Tata Communications Ltd: A Treasure Under Sea

One of our reader Sh Yugandar Reddy has posted a query on Tata communications; which I feel is worthy to have a relook at the stock.

Query: As you have already gone through the Balance sheet i have few doubts on consolidated BS and how they are calculated. i see the net worth of the company is just 321 crs(it decreased from 3600crs to 321 crs in last five years) out of which equity itself is 285 and the reserves are only 36crs. The debt on the books are -9331crs which is very high .the book value in just 11 . Net current assets are -7450crs. Adding one more point to the above query, in their PL account, I see PBT as 373.41 cr and Tax paid is 370.46 cr, why they are paying this much tax to the government. Also in 2014 PBT was 444.41 cr and tax paid was 343.28 cr. Why this company is paying high tax?

Hi Dear, I was thinking of adding another post on Tata Comm as earlier post (click here)was just a small introduction to it. But yes you are right in your findings about its very low net worth of 321 cr. Actually its net worth was around 5500 cr in 2007, then continuous losses took it to 321 cr.

Apart from so many other issues, its main problem was low revenue as compared to huge assets. Like in 2011, it was having a turnover of 12000 cr on assets base of 16000 cr!!! In 2015 turnover is 20000 cr with assets of 28000 cr. This is very low and an indication of potential ahead. The main reason of this low turnover was low prices of voice and data due to global excess capacity of submarine cables just like we are seeing the global excess capacity in shipping and rig market which has led to a crash in the rental prices. Same thing happened with Tata communications when global data prices fell to just 20% of 2003 prices in 2010. So its expensive assets were giving low returns due to low prices and low demand. On an average, cable systems across globe have used less than 20 percent of their ultimate capacity. But now scene is changing fast.

Demand for fast internet is rising fast and it is being driven by skyrocketing Internet video traffic, Cloud computing, requests from the financial sector for ever-faster trading connections, and soaring mobile phone use. Cloud computing is going to create huge demand for internet bandwidth due to its cost saving model mainly for small and medium enterprises. Cloud is just like outsourcing of back end process which has contributed much to the growth of countries like india. People are still not aware of the future demand strength of cloud but sooner the time will come when even we as individual will use cloud for saving our most critical data which can be accessed from anywhere in the world.

Companies like Netflix, Apple, Hulu and Amazon deliver movies and TV shows to consumers over the Web. In fact there are fears that widespread adoption of such services would stress the existing Internet infrastructure. In 2005 in UK, broadband internet had a maximum speed of 2 Megabits per second. Today 100Mb-per-second download speeds are available in many parts of the country.

Usage is increasing at such a rate that by 2035 analysts predicts the internet will use all of Britain's power supply - making it impossible to meet demands.  

Optical fibres are flexible, transparent strands the thickness of a piece of a human hair. Information is transformed into light, sent down the fibre, and then transformed back into information. These cables will have reached their limit within eight years, experts say.

The internet companies could always put down additional cables - but that will mean higher bills. Marginal costs of laying additional cables will be very high and so as the prices of internet usage.

So I think that if things goes on as they are now, Tata will witness a surge in its turnover and operating margins due to optimal squeezing of its assets. The losses it has incurred was mainly due to high depreciation and interest costs. Its depreciation in last 5 year was 9500 cr!!! So deep down the sea its financial health is much better than it appears on the surface. Its high debt is mainly due to its inability to raise equity capital due to 26% shareholding of Government of india in it. It has not raised any equity capital since it acquired the VSNL from Govt of india.

Its debt has been increased by 3000 cr in last 5 years but its assets have been increased by 13000 cr!!! This is due to depreciation impact and other non cash cost/loss elements. Apart from this it is still having around 3400 cr in cash and other investments.

Regarding your query on high taxes even on low profits; it is only due to taxes on profits in its standalone business which is earning good profits and so taxes are payable in india and it can not claim the benefits of losses in other countries just like nestle is paying taxes in india for its india business and it can not adjust the income of india with loss of Pakistan business.

Tata comm is also looking to sell its Neotel business in Africa and data center business in India. These will further reduce its debt. Its case for settlement of land assets acquired from VSNL is pending with court and any favorable outcome will be a great news for it as although TCL will not get much from the land sale (pursuant to agreement with Govt in this regard wherein Govt and Minority shareholders will get the share in land sale) but this will pave the way for equity infusion in place of high cost debt.

I am still studying it as it is a very difficult business to study and without understanding the main factors affecting the future growth, any investment in it will be more like a guess. But it is still worthy of taking this guess. So I am investing in it at every fall.

I am hopeful that soon I will complete the study and post a final post on it.

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)