From having to completely reinvent itself in terms of services and product portfolio to dealing with regulatory issues, Tata Communications has had to face several challenges as it struggled to turn the business profitable in a highly competitive market.

Vinod Kumar, Managing Director and Group CEO of Tata Communications, says the worst days are behind and the company is on its way to consistent growth. In an interview with Business Line, Kumar outlines his game plan in driving the company’s growth strategy. Edited excerpts:

How do you assess your performance over the last three years? Would you have done anything differently?

We are seeing the efforts of what we have been doing for some time. The transformation journey is now in a period where we are starting to see results. We are nowhere near the peak yet. There was a period when internally we knew what we were doing, but externally everyone would ask us for proof points and numbers. We are in the early stage of those proof points being visible. So it’s a gratifying phase that we are in.

What has been the broad strategy in this transformational journey?

It’s about cost and productivity, it’s about innovation culture, it’s about brand and positioning and it’s about talent and building new competencies. We have been doing all four of these with very clear deliverables over the last three years. Last year, we did some innovative programmes on cost optimisation. Our target was to take out $100 million of our cost, but without reducing headcount.

On the innovation side, we ran a programme to identify business opportunities by creating new business ideas that will add to the top line growth in the future. An idea that can turn into a $200-million business in 10 years. This kindles entrepreneurship within the organisation. We will run this every six months with the objective of having five-six ideas every year.

Your voice business has been under pressure with the advent of voice over IP and telcos moving into national long distance segments. How do you plan to address this?

Voice is important, but my business is not hinged on it any more. We have moved on to mobility, cloud, connectivity solutions. The way I see it, our foundational business should be able to generate 4-5 per cent of our growth, our VPN, collaboration, data centres on top of that giving us 8-10 per cent growth.

Then I look at what are the businesses we can create that can take us to 15 per cent growth a year, then I look at what are the big bets or trial balloons that can get us 15-20 per cent growth with disruptive technologies.

Is data service compensating for any loss in revenue from voice business?

Overall business grew 9 per cent if you take out exchange rate variance. Our dependence on data has grown and within data, our managed network services and collaboration account for 60 per cent of our EBITDA, compared to earlier when almost all of it came from selling lease line connections. But at the same time, I should add that our traditional business of voice and basic data network is important because without it, we will not be able to offer services such as Virtual Private Network.

Critics say that Tatas have not lived up to its potential in turning around the company. How do you respond?

You have to look at what we started with. In 2002, this company had five international gateways and one customer BSNL. Now, we are the only player from emerging markets that’s there on Gartner’s leadership category. We are there with players who have been in the business for over three decades. Isn’t that an accomplishment that’s worth tipping your hat to?

Some analysts say you have not been able to give quicker returns to shareholders. And whatever profits you are showing, it’s primarily due to asset stripping and not due to exceptional performance in business. Please comment.

About $30-million worth of land sale in Chennai is not asset stripping. I would not call sale of Neotel asset stripping either because it is a strategic move that strengthens the balance sheet leading to shareholder return. Keep in kind that this company hasn’t had equity put in since it went public. Naturally, given our starting point in 2002, the business had to transform itself and we had to make significant investments worth $3 billion of capital expenditure and $1 billion of operational expenditure during that period to affect that transformation from a one product domestic company. Today, we serve 1,600 service providers around the world, 6,000 enterprise customers, diverse product portfolio of voice, data, mobility, IP services, biggest infrastructure of any cross-border telco in the world, all of that required investment and we had no choice but to borrow.

That brings me to your debt position which has been another concern area. How do you plan to manage it?

Our debt to EBITDA ratio for our core business, (non-Neotel) is about 3.2. Go look at other telcos and see their debt to EBITDA ratio. The scale of our investments are beginning to translate into growth, in other words, our cost base doesn’t have to increase as our top line is increasing and you will see that effect continuing in the coming quarters. Yes, we had to go through a period where returns to our shareholders were low but now the performance and the movement of the shares reflect markets’ views.

You have had a tough time raising equity due to regulatory hurdles. Do you think it’s time the Government sheds its stake in the company?

I can’t give an opinion on what the Government should do. From an operational stand point, they have been very supportive. But we wish that along the way we had the option to raise equity as that would have created a different P&L picture. But that’s water under the bridge. We have gone through that period when everyone doubted us, but we have stuck to our guns and executed our strategy. We now generate enough cash flows not only to fund our own capital expenditure, but we would soon start retiring some debt as we go along. The sword hanging over our head on equity from a company perspective is not as much. Still, we would like equity to come into the business because then we can step on the gas.

Would you look at debt refinance or asset sale like what you did with Neotel?

Neotel exit is more strategic because we would have had to invest a lot of money if we stayed invested. Our cost of borrowing is 4.25 per cent which is very good compared to 15-18 months ago when it was 7-8 percent. We have had no problem servicing our debt. There is no need to sell any assets to retire debt.

Are you looking at unlocking value as you spin off some of your business into subsidiaries such as the data centre business?

In the near term, it is more of an organisational design strategy because we believe in narrow and deep. When you have relative low marketing share in an area, our current strategy is to create dedicated teams to work on that. Every time we have done that it has paid off. Over time maybe this can become large enough to be stand alone entities and maybe we will bring partners or monetise in some way to bring even faster growth.

There is an impression that at the Group level, the Tatas are keen to sell off the telecom ventures, including Tata Comm. Is that correct?

The signals I get are to innovate, create disruptive models, grow the business and think medium to long term. No stakeholder is telling me to manage the business for short term. We are making significant investments on future services. I wouldn’t be doing that if I was trying to sell this business.

Would you stay invested in your operations in Sri Lanka and Nepal?

These are small operations but they give us traffic. We look at whether they are adding to our overall portfolio and right now they are.

What kind of headwinds do you see going forward?

I see very little headwinds that’s going to push as back. But there are things that can temper our growth. For example, global economic growth is something we have to watch out for. The other thing is how do you keep innovating your service portfolio and adjust super fast to keep pace with the winds.

Was your partnership with Formula 1 done to deal with brand perception?

I won't say there is any stigma being an Indian company. Tata brand name is known among large MNCs that we target. But there was no intuitive association with global network services and Tata. So we have had to build that association in people's minds. So the Formula 1 was a big step in that direction. It's helped us a lot. But we can't stop there. One of my big areas of focus is to see how we can fully exploit what we have built.

What will be your focus in the next one year?

Financially, our past investment will sweat harder. We will continue our growth momentum.

Any acquisitions that you are looking at?

That is not a priority. There’s enough on our plate. There will come a time when we may have to do acquisition but nothing as of now.

We now generate enough cash flows not only to fund our own capital expenditure but we would soon start retiring some debt as we go along.

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