Tata Docomo Marketing Strategy

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					India Equity Report | Company Update | Telecom - Services Provider




Tata Teleservices (M) Ltd.                                           ` 23                   Gateway to Prosperity


DOesn’t COst MOre                                                    Buy                       August 27, 2010


Company Background
                                                                                               Sachin Gandhi
Tata Teleservices Maharashtra Limited (TTML) spearheads the Tata group's
                                                                                             sg@indiratrade.com
presence in the telephony sector in the telecom circles of Maharashtra and
Goa including Mumbai. The ISO 9001:2000 certified company provides tele-                         Arpit Jain
phony services including mobile, fixed wireless phones (FWP), public tele-                   aj@indiratrade.com
phone booths and wireline services. Broadband data network and application
services include leased lines, DSL, Wi-Fi, ethernet, managed gateway ser-          Info Codes
vices and web conferencing services. The Company holds two unified access          Reuters                 TTML.BO
(basic+cellular) services licences (UASL), one for Mumbai Metro and the other      Bloomberg               TTLS@IN
for the rest of Maharashtra and Goa. It has deployed the latest 3G 1X CDMA         NSE                     TTML
technology in Maharashtra to offer wireless communication services like mo-        BSE                     532371
bile and fixed wireless phones.
Investment Rationale                                                               Market Data
   Large Customer Base                                                             52 Wk Range (`)         : 37 / 19
   TTML commenced landline operations in 1998 and today has the largest            Shares in Issue (mn) : 1897.2
   wireline base in Mumbai & Maharashtra amongst all private operators, with       Mkt. Cap (` bn)         : 43.73
   over 600,000 subscribers, and with over 50% market share. It commenced          BSE 2 Wk Avg Vol        : 1240000
   full mobility wireless services on the CDMA-1X platform in 2004-5, and has
   over 11 million wireless subscribers today, with over 16.9% market share. It
                                                                                   Share Holding Pattern (%)
   is also a market leader in wireless data cards, with its pioneering Plug2Surf
                                                                                   Promoters               : 77.72
   1-X data cards and its recent launch of mobile broadband services with Tata
                                                                                   DIIs                    :   0.98
   Photon+.
                                                                                   FIIs                    :   0.80
   No Congestion
                                                                                   Others                  : 20.50
   TTML’s network has been rated as the only congestion-free network across
   Maharashtra and Mumbai in 5 consecutive reports issued by the Telecom
   Regulatory Authority of India (TRAI). TTML has also recently been rated the     Investment Theme
   No.1 wireless telecom service provider in terms of overall customer satisfac-   TTML has the largest customer base in
   tion across Mumbai and Maharashtra in independent studies commissioned          wirelines and is growing strong in the
   by the Telecom Regulatory Authority of India.                                   Wireless. Its a really low priced stock
   Innovations at the Front                                                        than its competitors and even amongst
   The Company has been responsible for a number of innovations over the           other peers in the TATA group. Change
   years, including its market introductions last year of 1 GB memory USB          is however going to set in and the
   wireless modems, the world’s first CDMA AM/FM Radio Phone, the Ganesha-         scenario should receover a lot with 3G
   motif Sumukha phone, the launch of the Novatium sub-$100 PC in Mumbai,          and MNP to set in. We feel TTML should
   and, for the first time, a 100 Mbps to the home ethernet-based broadband        see some turnaround happening in the
   service called Power Launcher.                                                  year to come. With Brand image and
   Broadband Anytime... Anywhere                                                   Honesty at its background & with a full
   Leveraging its high quality buried fibre Next Generation Network extending      portfolio of products and services for
   over 1600 kms in Mumbai, TTML has announced its vision for Digital MumbaiTM     different categories of retail & enterprise
   – broadband anytime, anywhere, in Mumbai city.                                  consumers, and an excellent network
   Going along with a Japanese NTT                                                 backed by good customer care, TTML
   The Company has already rolled out its GSM services under the brand name        is well positioned to lead the market in
   TATA DOCOMO in Mumbai, Maharashtra and Goa as a Joint Venture with              the years ahead.
   NTT Docomo Inc Japan.                                                            Don’t let this go as a Missed Call
TTML
  Subscribers Growing
  TTML’s CDMA based mobile service has been operational for the past 5-6
  years, but the GSM service was launched with the Tata DoCoMo brand only in                      A 3G View
  August’2009. Since then TTML has been leading the subscriber additions              The 3G Auction is finally over and none
  chart. TTML’s revenue market share has also increased substantially over the       of the operators have gone for the All-
  last 3 quarters because the company managed to pull business from other            India license.
  operators on the back of first-mover advantage of the per second tariffs and a
  very strong Brand image. The growth from Tata DoCoMo launch was very well          A total of 7 operators have won li-
  supported by Tata Photon+ launch and the company has managed to lead the           censes of between 3 circles to 13
  Wireless Broadband segment in its circles of operations. TTML's subscriber         circles. All these 7 operators have sub-
  base rose 74% to 13.9 million in Q1 June 2010 over Q1 June 2009.                   stantial 2G operations in the circles
  DOCOMO Honesty will Pay Soon                                                       they have won.
  The launch of the per second plan by Tata DOCOMO has already shaken                TTSL has won licenses for 9 strategic
  most operator plans its launch forced all other operators to do the same, after    located circles. Infact many say TTSL
  which they started experiencing degrowth in Total Income. The Plan has             & Idea Cellular have been the most
  boosted the subscriber base significantly and may soon see a surge in postpay      clever 3G winners. They have left the
  with one more first introduced plan “The Free Airtime Rollover Plan”. The offer    Metros, but have bought the most im-
  is a unique one where potential and existing customers can roll over their         portant A-circles like Maharashtra &
  current unused free air time to next month! What makes this further compel-        Gujarat. They have also won the license
  ling is that Tata DOCOMO allows the roll over of free air time for a period of 6   for all the circles surrounding Delhi.
  months. The Free Air Time roll over plan is available under the most lucrative
                                                                                     This was a very clever move because
  20 options of their popular Diet 299 and Diet 499 plans In other words, the
                                                                                     as we all know that Delhi & Mumbai
  offer allows the customers to choose amongst different combinations that
                                                                                     are most densely populated Telecom
  suit their usage pattern, under each plan.
                                                                                     markets, but a lot of economic growth
  Maiden Profit Expected
                                                                                     is happening around these cities. That
  TTML’s Total Income has been rising pretty handsomely in the last 3 quar-
                                                                                     means circles like Maharashtra,
  ters. The rollout of GSM network did increase operating costs & put some
                                                                                     Punjab, Haryana, UP (W) & Rajasthan
  pressure on TTML’s EBITDA and in turn led to increase in its Net Loss. Be-
                                                                                     will see increasing economic activity
  cause of Tata DoCoMo’s launch in August’09, the increased operating costs
                                                                                     and hence will see surge in population
  pressure was most evident in the Q2 & Q3 of last fiscal. But the company
                                                                                     and increasing demand for Data & other
  continued to add revenue-generating subscribers at a healthy pace and the
                                                                                     Telecom services on the 3G platform.
  growth in incremental revenue has now started outpacing growth in incre-
  mental costs. This effect was clearly seen in Q4, when the company’s EBITDA        One thing to remember that these 3G
  shot up and the Net Loss dropped substantially. If this trend continues at the     licences are for a period of 20 years
  same pace, TTML may report its maiden quarterly Net Profit possibly in Q2          and hence the regions around the Metro
  of FY’2011.                                                                        cities will also become mini-metros
  Tele Pathy                                                                         themselves. And this is not too far into
  TTML offers CDMA-based as well as GSM based mobile services, EVDO-                 the future. It could be just 3-5 years
  based Wireless Broadband service, Landline service and Enterprise services         away.
  to subscribers in Mumbai & Maharashtra circles only. The rest of the country       Bharti Airtel, Vodafone & R-Com are
  is served by TTML’s parent company Tata Teleservices Ltd (TTSL). TTSL is           currently the largest Telecom operators
  currently an unlisted entity, but we may see some kind of reverse merger           in terms of Revenues and predictably
  happenings between TTSL & TTML very soon, i.e. the parent company could            they have shelled out the maximum
  merge into its subsidiary and will become a single PAN India Telecom player.       amount of money to buy their respec-
  This merger is something that may be inevitable and was in the waiting for         tive circles. All 3 have bought Mumbai
  quite some time. Now is the perfect time to get it done because things are         & Delhi licenses which were the most
  looking up for both TTSL and TTML post the successful launch of Tata DoCoMo        expensive circles. Apart from that
  and Tata Photon+ in several circles and successful 3G Auction in which TTSL        Vodafone has focussed on other
  & TTML have managed to win 9 crucial circles, including the important ones         Metros of Chennai & Kolkata and few
  of Maharashtra, Gujarat, Karnataka, etc. A unified identity will help the group    other A-category circles.
  in raising resources, sourcing of equipment, strategy & planning, marketing.

                                                              2
TTML
  China 3G Equipments welcome
  The growth from Tata DoCoMo launch was very well supported by Tata Pho-                    A 3G View (contd...)
  ton+ launch and the company has managed to lead the Wireless Broadband
                                                                                    But Bharti Airtel and RCom have added
  segment in its circles of operations. The ban on Chinese equipment had
                                                                                    a lot of B & C category circles like Bihar,
  halted further expansion of Photon+ for several months, but recent announce-
                                                                                    Assam, North-east and J & K. Aircel is
  ment related to this will come as a big relief. Availability of Chinese Telecom
                                                                                    another operator which has done some
  equipment is also crucial for 3G rollout because majority of the current equip-
                                                                                    clever moves. Aircel has focused purely
  ment, which is 3G-ready, is Chinese and upgrade would save Capex.
                                                                                    on Southern circles and Eastern region.
  Here Comes the U Turn
                                                                                    It has no 3G presence in Western as
  TTML revenue jumped 173.92% to ` 13.95 bn in Q1 June 2010 over Q1 June
                                                                                    well as Central India. Aircel has man-
  2009. It had underperformed the market over the past one month till 28 July
                                                                                    aged to bag highest number of Telecom
  2010, falling 5.95% as compared to the Sensex's return of 1.03%. It had
                                                                                    circles at 13 (alongwith Airtel), but has
  also underperformed market in the past quarter, sliding 7.97%.
                                                                                    paid just ` 65 bn because nearly half of
  3G Circles - Private - Operators Who’s where?
                                                                                    these circles are B & C Category circles.
    Name of Circle           Bid Rs. Cr       Operators
    Delhi                     3316.93         Vodafone, Bharti & R-Com              S-tel, which is the smallest amongst all
    Mumbai                    3247.07         Vodafone, Bharti & R-Com              the winners, has won 3G license for the
    Karnataka                 1579.91         Tata, Aircel & Bharti                 3 circles in which it is already present in
    Tamil Nadu                1464.94         Vodafone, Bharti & Aircel             with 2G services. Therefore S-tel has be-
    Andhra Pradesh            1373.14         Idea, Bharti & Aircel                 come a very good M & A target for larger
    Maharashtra               1257.82         Tata Idea & Vodafone                  companies like Vodafone & Tata
    Gujarat                   1076.06         Tata, Vodafone & Idea                 Teleservices because their circles don’t
    Kolkata                    544.26         Vodafone, Aircel & R-Com              overlap.
    Uttar Pradesh (W)          514.05         Bharti, Idea & Tata                   According to analysts biggest winners
    Uttar Pradesh (E)          364.57         Aircel, Idea & Vodafone               in this 3G auction are TTSL (including
    Punjab                     322.01         Idea, R-Com, Tata & Aircel            TTML) & Idea Cellular. They have got
    Rajasthan                  321.03         R-Com, Bharti & Tata                  most of the best circles after the 2 Metro
    Kerala                     321.48         Idea, Tata & Aircel                   circles and that too at a reasonable cost.
    Madhya Pradesh             258.36         Idea, R-Com & Tata
    Haryana                    222.58         Tata Idea & Vodafone
    Bihar                      203.46         S-Tel, Bharti, R-Com & Aircel
    West Bengal                123.63         Vodafone, Bharti, R-Com & Aircel
    Orissa                      96.98         S-Tel, R-Com & Aircel
    N.East                      42.30         Bharti, R-Com & Aircel                    Number Portability is the key
    Assam                       41.48         Bharti, R-Com & Aircel                The telecom regulator recently an-
    Himachal Pradesh            37.23         Bharti, Idea, R-Com & S-Tel           nounced mobile number portability
    J&K                         30.30         Idea, Aircel, R-Com & Bharti          (MNP) will be implemented nationwide
                                                                                    from October 31, ruling out any further
Key Financials
                                                                                    delay. The MNP is a service that allows
 Year Ended                             June 08          Mar 09          Mar 10     a mobile user to change his operator
 Revenue (` mn)                         18155.4         20686.1         22844.0     while retaining the number. MNP is an-
 Rev. growth (%)                           26.45           13.94           10.43    other chance that TTML would benefit.
 EBITDA (` mn)                           4907.5          6043.2         (2980.1)    Since TTML launched its GSM services
 Net profit (` mn)                      (1257.4)        (1596.0)        (2980.1)    late most of the top category subscrib-
                                                                                    ers who have already subscribed to some
 Shares outstanding (mn)                 1893.6          1897.2          1897.2
                                                                                    service would get a chance to jump in to
 EPS (`)                                    (0.7)           (0.8)           (1.6)
                                                                                    TTML thus increasing TTML’s average
 EPS growth (%)                          (61.32)           26.69           86.72
                                                                                    revenue per user.
 P/E (x)                                   (42.3)         (27.1)          (15.1)
 EV/ EBITDA                                113.0            75.8         (160.7)
 ROCE (%)                                  (8.85)        (12.18)         (29.32)
                                                              3
TTML


Financial Statements
       Income Statement                                                                              (` mn)
                Year end                     June 08    March 09         % Chg     March 10        % Chg
                Total Sales                  17838.4        20410.8       14.42      22138.3         8.46
                Other Income                   317.0          275.3      (13.15)       705.7       156.34
                Change in Stocks                 0.0           (2.1)           -         43.9    (2190.48)
                Raw Material Con.                0.0            0.0            -          0.0            -
                Employee Exp.                  938.6         1136.8       21.12       1464.4        28.82
                Indirect Taxes                 123.3          119.5       (3.08)       137.9        15.40
                Other Exp.                   12186.0        13384.5        9.84      24265.7        81.30
                Operating Exp.               13247.9        14642.9       10.53      25824.1        76.36
                Operating Profit              4590.5         5767.9       25.65      (3685.8)     (163.90)
                Total Interest                1762.1         3143.1       78.37           0.0     (100.00)
                Gross Profit                  3145.4         2900.1       (7.80)     (2980.1)     (202.76)
                Net Dep.                      4393.5         4484.0        2.06           0.0     (100.00)
                Total Taxation                   9.3           12.1       30.11           0.0     (100.00)
                Net Profit/Loss              (1257.4)       (1596.0)      26.93      (2980.1)       86.72


       4 Years Balance Sheet                                                                         (` mn)
                Balance Sheet                            June 07       June 08        Mar 09       Mar 10
                              SOURCES OF FUNDS              17115.3     20869.5      21901.3      23656.2
                Equity Share capital                        18095.0     18935.6      18971.9      18972.0
                Share Application Money                         0.0          0.0          0.0          0.0
                Preference Share Capital                        0.0          0.0          0.0          0.0
                Reserves & Surplus                      (21307.1)      (20941.5)    (22655.2)    (25635.3)
                Loan Funds                                  17001.3     17587.6      14823.0      17229.5
                Unsecured Loans                              3326.1      5287.8      10761.6      13090.0
                                   USES OF FUNDS            17115.3     20869.5      21901.3      23656.2
                Gross Block                                 40535.2     45270.1      45531.9      55741.4
                Less : Revaluation Reserves                     0.0          0.0          0.0          0.0
                Less : Accumulated Depreciation             18268.5     16635.8      16535.5      20703.2
                Net Block                                   22266.7     28634.3      28996.4      35038.2
                Capital Work in Progress                     2031.7      1250.0       2180.7       1969.1
                Investments                                     0.0          0.0       750.0       1200.0
                Current Assets                              4301.40     4554.70      5721.90      5971.70
                Less : Current Liabilities              11484.50       13569.50     15747.70     20522.80
                Total Net Current Assets                (7183.10)      (9014.80)   (10025.80)   (14551.10)
                Misc. Expenses not written                     0.00        0.00          0.00        0.00
                                               NOTE
                Bk Val Unquoted Investments                     0.0          0.0       750.0       1200.0
                Mkt Val. Quoted Investments                     0.0          0.0          0.0          0.0
                Contingent Liabilities                      13562.1     11265.9      11933.7       9118.7
                Dividend (%)                                      0           0            0            0



                                                        4
TTML

        Quarterly Income Sheets                                                                                 (` mn)
                    Quarter Ended                               Sep 09         Dec 09         Mar 10         June 10
                    Net Sales                                    5382.6        5937.0          6078.6         5600.9
                    Cost Of Sales                                4339.2        4771.4          4674.6         6224.5
                    Operating Profit                             1043.4        1165.6          1404.0         (623.6)
                    Recurring Income                               68.2           12.1          100.3         8380.5
                    Adjusted PBDIT                               1111.6        1177.7          1504.3         7756.9
                    Financial Expenses                            956.7         844.3           631.5           774.8
                    Depreciation                                 1238.2        1341.0          1531.4         1403.3
                    Other Write Offs                                0.0            0.0             0.0            0.0
                    Adjusted PBT                                (1083.3)      (1007.6)         (658.6)         5578.8
                    Tax Charges                                     0.0            0.0             0.0            0.0
                    Adjusted PAT                                (1083.3)      (1007.6)         (658.6)         5578.8
                    Non Recurring Items                             3.5            0.0           (3.5)            0.0
                    Other Non Cash Adjust                           0.0            0.0             0.0            0.0
                    Net Profit                                  (1079.8)      (1007.6)         (662.1)         5578.8


   52 Week Index Relative Percentage Appreciation




                                                   TTML vs SENSEX

Risk Associated
  Missed Calls from Competitors
New players and current player offers may seriously dent the expansion plans of established players. All the players should
think out of the box and come up with ideas. Next thing would be consolidation in the industry which is already happening
in the telecom tower business.
  Regulation & Compliance
Regulation and Compliance has always been a key factor in the India Telecom Industry, History shows that it has turned
many a players from the sunny side to the dark side with just one verdict. Things like lack of spectrum with increasing
teledensity are other issues.
  Expansion Issues
This is the biggest criteria for smaller players. While there are no smaller players, as the new players are backed up by
some heavy-weights, expansion is still tough. This is where sharing or owning infrastructure comes into picture.
  Strategic Partnerships
Lured enough by the cheap call SMS strategy & now with advent of 3G strategic partnerships with good VAS content would
be a major issue with revenues from VAS coming up fast and strong anyone who leaves the queue will wait long.

                                                            5
TTML

  In a Nutshell
  Looking at the recent developments in TTML and the overall sector growth expected in telecom, there is only one thing
  which is noticed, TTML currently is one of the most low priced scrip among its peers and among others in the TATA
  group. While all its current products & services are nicely set, and while most of its services have received applauds
  like Tata Indicom won the "Most Congestion Free Network" for 5 consecutive years. Tata Docomo won the "Best
  Operator in Emerging Market" plus it also has a brand image of being in the TATA Group, things did not ever in the past
  seem to go the company's way. The announcement of 3G and MNP could however change the whole scenario. We
  look forward for some concrete transitions coming in the company in the year to come which could result in a good
  turnaround for TTML.




  Indira Group Offices
   Registered Office                       : Singh House, 3rd Floor, 23/25 Ambalal Doshi Marg, Fort, Mumbai 400023
                                              Tel : +91-22-22656812                    Fax : +91-22-22656985                     Email : im@indiratrade.com

   Administrative Office                   : Ramavat House, E-15 Saket Nagar, Indore 452018
                                              Tel : +91-731-2566361                    Fax : +91-731-2562117                     Email : ii@indiratrade.com

   Institutional Dealing Unit : Africa House, 3rd Floor, 5 Topiwala Lane, Lamington Road, Mumbai 400007
                                              Tel : +91-22-30080675                    Fax : +91-22-23870767                     Email : ie@indiratrade.com


  Rating Interpretation
   Buy        : Expected to appreciate 20% or more over 12-months                         Reduce : Expected to depreciate up to 10% over 12-months
   Accumulate : Expected to appreciate up to 20% over 12-months                           Sell       : Expected to depreciate 10% or more over 12-months
   Trade Buy : Expected to appreciate more than 10% over 45-days                          Trade Sell : Expected to depreciate more than 10% over 45-days


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