Tata Tele closure may cost the group dear

Can look at options including sale of tower stake, fibre & enterprise businesses to partly cover ~28k-cr loan payback

With the curtains likely to be drawn on Tata Teleservices soon, the group is staring at some serious challenges — paying debt of over ~28,000 crore to banks, deciding the fate of over 6,000 employees and battling the realisation that despite investing over ~50,000 crore (based on estimates) through the years, it would be able to recover little.

According to reports, Tata Teleservices is likely to wind down operations in phases, and has had discussions with the government. And, if a letter by former Tata group chairman Cyrus Mistry is to be believed, the fire sale or shutdown would cost the group $4-5 billion, which is in addition to the $1.2-billion paid to DoCoMo after it pulled out of India.

Analysts say though Mistry’s numbers might be on the higher side, the Tatas would have to take a substantial haircut until they go for bankruptcy proceedings — an option they had looked at earlier but did not pursue. The firm posted a huge spike in losses, ~4,617 crore in 2016-17 up from ~2,023 crore in the previous financial year, and its turnover came down from ~10, 588 crore in 2015-16 to ~9,419 crore in 2016-17, sealing its future further.

In an interview to CNBC-TV18, to be telecast on Monday, Tata Sons Chairman N Chandrasekaran has said: “The area where we have a big issue is telecom. Tata Teleservices is really in bad shape. It’s very very difficult, close to impossible, for us to recover. I’m at a point where I need to make a call. I will figure out a way this financial year. I don’t want to put good money after bad money. I will have to take a tough call and I will.”

Analysts argue that even if Tata Teleservices gives their entire spectrum back to the government (which means they won’t get paid), they could recover around half of the debt through sale of other assets.

They could also transfer these assets to group company Tata Communications, as they fit in well with their area of operation. Considering the firm forked out $1.2 billion to DoCoMo to settle the dispute and buy out their 21.63 per cent stake in Tata Teleservices, analysts say there is no reason to believe that they cannot take a write-down.

The way the company bought spectrum might not fetch them much money. A report by Bank of AmericaMerrill Lynch points out that of the 91.6 MHz of pan-India spectrum it owns in the 1800-MHz, a mere 14.8 Mhz is liberalised (can be used for 2g, 3g or 4G). Converting the rest — which the firm received administratively from the government — would cost over $1.7 billion, making it unattractive. So, giving it back to the government could be the firm’s only option.

Tata Teleservices also has spectrum in the 800-MHz band in most circles that can be used for 4G. But there are two problems — many of them are expiring in a few years, and with 2.5 Mhz per circle it is not enough to offer 4G services that requires 5 Mhz.

The company, of course, can make money by selling its remaining 32 per cent stake in its tower business, ATC Infrastructure (formerly Viom Networks). Last year, it had sold 22 per cent to ATC at a valuation of ~21,000 crore, and, based on the same numbers, it could get another ~6,700 crore.

It also has a strong enterprise business— which controls over 30 per cent of the ~22,000-crore enterprise market, and has been growing at 30 per cent annually, compared to the industry average of eight per cent. This was one reason why Bharti Airtel was interested in the business. The firm could also make money from the over 125,000 kms of optical fibre it has across the country. Analysts say this could fetch the firm ~5,000-7,000 crore.

It also has the leeway of shutting operations in circles where it has low market share and concentrate on the ones were it has a substantial presence such as in Mumbai (4.2 million), Karnataka (5.5 million), Maharasthra (4.2 million) and Madhya Pradesh (3.7 million).

So, why did the Tatas fail to make a dent in the telecom sweepstakes? A key reason is that they bet on the wrong technology in the initial, crucial years, giving players like Airtel a big head start. They also made the mistake of getting out of GSM completely.

While, initially, they hedged their bets by putting one foot in GSMand the other in CDMA technology, in 2006 they made the fateful choice of moving out of GSM altogether. The Tatas walked out of their joint venture with the Aditya Birla Group, which offered GSM services (they were the fifthlargest player), by selling their 48.12 per cent stake to their estranged partners (previously the two had bought AT&T’s stake, who was the third partner).

“Had they continued with the JV and resolved their issues, they would have been a force to reckon with in the GSM space today, and perhaps part of one of the top-three players. They could even have been part of Idea,” says a senior executive of a competing telco.

However, they soon realised their mistake — globally, CDMA was receding and GSM was marching ahead. In 2008, when the Centre allowed “dual technology” (CDMA players would also get GSM spectrum without a separate licence), Tata Teleservices returned into the GSM fold by picking up spectrum. This time, it roped in Japanese giant DoCoMo as its JV partner.

Tatas were not the only ones who had initially bet on CDMA and then moved to GSM. Mukesh Ambani, who at the time was overseeing the undivided Ambani telecom business, followed the same strategy, hoping that the data revolution was all ready to come and CDMA was more efficient, cost-effective. But it did not work for them as well. And, just like the Tatas, Anil Ambani, who got the telecom business after the brothers split, realised that it had no choice but to shift toGSM.

To be fair, in its second coming, Tata Teleservices played an aggressive pricing game — they started charging voice in seconds, instead of the of the prevailing system of charging in minutes. Customers’ bills fell by 12-15 per cent, forcing everyone to follow suit. However, it also squeezed margins for the industry in a big way, especially as new licensees such as Telenor, Sistema and Videocon also joined in making the market even more competitive.

Analysts say that despite launching 3G services in 2010, ahead of others, Tata Teleservices lost the direction. “With losses mounting, they seem to have kept investments under a tight leash, were chary of buying spectrum like the competition, they missed the 4G bus, though DoCoMo was one of its pioneers, and still pegged their strategy on voice. The telecom scam also hit them hard,” says a senior executive, who was involved during that period with Tata Teleservices.

The numbers reflect the changes: From a subscriber market share that hit 11.47 per cent in August 2010 from just over 9 per cent in December 2008, Tata Teleservices saw a steep drop, and it had a share of 7.7 per cent by February 2013. The fall continued — based on July 2017 subscription data, they have a share of 3.55 per cent. And, even while the Tata group pumped in more money, losses did not reduce. Matters turned worse with the onslaught of Reliance Jio and its aggressive pricing.