The Hindu Business Line : Tata Telecom: Pare exposures

SHAREHOLDERS of Tata Telecom may consider cutting exposures in the stock on every uptrend linked with the broad markets. Fresh exposures may also be avoided at the current price levels. The stock has run-up sharply since the announcement of the strong second quarter earnings performance.

At the current market price, the stock trades at a price-earnings multiple of about 14 times its trailing 12-month per share earnings for 2003-04. It appears that the Tata Telecom valuation has run ahead of its fundamentals and the scope for capital appreciation from these levels may be limited.

Tata Telecom's fundamentals continue to remain on a strong footing. The robust earnings performance for 2003-04 second quarter, strong growth potential for its core focus segments such as converged and call centre solutions and equal joint-venture equity-cum-technical partner in Avaya Inc. US, inspire confidence. However, the challenge of managing slow expansion in its portfolio of offerings, risk of an outsourcing backlash affecting its contact-centre operations and intense competition from global telecom majors, may cloud its growth prospects to some extent.

Solid second quarter

In the latest quarter ended September 30, Tata Telecom has turned in a solid performance. The salient features are:

On a sequential basis (quarter-on-quarter) basis, the company recorded a 26 per cent growth in revenues to Rs 93 crore. However, revenues were lower than Rs 107.8 crore recorded in 2002-03 fourth quarter (its best quarter in 2002-03).

The operating profit margins had improved by 4.8 percentage points to 16.16 per cent on a sequential basis. This was achieved through better control over consumption of raw materials, staff and training expenses and other expenditure. The OPMs in the latest quarter were also higher than 13.3 per cent registered in 2002-03 fourth quarter.

It notched up an impressive 90 per cent growth in post-tax earnings to Rs 8.57 crore on a sequential basis. This was even higher than the post-tax earnings of Rs 8.32 crore recorded in 2002-03 fourth quarter.

Expanding portfolio

Over the past three years, Tata Telecom has successfully reduced its dependence on pure voice solutions to its enterprise customers. Instead, it has shifted the focus on its portfolio of offerings from enterprise voice to converged (voice, data and video) solutions (including IP Telephony and teleconferencing) and contact centre/CRM solutions for business process outsourcing companies.

Apart from technical partnership with the US-based Avaya Inc., it has entered into partnerships with Polycom (for video conferencing), Isarel-based NICE Systems (for customer responsiveness) and LG (for EPABX voice products).

It also has alliances with systems integrators such IBM, HP and Servion for converged and networking solutions. Tata Telecom is a leading player in its existing portfolio of offerings, holds a sizeable market share in each of these offerings and has built up a strong reference set of customers.

Each of these offerings also have a strong potential for growth. And the company is well positioned to capitalise on the boom in BPO and enhanced spending in domestic infrastructure.

Risks and concerns

Despite the burgeoning demand for its range of offerings, the company is exposed to t risks such as:

The converged solutions segment may involve a slow take-off and require considerable customer education to expand the domestic market. If customer resistance to new solutions builds up, it may affect the growth rates of Tata Telecom in the coming years.

The demand from contact-centre solutions segment may suffer if the fears of an outsourcing backlash from the US gathers momentum as it enters the election year. If this happens, it may affect the investments in telecom and IT infrastructure by the BPO business.

As offshore outsourcing becomes more strategic in the coming years and multinationals across the US and Europe set up/expand their presence in India, the competition among global enterprise communication solution providers will become more intense.

Players such as Nortel, Siemens, Cisco and Alcatel are likely to step up their presence in different communication offerings and put pressure on the margins of Tata Telecom.

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