.
According to a senior analyst from broking firm Edelweiss, Tata Communications should look at managing costs and assets better, and meet the customer’s quality expectations in the face of reduced tariffs and very low margins in the voice segment.
The company is also at a disadvantage with no direct access to end-customers in the voice business. It is largely dependent on cellular and basic service providers to route their NLD and ILD calls. Besides, with a large part of its operations in international markets, the company may find it difficult to integrate its acquisitions and manage operations.
Outlining the areas that the company may want to look at, Uppal observes, “I would worry about depending heavily on Wi-Max as the Wi-Max story is still unfolding and there are concerns about how effective the technology will be in the new competitive environment. So, its exposure to a specific technology could be seen as a kind of threat as it is prone to changes. Unlike its competitors who don’t seem to be taking a very technology-specific exposure, my perception is that Tata Communications is. If Tata does not hedge its bets there, it could become a threat.”
According to Sourabh Kaushal, industry manager, ICT practice, Frost & Sullivan, the company may want to focus on deploying more value-added services on its platform. Also, its coverage should be expanded to include new licence areas. “Being the oldest IT company, with the largest ILD and internet network, the company can improve its prospects considerably, provided it removes the stumbling blocks and becomes more market savvy. The company may also want to focus on the retail consumer segment; so far, it has mainly focused on the enterprise, voice and data segments.”
Future prospects
For Tata Communications, demand from enterprise and retail clients for broadband and data services will be the major growth drivers in the near future. With enterprise sectors like retail, financial services, automobiles and the public sector increasingly looking to IT and telecom companies to service their needs, there will be enough business potential. The key opportunity for Tata Communications lies in the demand for wireless services and the huge potential that exists in the broadband enterprise segment and the untapped rural markets.
In March 2007, the company had announced the setting up of a separate subsidiary for its broadband and internet services for retail customers, the process for which is under way.
With its increasing global aspirations, Tata Communications is seriously looking at opportunities in managing telecom outsourcing for service players in markets like Europe, the Middle East and Africa. It is hoping to corner 6-7 per cent of the $50 billion telecom cross-border business by 2011. It is also open to acquiring small and mid-sized companies with annual revenues of $50-$200 million across these regions.
In sum, the company’s positive steps in the past few years have begun to pay off. It has not only managed to recover its position but has also drawn up ambitious plans for the future. The only hurdles in the way are falling ILD rates, aggressive pricing in the international arena by players like Reliance and Bharti, and the impact of exchange rates due to significant earnings in foreign exchange. Given Tata Communications’ new momentum and energy, it seems set to not only overcome these hurdles but also to scale new heights.
