Tata Teleservices Limited’s (TTSL) downslide has been almost as rapid as its rise had been. The ambition that the company had displayed in 2009-10, when it launched GSM services, is missing today. This was the same company that had introduced the game-changing Pay for What You Use strategy that went on to influence industry dynamics and led to the company adding over 4 million subscribers each month. It was also the first private operator to launch 3G services in India.

Today, however, the company is in a tough spot owing to continuing losses, low subscriber growth and mounting debt. Intense competition in the voice segment has led to low margins and declining subscriber market share, while revenues from data services have been unable to fully offset the shortfall from voice services. As of June 2013, TTSL’s subscriber market share stood at 7.40 per cent, according to the Telecom Regulatory Authority of India (TRAI), against 10.68 per cent as of end-June 2011. Company officials point out that TTSL was a late entrant into the GSM segment and launched these services only four years ago as compared to the incumbents, which have been operating in this space for 17 years. This, perhaps, accounts for its low subscriber market share.

The company’s low-tariff strategy is no longer attracting subscribers. Moreover, regulatory issues such as non-allocation of spectrum in the Delhi circle as well as in 39 districts, and a ban on 3G intra-circle roaming agreements have constrained expansion of mobile services.

On the positive side, company officials claim that TTSL has the fourth highest revenue market share. In fact, they claim that the company has higher quarter-on-quarter revenue growth than most of its competitors in the GSM segment. In addition, the visitor location registry (VLR), which provides information on the active number of subscribers, improved from 48.02 per cent in June 2011 to 59.24 per cent in June 2012 and further to 67.96 per cent in June 2013. The improvement in the VLR was on account of the disconnection of several inactive subscribers as part of a cost management exercise.

To improve profitability, TTSL has been optimising its operations. The company has shut down CDMA mobile operations in the Jammu & Kashmir, Northeast and Assam circles as it was not viable for it to continue operating in these circles after acquiring 2G spectrum at a high reserve price. It has also discontinued post-paid services in the West Bengal and Bihar circles, while increasing tariffs for prepaid services in these circles and redeployed its infrastructure assets in other circles.

“TTSL is a good company but has witnessed several setbacks and has been impacted by the recent decisions on spectrum. It has still not been allocated spectrum in the high-ARPU Delhi circle. Also, due to the high reserve price of spectrum, the company was not in a position to bid in the recent auctions. In fact, it has decided to surrender the excess spectrum,” notes Dr Mahesh Uppal, director, Comfirst.

Meanwhile, TTSL has accumulated huge debt due to the high 3G spectrum acquisition cost. The company reportedly has a debt burden of over Rs 200 billion, which is impacting its ability to secure additional funds for its expansion plans. According to market analysts, consolidation through a possible merger may be the only way for TTSL to improve its market position and reduce its debt. “The future outlook for TTSL is bleak. But with talks of a possible merger, the company’s prospects could improve,” says Uppal.

 Merger plans

Although company officials remain tight-lipped, leading business dailies report that TTSL has initiated talks with Sistema Shyam Teleservices Limited (SSTL) for a possible merger. With 100 per cent foreign direct investment permitted in the sector, SSTL has stated that it intends to look at merger or acquisition opportunities in the CDMA segment.

A merger would lead to a win-win situation for both operators. With SSTL intending to bring in more capital, TTSL would be able to obtain funds to pare its debt while SSTL would get access to more subscribers as well as to spectrum in 13 circles, where it did not win spectrum in the auction, and additional spectrum in the remaining nine circles. The deal would, moreover, enable the merged entity to reduce opex by sharing infrastructure, technical expertise and manpower, and achieve economies of scale, thereby improving efficiency.

The two operators are waiting for the government to issue the final merger and acquisition guidelines. However, the deal may not materialise if the government makes it mandatory for the merged entity or the acquirer to surrender excess spectrum or pay market-determined prices for the spectrum it receives as part of the merger or acquisition.

Background

Incorporated in 1996, TTSL initially launched CDMA-based fixed line services. For many years, TTSL and Reliance Communications were the only private operators to offer these services. In 2005, TTSL launched CDMA wireless services under the brand, Indicom. However, with GSM technology gaining greater traction than CDMA technology, despite the latter being more efficient, TTSL found itself losing ground in the mobile race. It could not garner as many customers as its GSM counterparts.

In 2007, TTSL applied for a dual technology licence and two years later launched GSM services under the Tata DOCOMO brand. The company attributes its decision to commence GSM operations to the lack of additional spectrum in the 800 MHz band and the absence of a spectrum road map for CDMA technology.

Prior to the launch, in November 2008, it sold 26 per cent stake to Japan’s NTT DOCOMO for about $2.7 billion. With DOCOMO’s support, it introduced the innovative Pay Per-Second pricing model for mobile services in September 2009. This model was in contrast to the prevailing method of billing customers on a per-minute basis. The company’s plan was to implement a single-tariff structure across all circles, thus moving away from the multiple-tariff plan regime for different circles.

TTSL’s Pay Per-Second billing strategy was a winner. It helped attract new customers in hordes. In a short time, the company’s market share shot up from 9.39 per cent in end-September 2009 to 11.50 per cent in end-September 2010. The move helped TTSL surpass Bharat Sanchar Nigam Limited and become the fourth largest operator in terms of subscriber base. Moreover, Tata DOCOMO’s marketing campaigns – Do the New and Friendship Express – successfully targeted the youth segment, adding to its subscriber numbers.

However, TTSL’s marketing success and pricing advantage were short-lived. Other operators replicated its Pay Per-Second pricing model, leading to a stiff tariff war. Moreover, TTSL had to incur higher operational costs for setting up its GSM network in the 1800 MHz band as compared to counterparts such as Bharti Airtel and Vodafone, which were providing GSM services in the 900 MHz band.

Meanwhile, ARPUs started falling as the increase in minutes of usage did not compensate for the decline in tariffs, thus affecting the profit margins of several companies. TTSL, in particular, suffered as its GSM network coverage was relatively limited, which led subscribers to migrate to other service providers.

While TTSL was the first operator to launch 3G in India, rolling out services in nine circles, it could not fully capitalise on its first mover advantage. High tariffs and low availability of affordable smartphones impacted the uptake of these services in Tier I and Tier II cities, which still continues to be an industry issue.

The company restructured its internal operations to integrate all services under Tata DOCOMO, but these efforts could not revive its fortunes. By September 2011, TTSL’s market share had dipped to 10.16 per cent and by September 2012, to 8.64 per cent. Today, it stands at just below 8 per cent.

Deteriorating financial performance

According to CARE Ratings, TTSL’s losses widened from Rs 13.34 billion for the year ended March 2010 to Rs 33.89 billion for the year ended March 2011 and to Rs 42.28 billion for 2011-12. This was despite an increase in revenues from Rs 63.97 billion for the year ended March 2010 to Rs 100.02 billion for the year ended March 2012. For the period April-September 2012, the company’s net losses stood at Rs 26.27 billion as against a loss of Rs 24.51 billion during the same period in 2011.

According to TRAI, TTSL’s revenues fell from Rs 25.69 billion for the quarter ended March 2012 to Rs 24.15 billion for the corresponding quarter in 2013. Declining revenues coupled with high interest expenses had a major impact on the company’s profit margins. “Additional debt raised to roll out 3G services led to an increase in interest expenses, which had a further negative impact on profitability,” says Swati Agarwal, general manager and regional head, north, CARE Ratings.

Revival strategies

In order to revive operations and recover market share, TTSL is following a multi-pronged strategy, which includes reducing costs, closing operations in low-growth circles, focusing on data services and expanding its portfolio of enterprise services. In its effort to cut costs, the company has discontinued mobile services in three circles where its CDMA licence was cancelled by the Supreme Court in February 2012.

To improve non-voice revenues, TTSL’s strategy is to focus on the data service and enterprise business segments. It is aggressively expanding its 3G network coverage in the circles where it holds spectrum in. The company’s high speed broadband service, Photon, has already gained significant traction. According to Uppal, “TTSL is a leader in the data service segment owing to the strong uptake of its Tata Photon dongles.”

Recently, the company launched the Photon Max broadband service based on EV-DO Rev. B technology in Mumbai. The service is expected to be introduced in Kolkata, Chennai and Uttar Pradesh within a month. To encourage users to adopt data services, the company has reduced tariffs for select 2G and 3G data packs by up to 90 per cent. Slashing tariffs will be beneficial for TTSL as non-affordability of data services has been cited as the biggest deterrent to uptake.

The small and medium enterprise (SME) segment is another focus area for TTSL. The SME market is valued at Rs 105 billion and is expected to increase to Rs 168 billion by 2018, opening up a plethora of opportunities for the company. TTSL can gain from its extensive network coverage and large number of channel partners across the country.

At present, the company offers telecom services (fixed line, wireless, broadband, VoIP) and managed services to the SME segment. In 2012-13, its SME business contributed about 11 per cent to the overall revenues and registered 20 per cent year-on-year growth. For 2013-14, the company is targeting a year-on-year revenue growth of 20 per cent and a market share of over 10 per cent. In this regard, it is planning to invest 40 per cent of its total capex in expanding its SME business. Company officials are of the view that data services using CDMA technology will be critical for enterprise solutions such as machine-to-machine applications and m-commerce, among others.

TTSL is also planning to foray into niche markets such as home surveillance and smart tracking solutions.

Challenges persist

On its road to recovery, TTSL is likely to face challenges on multiple fronts. One of the biggest issues will be retaining subscribers, especially high-ARPU customers. Competition from new entrants has affected TTSL’s market share even as the company has improved its network coverage. “Over the past few years, the intense competition in the wireless segment and relatively weak market position of TTSL has adversely impacted the company’s performance,” says Agarwal.

Retaining high-ARPU subscribers will be crucial for TTSL as these customers are the early adopters of data services and help in increasing overall revenue realisations. However, it may become difficult for TTSL to attract customers solely for data services.

The company does not hold 3G spectrum in several Category A circles including Andhra Pradesh and Tamil Nadu, and in the metro circles of Delhi and Mumbai. Moreover, with the government imposing a ban on 3G intra-circle roaming agreements, TTSL has little option but to focus on circles in which it holds 3G spectrum and target high-ARPU customers in these circles by providing better network coverage and offering more value-added services.

With regard to 2G data services, TTSL holds spectrum in the 1800 MHz band, which is not considered as efficient as the 900 MHz band in terms of coverage. In addition, the company holds only 4.4 MHz of spectrum in each circle. Using such a low quantum of spectrum for providing both voice and data services could prove to be a challenge. Also, TTSL had stated that it will surrender spectrum beyond 2.5 MHz in the 800 MHz band in all circles barring Delhi and Mumbai in order to avoid paying the one-time fee. However, it is making additional investments in network roll-out to offset the reduced spectrum availability.

Although TTSL is targeting SME business, it has contended that retaining small enterprise customers for a long period is becoming difficult. The company is of the view that several of these customers operate for a short period and then wind up their business. Moreover, it is facing competition from the incumbents Bharti Airtel and Vodafone India, which have also increased their focus on the enterprise segment.

Its highly leveraged balance sheet is another issue for TTSL. “With significant borrowings on its balance sheet, TTSL may prefer to go slow on any aggressive expansion capex in order to avoid further leveraging its capital structure,” says Agarwal.

Future outlook

The near-term outlook for TTSL is not too optimistic. The company is expected to incur losses in the foreseeable future due to intense competition and its weak market position in both the voice and data service segments. Although there has been an improvement in revenue realisations since March 2013 due to an increase in voice tariffs across the board, declining data tariffs could impact overall ARPUs and profitability. TTSL has a huge debt burden and with low ARPUs and limited uptake of data services, it will find it difficult to service its debt and raise additional funds.

However, company officials are extremely positive about TTSL’s future prospects. The company is betting big on its non-voice business, especially data services for which it intends to leverage its efficient CDMA spectrum. It also intends to participate in the auction for acquiring spectrum in the 900 MHz and 1800 MHz bands, subject to the final reserve price and market conditions.

TTSL will stand to benefit if it encourages users to adopt data services, which are expected to drive future revenue growth. But it will have to improve on several parameters to stem the slide and become competitive in the Indian telecom market.