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Walking On The Telecom Altar

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VoicenData Bureau
New Update

Investment is the buzzword in the telecom industry this fall. And it comes as

no surprise considering the fact that almost all big service providers have

positioned themselves directly in the eye of a massive evolutionary storm

spurred by the advent of new technologies. The Tata Group is no exception, it

has recently announced $26 bn investment across the domains they operate in.

Interestingly, investment in their telecom services has been at a very slow

pace. The group would invest over $2 bn this year in its telecom services. But

what is its significance for the Tatas?

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Tatas have been quite laidback, compared to thier peers when it comes to

telecom. But recently with VSNL's global acquisitions and TTSL and TTML's

increased national footprint, telecom has become the key of their overall growth

strategy.

Telephony Transformation



The telecom industry has seen steep price falls since deregulation. It is

also undergoing a profound technological shift. Keeping this in mind, TTSL's

total investment in telecom domain would be Rs 15,000 crore by the year 2007. It

has already spent Rs 8,000 crore and the remaining would be spent in another one

year in expanding capacity and network.  It

is targeting 18 mn customers by this fiscal to capture 20% market share. The

focus is to consolidate its position and provide coverage across length and

breadth of the country. It will add 1,500 new towns this year.

TTSL will roll out services in new towns, especially in second and third tier

towns with a focus on rural penetration, targeting first time users, introducing

variety of handsets, products and services for various segments.

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The new focus areas would be semi-urban and rural areas, as consumption

trends and income growth of the populace in these areas show a higher splurge

compared to their urban counterparts.

Similarly, TTML too is targeting around three million customers by end of

this fiscal, an addition of another million subscribers. At present, it offers

services in 171 towns and would add 45 new towns this year. It invested around

Rs 500 crore last year and would invest same amount this year as well.

TTSL and TTML have put themselves on the transformation stage. There have

been three areas of transformation for them. First, there's been

transformation of the leadership of the company. Daryl Green and Charles Antony

have been appointed as new chief executives to turn around the fortunes of TTSL

and TTML, respectively. Second, there has been clear transformation in the

balance sheets of the companies. TTSL generated revenue of Rs 2,575 crore in FY

2005-06 as against Rs 1,347 crore in FY 2004-05, a growth of 91% while TTML made

significant progress on its turnaround plan. The company grew by 31.2% and

clocked revenue of Rs 1,097 crore, as against Rs 836 crore last year. The

company posted a net loss of Rs 493 crore, down 6.63 %, as against Rs 528 crore

last year. The good financial performance gave both the companies to do the

third thing-transform business models.

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But TTSL and TTML are caught between a rock and a hard place. They are slowly

becoming boring utilities with few real growth prospects yet urge companies not

to do anything too radical, such as a big acquisition, that might make it a

riskier investment proposition.

The core market of both the companies is not getting any easier. It is facing

increasing competition in the domestic fixed line and wireless business from

state owned MTNL and other private players like Bharti and Reliance.

The important thing to understand about investing in telecom is that it can

be a miler coaster ride. Sometimes, total returns are way up; other times,

they're in the tank. In this new world, the question for carriers is whether

the services they have traditionally offered will cease to pack a margin punch

and whether, if so, they can move into services that do have real clout. Hence,

it becomes imperative for both the companies to focus on its core strengths and

view the long-term strategy to avoid debacle, which global operators have been

through in the past.

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New Bandwidth Baron



VSNL continues to roll the dice, as it has now completely changed its focus

from being a mere domestic operator to become a global giant. The company bets

that global markets will be a smooth sail than the Indian market has lately

been. It expects that it is a multinational in making and next year onwards,

major chunk of its revenue would come from international market.

The company is riding high on its global acquisitions-Tyco and Teleglobe.

These acquisitions have given company a new lease of life with bandwidth

capacity in abundance. It now plans to invest around Rs 2,700 crore in two

terabit cable systems. The first one is a trans-continental cable system linking

India-Middle East- Europe, which is expected to be completed by mid -2008. The

second one is an intra Asia cable system linking Singapore, Hong Kong and Japan,

expected to be ready by the end of 2007. These systems will link with other

existing and proposed networks in the region and also interconnect with VSNL's

global network. The cables will be built in partnership with other major

carriers in the region.

VSNL has already invested nearly Rs 1,600 crore in the last 30 months in

submarine cables, including the Tata Indicom Cable, TGN acquisition and other

cable investments. VSNL has been upgrading its networks to meet the increasing

demand, and now plans to upgrade the TGN-Pacific network to 1 terabit (1000 Gbps)

from the present capacity of 640 Gbps.

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Tata's

Telecom Investment in FY 2006-2007
TTSL

Rs 7,000 crore
TTML       Rs

500 crore
VSNL       Rs 2,700 crore


Total

Rs 10,200 crore

As any growing organization should have, VSNL also has an ongoing investment

plan to support and grow its various businesses. The company is also investing

substantially in building out its broadband network in all major cities in

India.

As this suggests, the investment that VSNL has made in its global network is

focused on infrastructure rather than services. There is a glut of bandwidth to

lease or acquire under appropriate market circumstances. The precipitous price

falls in the bandwidth market mean that it is cheaper for VSNL to lease capacity

rather than bother about buying and operating a network even if it that network

were to be acquired at zero cost. Price stability is not looking very realistic

in the market than it was couple of years back. Customers are willing to pay a

price for those things that are unique.

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Hence, though the coming days look glorious relying on excess bandwidth could

turn out too costly for VSNL. It needs to keep an eye on global bandwidth prices

and also on players like Bharti and Reliance, as competition would be cut throat

in the coming days.

All the three telecom companies of Tata Group-TTSL, TTML and VSNL have

closely aligned their business operations, strategies, and share certain

infrastructure, which include billing platform and intelligent network. All the

three companies benefits from the goodwill associated with Tata Indicom brand,

which is used for marketing its products and services. The company's

infrastructure sharing agreement jointly negotiates with equipment suppliers and

service providers and benefit from economies of scale. 

The investments made by Tata Group in their telecom venture are in line with

what global operators did in past. But it's always returns on these

investments that makes all the difference. Operators like BT suffered and were

in huge debt couple of years back due to lack of right business model. Therefore

strategic investments are the need of the hour. If Tata's strategy of

investment is wrong, it represents a loss of billions of dollars, perhaps more

than that. If it is right, it is the future of this company for the next

century.

Rahul Gupta



rahulg@cybermedia.co.in

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