Tata Communications Limited Group5 51y20

TATA COMMUNICATIONS: Emerging markets growth strategy Subhojit Bagchi – F002

Ankit Jain – F023

 Mitali Bansal – F006

 Satyajeet Kulkarni – F030

 Rajat Bansal – F007

 Pratik Nandekar – F040

 Bharath Ram – F017

 Kumar Nirnay – F043

 

  Shubhendu Sahani – F051

Does TCL need a second home market? • Even with 12-15% annual growth, TCL would be a very small player in the global B2B communications market. • Major cause- Large size of competitors such as: – Verizon Operating – AT & T margin: 20% – BT – Orange business services Break-even

Does TCL need a second home market? • Network presence outside India was weaker compared to the other competitors. • Globally 2012

2017

$ 2.1 $ 2.7 bn bn @ 5.1% p.a

• Also, the business through enterprises contributed a larger share in the overall business

New world of Communications

Does TCL need a second home market? Emerging markets focus

Position itself as the go-to provider of services in emerging market regions

IP and cloud services

Latest Technologies. Offer innovative pricing. Pay per use.

Asian touch customer experience

Improve the customer service

Therefore, in order to achieve the above dimensions as a part of its new strategy, we feel that TCL may need a second home market.

How does new geography add value? • Introduce the most successful product lines in other countries after they have fully developed in home markets. • Developing countries often are the geography of choice – relatively high population growth – unaddressed market needs

Suitability of Russia as a home market

C

Parameter

Distanc e

Parameter

Distanc e

Different languages

FAR

Lack of colonial ties

NEAR

Different ethnicities

FAR

Different religions

G

FAR

A

FAR

Lack of shared NEAR regional trading MODERA bloc

TE Lack of common currency

FAR

Lack of trust

NEAR

Different values, Parameter norms and dispositions Physical distance

FAR Distanc e

Political hostility Parameter

FAR Distanc e

FAR

Rich/poor differences

FAR

Lack of land FAR FAR border Differences in time zone

MODERA TE

E

Low PCI

FARFAR

Economic size

MODERA TE

Differences in FAR Natural FAR climates resources But since it is service sector, Geographical distances wont make

Russia vis-à-vis other EM GDP 2011 (USD Bn)

GDP growth (11-16 E) (%)

Populatio n (Mn)

Ease of doing business ranking

Urban Populatio n (%)

India

1887

7.8

1202

132

30

South Africa

408

3.5

49

35

62

Russia

1857

4

142

120

73

Indonesia

846

6.4

246

129

44

Brazil 2474 4 193 126 87 20 % of the deals from America and Europe had Russia requirements but almost none for India and Asia. But, TCL did not have an existing network or enterprise business presence in Russia unlike the ones it had in the top 18 emerging markets.

Pascal as entry vehicle into Russia: Strengths and Weakness • • • • • • •

• •

Already had licenses to scarce spectrum that would drive future growth Customers, assets, and positive EBITDA Reciprocal Synergies - Pascal followed wireless netwrok strategy similar to TCL Cost Synergies - reusing TCL product capabilities. State-of-the-art IT systems Very Impressive senior management in of technology and operations knowledge One of the leading providers of telecom services and connected nearly 200 cities in Russia

No international connectivity or voice services No internal view or experience in rolling out the next gen of wireless network using LTE technology

Various entry options in Russia: Acquisition deals are competitive, based on market prices, and risky; alliances are cooperative, negotiated, and not so risky. Three sets of factors need to be analyzed before deciding on a collaboration option: 1. The resources and synergies the organization desires, The company didn't have much of redundant resources  2. The marketplace it competes in, Overall the telecom market is expected to grow at 5.5%, however a Gartner report claims that enterprise market growth is likely to stay flat at 1Billion$ There is tough competition in the Russian broadband services market. It is dominated by Rostelecom, a govt. owned company.

Valuation of Pascal for TCL Other Russian Firms

Pascal

Company Name VimpelCom Total Equity : USD 50 million   Mobile Total Debt : USD 25 million TeleSystems (MTS) For 2012 (PASCAL)   Rosetelcom EBITDA : USD 20 million   Enterprise value : 20*3.5 = USD 70 million Sistema   Equity value : Enterprise value – Total debt + Average

cash

= 70-25+3 Parameters Total Cost   Direct Cost   Indirect Cost   Saving 6.5%of IC  

= USD 48 million 2012 2013

EV/EBITDA 3.6 4.4

3.3 2.6 3.5

65.3

74.7

2014 82.1

5.5

7.2

8.5

9.6

10.8

11.7

59.8

67.5

73.6

79.9

84.8

88.2

3.887

4.39

4.78

4.8

5.51

5.73

suming net savings as 6.5% (5-8 is the best)

2015 89.5

2016 95.6

2017 99.9

Valuation of Pascal for TCL CAGR : (5.73/3.89)^(1/5) – 1 = 8 percent

After merger happens : Net worth : 3.89/0.08 = USD 48.625 million paid = USD 102 million

So based on valuation TCL will have a net loss of over USD 50 million

allenges and risks if TCL acquired Pas  The regulatory regime in emerging markets: Service provision in emerging markets is ultimately governed by the local regulatory regime. Licenses are either totally unavailable to foreign operators, seriously limited in number or are prohibitively expensive and can take years to finalize — far too long for a multinational corporation to wait for local connectivity.

 The costs of the initial investment: Acquiring a 100% stake in Pascal would pose the challenge of funding the need to leverage relationships that can facilitate effective agreements with local operators. TCL was facing a constraint of not being able to raise further equity or debt on it’s balance sheet

allenges and risks if TCL acquired Pas  Understanding the local culture and its distinctive business practices  Making connections with local businesses  Finding skilled staf  Deficiency in the necessary infrastructure in place to provide enterprise customers with services: Pascal did not offer any international connectivity or voice services. Also the company leased the bandwidth it operated on

 Growth issues: Overall the telecom market is expected to grow at 5.5%,

Thank You