Date:17/12/2006 URL: http://www.thehindubusinessline.com/bline/iw/2006/12/17/stories/2006121701591000.htm

Back Tata Teleservices (Maharashtra): Avoid

Krishnan Thiagarajan

Given the higher competitive intensity and changing market dynamics, retaining market share and building up scale from these levels will be a tough challenge for TTML.

Shareholders can abstain from investing in the rights offer of Tata Teleservices (Maharashtra) — TTML. The offer is being made at Rs 17 per share in the ratio of 19 shares for every 100 shares held.

Since the offer price is just in line with the current market price, shareholders keen on maintaining their equity stake can consider entering the stock on weakness over the next few months.

TTML is in the business of providing wireline telephony and CDMA-based mobile and fixed wireless services in the circles of Mumbai and Maharashtra (including Goa).

According to the offer document, it provides mobile services in 179 towns across the service areas and is in the process of expanding to other towns.

The competitive dynamics in the mobile segment are changing at a frenetic pace. The management of Reliance Communications, the second largest mobile operator, has signalled its intention of moving to the GSM technology network.

Though it plans to retain the current CDMA subscribers, Reliance may be interested in adding new subscribers mainly in the GSM network.

The recent acquisition moves by Reliance Communications with the intention of buying out Hutch's stake in Hutchison Essar, in consortium with some private equity players, has to be seen in the light of its changed strategy. If Reliance succeeds, it will leave TTML (along with its key shareholder and group company, Tata Teleservices) as the lone major private player in the CDMA domain, with its associated downside of high infrastructure costs and lower capex through infrastructure sharing.

It appears that as a CDMA player, Reliance Communications has clocked lower ARPU's (average revenue per user) relative to its top GSM peers.

This may be primarily due to lower roaming revenues (especially, international revenues on lack of GSM compatibility), higher proportion of bundling contracts with customers (for handsets and free minutes) and absence of infrastructure sharing with other operators.

TTML as a relatively smaller player (based on its mobile subscriber base and revenues) in the CDMA segment may also face similar pressure on these fronts.

While the financials of TTML are improving on a quarterly basis, with operating margins perking up over the past year, it still has a long way to go to catch up with its frontline private sector service providers.

The revenues have been increasing 5-6 per cent on a sequential basis over the past few quarters, with revenues at Rs 340 crore in the quarter ended September 30. The operating margins have increased to 18.4 per cent in the latest quarter compared to 10 per cent in the same period of the previous year and 17.8 per cent in the immediately preceding quarter.

However, it continues to incur net losses on account of interest and depreciation charges.

Given the higher competitive intensity and changing market dynamics, retaining market share and building up scale from these levels will be a tough challenge for TTML. The mobile subscriber base of TTML (CDMA mobile and fixed wireless) is still only half of Reliance Communications', in the circles in which both operate.

In our view, the key trigger for the stock is a possible merger with Tata Teleservices, TTML's major shareholder, holding 47 per cent equity stake.

While the merger may be inevitable, both the timing and the valuation remain uncertain variables. According to the offer document, Tata Telesevices offers CDMA-based mobile and fixed wireless services in 17 circles, besides providing wireline services in five circles.

Offer details: Of the issue proceeds of Rs 490 crore, the company plans to utilise Rs 122 crore for debt repayment to Tata Teleservices, Rs 178 crore to banks, and Rs 150 crore for funding project costs.

The company expects to incur Rs 5,336 crore as CDMA project cost till fiscal year ending March 31, 2007. Of this, Rs 3,942 crore has been incurred as of August 31.

For the balance, the company has made firm arrangement in the form of long-term rupee debt and deferred liabilities. DSP Merill Lynch is the manager to the offer. The offer opened on November 21 and closes on December 20.