Tata Tele (TTML) is a listed subsidiary of unlisted Tata Teleservices Ltd which has pan-India operations. The company provides fixed line, CDMA-based mobile and fixed wireless services in Mumbai and Maharashtra. TTML has efficiently managed to reduce its earlier losses, with strong improvement in EBIDTA margins in past few quarters during FY07. The company posted a Cash Profit of Rs 131 crore for FY07 against Cash Loss of Rs 21 crore in FY06.
The ARPU during Q4 FY07 in mobile business stood at Rs 440, while the cost per subscriber was at Rs 340, which TTML plans to cut down to Rs 300 going forward. This would help it to improve the EBIDTA margins further and also result in reduction of net losses. TTML is likely to become net breakeven in FY09 when the current initiatives undertaken would start paying-off. Thus we expect TTML to show strong operational
performance going forward.
The subscriber base of TTML stood at over 30 lakhs as on 31st Mar’07 up from 10 lakhs as on 31st Mar’06. TTML plans to add around 1 lakh subscribers per month going forward and has planned a capex of Rs 500- Rs600 crore for FY08 to expand its coverage in the Maharashtra-Goa-Mumbai telecom circle. Also the company currently has a presence in 410 towns, which it plans to double this during FY08. This would certainly help the company to witness strong improvement in operational performance in next few years.
Financials
Net Sales up by 24% y-o-y with strong improvement in EBITDA in Q4 FY07 TTML has witnessed 24% y-o-y and 5% q-o-q growth in net sales to Rs 380.43 crore. This is backed by the strong growth in subscriber as witnessed during FY07. Also the company is witnessing strong improvement in EBIDTA margins on account of growing scale of operations, which has resulted in some fixed nature costs like Network operation, interconnect-access costs and Administration costs to decline q-o-q in past few quarters.
Thus for Q4 FY07 the company witnessed 135 bps of expansion in EBIDTA margins at 23%, while for FY07 the EBITDA margins witnessed robust expansion of 921 bps at 20.45%. Also going forward we believe the margins to improve further with the operating cost per subscriber declining further from Rs 340 as witnessed in Q4 FY07.
Net loss down by 22% q-o-q and 70% y-o-y during Q4 FY07 Though the company continued to witness net loss for the fourth quarter of FY07, the same has declined by 22% q-o-q and 70% y-o-y to Rs 45.90 crore in Q4 FY07 on account of strong improvement in operational efficiency. Since the company is in its growth phase and incurring huge capex, the depreciation cost is high due to which it has been making losses at its bottomline. During Q4 FY07 the depreciation cost was up by 3% q-o-q but declined by 20% y-o-y to Rs 104.48 crore. During FY07 the net losses reduced by 43% yo-y to Rs 310.61 crore.
Valuations
At current market price of Rs 29.40, TTML is quoting at EV/Sales and EV/ EBIDTA of about 4.95x and 22.62x respectively of its TTM earnings as on Mar’07.
Risks
- The future growth of TTML’s business is dependant on its ability to expand its network capacity, which is limited by the amount of the frequency spectrum available for its use. Thus the company’s network expansion plans might get materially affected if it is unable to obtain additional spectrum, which is an industry-wide phenomenon.
- Rapid changes in technology may render the company’s current technologies obsolete or require it to make substantial capital investments.
Growth
- Telecom Services Providers market grew at CAGR of 52% over last 2 years, while TTML grew at a CAGR of 89% in the same period.
- On the operational front the company’s current initiatives are helping it to cut down on costs, which have resulted in strong improvement in EBITDA margins, significant improvement in cash profits and productivity.
- TTML would focus on rural areas to drive its growth, where currently it is witnessing over 60% q-o-q increase in subscriber base, which stood at 2 lakhs in Q4 FY07 up from 1.09 lakhs in Q3 FY07.
- TTML is currently in its fourth year of wireless operations, a huge market yet to be explored, which going forward would yield strong revenues for TTML.
- TTML had incurred capex of Rs 738 crore in FY05, Rs 507 crore in FY06, Rs 564 crore in FY07 and plans to incur Rs 600 crore capex in FY08.
- The numbers of sites of TTML for providing services have also moved up from 694 in FY05 to 1234 in FY07.
Since the company is currently making losses, it could not be compared on PER basis with the peers in the Telecom Industry. However on EV/Sales and EV/ EBIDTA it is trading at cheaper valuations. Also in terms of EV Per Subscriber the company is cheap compared to peers. We believe TTML would witness strong growth from the current smaller base with its plans of adding 1 lakh subscribers every month. Also the current initiatives would further improve its operational efficiency thereby wiping-off all the losses and witnessing strong growth momentum going forward.
