Tata Communications, the global tele­communications arm of the Tata Group, has been making concerted efforts over the past few years to evolve its business strategy. In an attempt to remain relevant in the global market, the company has modernised its service offerings and ventured into enterprise and data centre services. With its traditional voice service business witnessing a slowdown, the company did well by diversifying its oper­ations. It has also augmented its global telecom infrastructure to support the rising bandwidth demand of customers and expanded its global footprint to growth markets such as Southeast Asia, the Middle East and Africa. By deploying multiple leading technologies and differentiated go-to-market models, the company has been able to establish itself as a significant player in the global telecom market.

Business structure and operational performance

Tata Communications operates under two business divisions – core and start-up. The core business comprises global voice solutions (GVS) and global data solutions while the start-up division includes its South African subsidiary Neotel and its Nepal-based subsidiary United Telecom. Under GVS, the company provides international wholesale voice carriage and termination services to global telecom service providers and national long distance termination services in India.

The company’s core business witnessed a 9.7 per cent year-on-year growth in net profit during the quarter ended September 2015. This was on account of a 15.5 per cent year-on-year rise in the company’s net revenue during the same period. This resulted in an improvement of 1.4 percentage points in the earnings before interest, taxes, depreciation and amortisation (EBITDA) margin, from 12.9 per cent during the quarter ended September 2014 to 14.3 per cent during the corresponding quarter in 2015. Meanwhile, the start-up business did not perform very well with the company reporting a loss of Rs 274 million during the quarter ended September 2015 as against a profit of Rs 619 million during the corresponding quarter in 2014. This was on account of an 18 per cent drop in revenue during the period, which was due in part to a severe depreciation in the South African currency.

A segment-wise analysis of the com­pany’s performance reveals that the enterprise segment contributed 56 per cent to the company’s overall revenue during the quarter ended September 2015 while the service provider business contributed 44 per cent. The enterprise business segment continues to display strong momentum with healthy year-on-year growth, owing to the fact that it is less price-sensitive than the service provider segment and the engagement with customers is generally for a longer term.

On the data front, the company has been able to maintain healthy growth rates. During the quarter ended September 2015, the company’s revenue from its data business grew by 16.9 per cent on a year-on-year basis. The company is making significant investments in the segment by enhan­cing its products and services. The voice segment, on the other hand, continues to suffer owing to a depleting top line.

Debt reduction strategies

As of September 2015, the company had a gross debt of $1,744 million, the majority of it in foreign currency. It is currently evaluating the steps it can take to pare its debt, the prime among them being the sale of its data centre business and the offloading of stake in Neotel.

Tata Communications has data centres in the US, the UK and Singapore, covering 1 million square feet of co-location space and offering managed hosting and storage services. In India, it has facilities in New Delhi, Mumbai, Bengaluru, Chen­n­ai, Kolkata and Pune, among others. In a deal valued at Rs 45 million, Singapore Tech­­nologies Telemedia has emerged as the frontrunner to acquire a controlling stake in Tata Communica­tions’ data centre business. While the deal is yet to be finalised, the buyers will reportedly acqu­ire up to 74 per cent of the data centre operations across 44 locations in India and abroad, and the Tata Group will retain a minority holding.

As for Neotel, which Tata Commu­ni­cations had acquired in 2006 following the deregulation of South Africa’s telecom sector, it had been planning to sell stake in the former since September 2013. To this end,  it signed a definitive agreement with Vodacom South Africa in May 2014. However, the two parties decided to revise the terms of the agreement and have submitted documents for the restructured transaction for selling a majority stake in Neotel’s fixed line assets to Vodacom.

The financial details of the revised deal have not yet been shared. As per the original deal, Vodacom had reached an agreement to buy Neotel, controlled by Tata Communica­tions, for 7 billion rand. In dollar terms, the value of the transaction at that time was around $676 million, which has come down to $479 million due to the depreciation in the value of the South African rand. Under the revised pact, Neotel will offer a roaming arrangement to all the mobile network operators in the country, including Vodacom. The South African anti-trust division will now look into the revised deal. The agreement also requires the Indian government’s approval as it holds a 26 per cent stake in Tata Com­munications, formerly known as Videsh Sanchar Nigam Limited. Once finalised, the deal will mark one of the major divestments carried out by the Tata Group in an effort to exit its non-core businesses.

Recent initiatives

The company has stated that collaborations will be a vital part of its strategy, going forward. In line with this vision, it has partnered with the Microsoft Corp­ora­tion to connect businesses to Office 365, enabling its customers to boost employee productivity and at the same time streamline business processes with cloud-based communication and collaboration. The company has also teamed up with Sweden-based Net Insight to help media houses distribute video feed from any location globally to any number of devices on a real-time basis. It is also looking to tap the emerging opportunities in the rapidly growing over-the-top market.

Further, the company sees innovation as the key to a more sustainable growth curve. As a step in that direction, it is building India’s first internet of things (IoT) network, which will allow millions of connected devices such as smart meters to communicate with each other wirelessly. The company is deploying the IoT network with the help of a low-power wide area network based on LoRa technology for connected devices and IoT applications across Mum­bai, Delhi and Bengaluru. LoRa is a wireless communication technology dedicated to IoT and machine-to-machine communication networks.

Future outlook

While the company is finding it tough to maintain its position in the voice segment, it is looking at newer avenues to drive future growth. For instance, it has identified media as a relevant segment and is looking to augment its network and data centre infrastructure with components such as hosting and content delivery network capabilities to provide industry-specific offerings, which will take traditional broadcasters into the new age. The company has also recently launched a plug-and-play cloud-based hosted solution, which can be deployed globally to manage diverse customer touchpoints in any contact centre set-up.

The telecom industry is currently witnessing a big shift in the technology landscape, which is being increasingly driven by the evolving digital ecosystems across industries. Tata Communications has been able to adapt to the changing needs of the telecom market. Given that the company has a presence across various segments of the telecom industry and is building collaborations with other players, it is well poised to leverage the emerging opportunities in the telecom space.

Mridula Pandey