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Mumbai-based Tata Communications is tenaciously holding on to the corporate edge that it has painstakingly earned over the years through massive efforts in consolidation, restructuring and operational overhaul. Today more than ever, in the wake of the global economic downturn, the subsidiary of the $62.5 billion Tata Group is pulling out all the stops to live its ambition of leading in all the key focus areas and markets.

"We are pursuing our vision of delivering a new world of communications to our customers, with a strong focus on service excellence," says N. Srinath, CEO and managing director, Tata Communications.

"We will expand our network and services portfolio in India and globally. Our submarine cable and data centre builds will continue. And, with Wi-Max spectrum auctions coming up later this year, the company's broadband plans will also get a fillip. To do all this, we will continue to make prudent investments."

Over the past one year, Tata Communications, the oldest telecom company in the country, has built on the strategy of providing a range of communication services to customers in the wholesale, enterprise and retail segments. It has invested considerably in network infrastructure and service delivery capabilities within and outside India. The focus is clear: increase investments and operations in India, expand the national long distance network, strengthen the metropolitan area network and Wi-Max network for retail and enterprise customers, grow the company's global operations and step up its managed services offerings to meet enterprise customer needs.

In line with this business plan, Tata Communications recently launched a 10 Gigabit Ethernet service to help operators meet the growing market demand for high speed, secure and cost-effective bandwidth. According to company officials, the service will leverage Tata Communications' global network to cater to the large-scale, wholesale needs of users in 25 major cities in 11 countries worldwide, connecting key business centres over its Tata Global Network (TGN) cable system. For Tata Communications, strengthening its Ethernet services portfolio –­ a segment in which it leads –­ makes good business sense.

Earlier in the year, the company tied up with UAE-based operator Etisalat to jointly launch enterprise network services (essentially, a range of dedicated Ethernet services) for customers seeking connectivity in the UAE and globally. While the partnership will enable Etisalat to offer Layer 2 Ethernet services internationally, for Tata Communications it will translate into a presence and stake in the emerging UAE market. Towards this end, the company has set up a new office in Dubai, in addition to one in Abu Dhabi.

Another area of interest for Tata Communications is data centres. The company has invested around $250 million in completing the main segment of the TGNIntra Asia Cable System, and is investing another $180 million in setting up an internet data centre (IDC), which will be commissioned in early 2010. The company has announced an investment plan of Rs 100 billion in the next three years.

The tier III data centre was inaugurated in Kolkata in June 2009. The IDC, built to Telecommunications Industry Association's 942 standards, is spread across 6,000 square feet. It will cater not only to companies based in eastern India but also to those that service customers in this area. According to company officials, the eastern India market is relatively untapped. An IDC in this region will act as an enabler for attractive investment opportunities. The Kolkata centre is the latest addition to Tata Communications' IDC infrastructure, which is supported by a global network backbone and provides users access to secure data centres that are connected to Tier 1 cities in India.

Recently, the company bagged a coNtract from telecom operator Sistema Shyam TeleServices Limited (SSTL) to deploy call centre services. Tata Communications' role will be to deploy oNdemand hosted contact centre (InstaCC) services for all SSTL circles across the country on a pay-per-use model.

Banking on Wi-Max for future growth, Tata Communications has launched WiMax-based retail broadband in four major cities and is awaiting spectrum auctions to execute its Wi-Max rollout plans. The company has 90 per cent coverage in Delhi NCR, Bangalore, Hyderabad and Chandigarh, and is attracting more than 4,000 subscribers a month.

Market position
The company's biggest asset is its global optic fibre network, which spans over 200,000 route km (both terrestrial and submarine). It is the world's largest owner of submarine cable bandwidth. Over the years, the company has 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. Today, it has made a place for itself among the top three international providers of wholesale voice services and voice over internet protocol (VOIP) services. The company expects to commission additional submarine cable systems connecting emerging markets in Asia, the Middle East, Africa and Europe during the course of the year in order to meet coNsumer broadband demands.

The company is also a global Tier 1 internet service provider and a key player in the growing global internet protocol (IP) transit market. Its range of services includes transmission, IP, converged voice, mobility, managed network connectivity, international private leased circuit (IPLC), NPLC (national PLC), hosted data ceNtres, VPNs, Ethernet, television uplinking, transponder lease services, business messaging and collaboration, audio/video/ web conferencing, telepresence, managed security, communications solutions and business transformation services to global and Indian enterprises and service providers, as well as broadband and coNtent services to Indian consumers.

Tata Communications provides coNnectivity to more than 200 countries across 300 points of presence (PoPs) and has more than 1 million square feet of data centre and co-location space. It is, therefore, suitably positioned to deliver value-driven, globally managed solutions to Fortune 1000 and mid-sized enterprises, service providers and consumers. While it does have a retail coNsumer base, it caters primarily to business users and other telecom service providers. Over 50 per cent of the company's revenues comes from the international markets.

With offices in 50 countries, the company offers telecom services through its subsidiary in Sri Lanka and through joint ventures in Nepal and South Africa. In South Africa, its strategic investment in Neotel has given the company a distinct edge which will serve as the beachhead for the rest of the African market when it opens up.

Company snapshot
CEO and managing director: N. Srinath
Market capitalisation: Rs 140.6 billion (August 4, 2009)
Shareholding pattern: Tata group companies 50.11 per cent stake; Government of India 26.12 per cent; rest public shareholding
Global presence: Americas, Europe, Middle East and Africa, and Asia Pacific
Undersea cables: FLAG Europe Asia, SEA-ME-WE3, SEA-ME-WE4, SAT-3/WASC/SAFE, SEACom, I-ME-WE, TGN-TIC, TGN-Eurasia, TGN-Pacific, TGN-Atlantic, TGN-WER, etc
Satellite: Six satellite earth stations in India, three large earth station teleports in Canada, two small leased teleports in Europe

Journey so far
Of course, it hasn't been an easy ride for Tata Communications (the erstwhile Videsh Sanchar Nigam Limited [VSNL]). A state-run monopoly in long distance telephony for over 16 years, the former VSNL brought with it a huge PSU baggage. There were other problems too. Soon after VSNL became a part of the Tata stable in February 2002, the government deregulated the long distance sector, bringing the company face to face with competition.

The Tatas soon realised that to make the acquisition pay off, they had to reduce the dependence on the price-sensitive voice segment and explore new revenue streams. Bit by bit, the company got into areas like enterprise and data services where it could utilise its existing infrastructure. It also decided to aggressively look outside for business, having serviced a number of clients across the globe and picked up extensive experience in the international long distance (ILD) sector.

The company's fortunes turned around in 2005-06, with Tata Communications seizing the opportunity to buy international telecom companies going cheap. It acquired Tyco Global Network in 2005 and followed it up with the takeover of Teleglobe International Holding in 2006. This immediately added to its revenue pool and brought to the table one of the world's largest submarine cable networks. It also inherited a clutch of subsidiary companies across the world, giving it a presence in about 50 countries.

Over the years, the company also learnt to shrug off some of its sarkari attitude. Riding on the back of its overseas acquisitions and with a more astute top management in place, the company slowly pulled itself together. From a single-country, single-business entity in 2002 with nearly 90 per cent of its revenues coming from wholesale ILD operations, it has today grown to a global wholesale voice operator and provider of ILD, enterprise data and internet services in India and internationally.

In record time, Tata Communications has managed to storm the managed services space and emerge in a leadership position. "This is quite impressive coNsidering that the change in business model has been a major hurdle for all global telecom majors. And coming from  the stable of a state-run operator, this should have been a formidable task, but the team has pulled together beautifully," says Sridhar Pai, CEO, Tonse Telecom.

The gaps
Though it has come a long way, market analysts are not sure if the company can hold its own in the face of cut-throat competition. Several operators, domestic as well as international, have obtained long distance licences and are in the process of rolling out services. This will eventually impact Tata Communications' revenues.

As it is, the company's net profits have been slipping, though its overall financial performance for fiscal year 2008-09 has not been too bad given that it was a rough year for most operators. Consolidated revenues grew by 20.1 per cent year-on-year to stand at Rs 99.63 billion, driven by an expansion in the volume of traffic handled by the company during the year. Profit after interest, however, declined by 2.4 per cent to stand at Rs 1.56 billion on account of a sharp increase in interest costs. Analysts say it could have been worse, but the Rs 3.62 billion earned as profit on the sale of its investment in Tata Teleservices to NTT DoCoMo shored up the net profit.

The financial results for the quarter ended June 2009 show a sharp decline. Sales dropped by 3.2 per cent over the previous year to register Rs 8.43 billion in revenue, while net income dropped by a whopping 67 per cent to Rs 320 million.

The enterprise and carrier data segment, which had been growing over the preceding four quarters, declined during April-June 2009 due to the global economic slowdown. Furthermore, as a senior analyst from Edelweiss notes, "The company has been implementing a sizeable capex programme which might have resulted in the company's weak quarterly performance." Going forward, the company can expect the situation in the bandwidth business to get tougher due to a significant capacity glut in the trans-Atlantic ocean region, resulting in increased competition and falling margins. The upcoming WiMax spectrum auctions will, moreover, mean that Tata Communications' balance sheet will remain stretched in 2009-10. As a result of all these factors, market experts do not expect the company to turn in positive cash flows before 2010-11.

Analysts caution that Tata Communications needs to keep a close watch on its growing debt levels. During 2008-09, its debt almost doubled from Rs 33.46 billion at the start of the year to Rs 66.65 billion as it borrowed aggressively to finance various projects and fund the capital requirements of its subsidiaries. As a 26 per cent goverNment-owned entity, the company may need to explore new funding avenues to keep its $2 billion capital expenditure programme on track as there's not much room to increase its debt exposure.

On a more optimistic note, Dr Mahesh Uppal, analyst and director, ComFirst, says, "I am not that worried. The company has the backing of the country's major business house. So, whatever the problems are, they can only be temporary. Surely the downturn would have hit the company to some extent, but I don't think Tata's competitors will find themselves in a particularly more advantageous position."

According to Uppal, "The real issues for the company are the competitive nature of the industry and the fact that it still has a monopolistic mindset. This greatly reduces its advantages. The company is not as nimble-footed as some of its competitors. It needs to look at its mediumto long-term sustenance and should reinvent itself, abandoning practices that secure only its short-term interests. This is the real challenge."

The company is also disadvantaged by the fact that it has no direct access to endcustomers in the voice business and is largely dependent on mobile and basic service providers to route their long distance calls. Moreover, international players that used to previously ride on Tata Communications' network no longer need to do so as they have their own licences. The company's only hope is that these new licensees will need infrastructure, and while they could invest in their own infrastructure, using that of Tata Communications will help them optimise costs.

In the coming years, the company is likely to feel the increasing heat of competition. New ILD licensees like Bharat SaNchar Nigam Limited and Vodafone are establishing direct connectivity with foreign carriers. This is likely to impact Tata Communications' business adversely, particularly in the Gulf region. Further, the Department of Telecommunications has permitted the resale of IPLC services, which will further intensify the competition.

Still, the company is upbeat. If there is a challenge today it is for telecom companies to deliver value to customers at lower price points and still remain profitable. "We believe that our investments in infrastructure and managed services will actually help deliver this to our customers. Our offerings, like Ethernet, telepresence and hosted coNtact centres, provide customers greater efficiency at lower cost structures than traditional alternatives," points out Srinivasa Addepalli, senior vice-president, corporate strategy, Tata Communications.

Another area that the company needs to work on is branding. Analysts feel that its marketing and brand awareness is not much different from the days when it used to be a state-owned company. It can illafford to be so far removed from consumer brand awareness, especially when it takes on retail-centric businesses such as Wi-Fi hotspots. According to Pai, "Tata Communications is struggling to find its identity. Is it a B2B carrier (selling to enterprises/MNCs and global carriers) or a retail brand selling to end-consumers, SMEs, small and large contact centres?"

Future outlook
Aiming for an EBITDA margin of at least 20 per cent by 2012, the focus will increasingly be on data services, which will translate into reduced importance of voice in the total revenues. Already the data segment accounts for about 30 per cent of Tata Communications' total revenue. This will help improve the company's operating profit margin.

Company officials feel that the key opportunity lies in the surge in global demand for bandwidth and internet coNnectivity. This will give Tata Communications the opportunity to leverage its TGN and IP networks.

Tata Communications is also aggressively pursuing its global ambitions. It has its sights trained on telecom outsourcing management for service players in emerging markets like Africa and the Middle East.

"We will continue to build on our global footprint. We are strengthening our sales and delivery capabilities in developed market regions in North America and western Europe, while expanding our presence in the emerging market regions of Asia, the Middle East and Africa. Neotel, our joint venture (JV) in South Africa, and China Enterprise CommuNications, our proposed JV in China, will play major roles in our emerging markets growth plans," says Addepalli.

Overall, there is no denying that this Tata group company has been one of the frontrunners in the industry and enjoys strong relations with telecom carriers and operators worldwide. Having set a target of at least a 15 per cent compounded annual growth rate in organic sales during 2007-12, the company has its work cut out to get there.