tata teleservices ltd share price Management discussions

TATA TELESERVICES LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS: INDUSTRY STRUCTURE AND DEVELOPMENTS: The Indian telecom services sector has witnessed tremendous growth in the recent past, primarily driven by intense competition, entry of new operators and falling tariffs. India today has the second largest telecom network in the world after China. As of April 30, 2010, there were more than 638 million telephone connections in the country of which 601 million were wireless connections. Approximately 15 million mobile connections are being added every month. With much of the recent growth coming in rural areas, Indian telecom companies have been expanding their networks and are significantly increasing their geographical coverage in rural India. In India, there are various kinds of telecom service licenses, including access licenses, i.e. basic/fixed service, cellular, Unified Access (basic + cellular) service; carrier licenses, i.e. national long distance and international long distance; licenses for internet services; VSAT licenses; and IP-1 registration for passive infrastructure (towers, ducts, fibre). Unified Access Service License (UASL) operators like the Company can provide, besides fixed & mobile services, internet, internet telephony and broadband services under their UASL license. Unrestricted competition is allowed in all the categories. REGULATORY DEVELOPMENTS: Details of major developments on the regulatory front are as under: * Access Deficit Charges: The Telecom Regulatory Authority of India (TRAI) had abolished Access Deficit Charges (ADC), a levy paid by private telecom operators to Bharat Sanchar Nigam Limited (BSNL) for meeting the cost of unprofitable operations in rural areas, w.e.f. April 1, 2008. The ADC component on the international incoming calls was fixed at a reduced rate of Rs. 0.50 per minute for the period from April 1, 2008 to September 30, 2008 after which this component of ADC was also eliminated. Now all domestic and international calls are free from the incidence of ADC. BSNL challenged these ADC amendments before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) for the financial years 2006-07, 2007-08 and 2008-09. The TDSAT has dismissed all the appeals. Appeals have been filed by BSNL before Supreme Court against these orders of the TDSAT. Being statutory appeals these have been admitted by Supreme Court. However, no stay of TDSAT order has been granted. * Telecommunication Interconnection Usage Charges Regulation, 2003: The TRAI amended Telecommunication Interconnection Usage Charges Regulation, 2003 vide Telecommunication Interconnection Usage Charges (Tenth Amendment) Regulations, 2009 which effective April 1, 2009 reduced termination charges for all types of domestic calls viz. fixed to fixed, fixed to mobile, mobile to fixed and mobile to mobile to 20 paise per minute from 30 paise per minute, and increased termination charges for incoming international calls to 40 paise per minute from 30 paise per minute. This change has been challenged by incumbent operators before the TDSAT. The Company, Tata Teleservices Limited (TTSL) and Association of Unified Service Providers of India (AUSPI) have filed an appeal demanding a Bill & Keep arrangement. Arguments in all these appeals have been concluded in March, 2010. The final judgment is awaited. * Mobile Number Portability: Mobile Number Portability (MNP) is a service that allows end-users of telecommunication services to retain their current mobile telephone number when they switch from one operator to another. In November 2007, the Department of Telecommunications (DoT), accepted TRAIs recommendations of March 2006, on MNP DoT has divided the country into two MNP Service Zones and has signed license agreements with two companies to set-up and operate MNP. According to DoT, mobile number portability is expected to be launched across India by the end of this year. * Spectrum: (a) Allocation of 3G Spectrum: DoT had issued Notice Inviting Application (NIA) on February 25, 2010, kick starting the auction process. Auction process started on April 9, 2010 for 3 slots in 17 circles and 4 slots in 5 circles. Reserve price for all 22 circles put together was (for one slot of 2x5 MHz per operator) Rs. 3,500 crores. Nine service operators participated in the 3G-spectrum auction, which ended on May 19, 2010. The Company has succeeded in winning the bid for 3G spectrum in 8 circles and TTML in Maharashtra circle (including Goa but excluding Mumbai) with a bid value of about Rs. 4,606 crores and about Rs. 1,258 crores, respectively. (b) Guidelines for allocation of additional Spectrum: Based on TRAI recommendations (which discriminates between GSM and CDMA operators by allotting spectrum in a 2:1 ratio based on the unsubstantiated presumption that CDMA technology is significantly more spectral efficient), DoT issued fresh spectrum allocation guidelines in January 2008, increasing substantially the subscriber number thresholds, making it more difficult for established service providers to acquire more spectrum and improve their quality of service to subscribers. DoT had set up a committee on June 16, 2008 to review the spectrum allocation criteria. TDSAT, in a recent judgment, has held that the TRAI recommendations were made in a non- transparent manner and has advised DoT to issue fresh guidelines after getting the Second Spectrum Committee report. Second Committee submitted its report on May 13, 2009 recommending auction of 2G spectrum beyond initial allotment of spectrum of 4.4 MHz. Report had been referred by DoT to TRAI. TRAI has submitted its recommendation on Spectrum Management and Licensing Framework on May 11, 2010. In its recommendation of May 11, 2010, TRAI has capped the spectrum allotment to GSM and CDMA. It has recommended that committed spectrum is 6.2 MHz for GSM and 5 MHz in respect of CDMA. Prescribed limit of spectrum i.e. the amount of spectrum that can be assigned by the Government would be 8 MHz/5 MHz (GSM/CDMA) in the whole of the country except in the metro service areas of Delhi and Mumbai, it would be 10 MHz/6.25 MHz. However, spectrum assigned beyond committed amount of 6.2/5 MHz (GSM/CDMA) will be paid for at the Current Price which is to be a price linked to 3G price derived through bidding. TRAI will submit , supplementary recommendations on Current Price for 1,800 MHz spectrum. TRAI has also recommended license fees to be brought down to 6% over the next four years and has made recommendations for facilitating Mergers & Acquisitions. DoT is expected to take decision on these recommendations after receiving supplementary recommendations. Some of the decisions may be referred to an Empowered group of ministers (EGoM). * Use of Alternate Technology: DoT had issued on October 19, 2007, a press release permitting the use of alternate wireless technologies by UAS Licensees. UAS Licensees who were using CDMA technology for wireless access are now permitted to use GSM technology and vice-versa. In August 2008, the Honble Delhi High Court upheld the Governments decision. On March 31, 2009, TDSAT dismissed a petition filed by the Cellular Operators Association of India (COAI) and other GSM operators against the Governments decision to allow dual technology. TDSAT also directed DoT to immediately review the subscriber base of BSNL and Mahanagar Telephone Nigam Limited (MTNL) in all the circles and withdraw the spectrum allocated beyond the criteria laid down by DoT. The Honble Supreme Court on appeals by BSNL and MTNL has for the time being, stayed such requirement to surrender the spectrum. The AUSPI has made several representations to DoT and suggested that the validity of dual technology (GSM spectrum) should be 20 years from the date of amendment of the license or if the validity cannot be increased to 20 years and the excess amount cannot be refunded, same may be adjusted against future license fee and spectrum charges payable against the licensed operations. The Government has not responded to these suggestions by AUSPI and TRAI also has not addressed this issue in its recommendation dated May 11, 2010. * Security Clearance Before Purchase of Equipment: DoT vide letter dated December 3, 2009 has amended the UASL agreement asking all the service providers to take security clearance from DoT before placing purchase orders. On the representation by industry, different format was issued for submission of the request, last being on February 25, 2010. On March 18, 2010, DoT issued further clarification stating that service providers need not seek approval of passive and indigenous equipment. This created a situation where Licensees have not been able to import network equipment since December 3, 2009. On March 26, 2010, the Company received a DoT letter informing that import of equipment from M/s. ZTE, Huawei, Tong Yu Hong Kong Co. Ltd. from China, ECI Telecom, Israel is not permitted. For other equipment, DoT has now sought an undertaking along with each application undertaking to pay to DoT Rs. 50 crores if any of the equipment purchased vide that purchase order on security inspection were found to be dangerous to national security because of some malware or bug etc. DoT has also mandated that the purchase order should stipulate a clause for compulsory technology transfer within 3 years from purchase. Failure may lead to DoT taking criminal action against Licensee. On July 28, 2010 DoT made further amendments to UAS license and required that Licensees should sign an agreement with Vendors as per draft furnished by DoT. It requires vendor to deposit in escrow latest software versions and source code. Additional penalty of 100% of contract value would also be levied in case malware etc was found in equipment/software. Inspection of vendor facilities by notified international agencies has been prescribed. COAI and AUSPI have requested DoT to reconsider such arbitrary and unreasonable requirements. Vendors also have made representations to the Government. * Quality of Service (QoS) - For customer complaints, service requests, Value Added Services (VAS) deactivation and service termination toll free number 198 has been activated. This will be a common number for all service providers for all products. - Performance parameters of Network, Billing and Customer Care are required to be published on the website each quarter. An online Telecom Consumers Grievance Monitoring System is likely to be introduced. * Efficient Utilization of Numbering Resources: The availability of new numbers is under severe pressure in view of the rapid growth of mobile connections. The TRAI has initiated discussions to review the current method of allocation and sought suggestions for making more numbers available in the 10 digit format. They are also considering for the long term the feasibility of using 11 digit format. The possibility of re-allocation of levels now allotted for fixed line numbers to mobile is high. OPPORTUNITIES AND THREATS: The Company offers CDMA and GSM telecom services in 20 telecom circles. It had successfully launched GSM services in June 2009, as a result of which it today has one of the most complete portfolios of telecom services in the country, including landline, wireless, voice, data and broadband services. Winning the bid for 3G Spectrum in 8 circles gives the Company access to the 3G spectrum for the next 20 years. The Companys 3G spectrum footprint covers the entire geography of prosperous India on the Western side, while there is no entanglement with Category C circles. Therefore, the 3G bidding process has proven to be a most Capex-optimized bidding process for the Company. The advent of 3G services in the country is something that the Company looks forward to eagerly, since it will start off services simultaneously with other telecom companies thereby enjoying the benefits of a level-playing field in the telecom industry for the first time. The year witnessed the launch of new Value Added Services (VAS), which are expected to bolster the Companys revenues significantly in the coming years. Information on important litigations concerning the Company is as under: * Spectrum: The Company and TTSL filed in December 2007, a petition before TDSAT: - challenging allocation of spectrum beyond the contracted amount to GSM operators; - querying the pricing of spectrum beyond the contracted amount and recommending, if necessary, withdrawal of excess spectrum allocated to GSM operators; - seeking release of the 3rd and 4th CDMA carriers (within the contracted amount of 5+5 MHz) against its pending applications; - seeking upfront allotment of the contracted 5+5 MHz spectrum to CDMA operators, as was done in the case of GSM operators; and - demanding technology neutrality. DoT assured TDSAT that spectrum would be allocated against the pending applications. However, without allocating spectrum against pending applications, DoT enhanced substantially the subscriber number requirement for spectrum allocation eligibility in January 2008. The TDSAT was waiting the recommendation of TRAI on the report of the Expert committee. TRAI has made its recommendations on May 11, 2010. These recommendations do not deal with this issue. Before hearing the petition on merit, TDSAT is expected to decide whether it has authority to issue directions to DoT. * Computation of License Fee: TDSAT in its judgement of July 2006 had laid down the principle that revenues accruing from non-licensed activities should not attract license fee and directed TRAI to prepare a list of items to be included and excluded from Adjusted Gross Revenue (AGR), which attracts License fee. The matter was decided in 2007 by TDSAT, which based on TRAI recommendations identified various items to be excluded from AGR. The order would be effective from the date of filing of petitions in TDSAT. DoT has filed an appeal in the Honble Supreme Court challenging the whole order, while the Company and TTML have filed an appeal seeking implementation of the order from the first demand for the year 1999-00, raised by DoT in May 2003. * Fulfillment of Roll-out Obligations: As a UAS Licensee, the Company was required to complete certain rollout obligations within 1st and 3rd years from the effective date of its license(s). The coverage had to be certified by the Telecommunication Engineering Center (TEC). Due to reasons not in the control of any of the UASL operators, the first year norms could not be met by any of them. Despite various representations from the industry and the Company, DoT on June 4, 2007, issued show cause notices to the Company and other operators alleging non-fulfillment of the stipulated rollout obligations at the end of the first year. The notices required the Company to explain to DoT, why liquidated damages of Rs. 126 crores (i.e. Rs. 7 crores each for 18 circles) should not be recovered from the Company for the alleged failure. The Company has replied to the notices. The Company has received legal opinion that the demands are invalid under law. * Special Audit by DoT: DoT appointed a firm of chartered accountants as special auditor to conduct audit of License fee payments during the FY 2006-07 and 2007-08. The report of the special auditor has been submitted to DoT in last week of May 2010. SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE: The Company is in the business of providing a wide range of telephony products in 20 out of 22 circles in India and also provides national long distance services. Details of various products and services are provided in the Directors Report. OUTLOOK: The outlook for the Company appears bright on a long-term basis. It successfully launched GSM services under Tata Docomo brand in 16 circles since June 2009. It has been successful in winning 3G spectrum for 9 circles (including Maharashtra) covering >50% of population primarily in the western belt of the country. TTSL has also been permitted by DoT to use GSM Technology in 17 Circles and has been allocated GSM spectrum in 16 circles (except 39 districts in 9 circles). It is yet to receive spectrum in Delhi, which has been unduly denied despite the fact that as on date defence has vacated 10 MHz of spectrum to DoT. The Company will also benefit from its association with TTML, which has Licenses to provide telecom services in 2 circles. The national tele-density is around the 54% mark and considering the tele- density of other regions and countries in Asia, there is a vast market in India waiting to be tapped and the Company will take all the necessary initiatives to become a major player in its chosen areas of operation. The Company has been late entrant in CDMA and GSM 2G services, but it now has an opportunity to be on par with other operators as for providing 3G services. The Companys Photon+ high speed internet services along with some other strategies will enable it to compete in circles, where it did not pursue bid for 3G spectrum due to exorbitantly high bid price. RISKS AND CONCERNS: As is the case with any infrastructure project, the Company is exposed to a number of risks. The key risks include: Regulatory Risks: The Indian telecommunications industry is subject to extensive Government regulation, especially as regards allocation of spectrum and introduction of new services. However, the industry is being liberalised and the Company would continue its endeavour to take advantage of the new opportunities offered by regulatory changes. These include use of alternate technology, new platforms and the proposed introduction of 3G services, which could allow the Company to provide all types of high speed communication and convergence services. The Companys telecommunications licenses, provide broad discretion to the Government to influence the conduct of the Companys businesses by giving it the right to modify, at any time, the terms and conditions of the licenses and take over the entire services, equipment and networks or terminate or suspend the licenses, if necessary or expedient, in the public interest or in the interest of national security or in the event of a national emergency, war or similar situation. The Companys licenses are for fixed periods and are renewable for additional terms at the discretion of the Government. There can be no assurance that any of the Companys licenses will be renewed at all or renewed on the same or better terms. The recent amendment to licenses requiring prior approval of Licensor before placing purchase orders for imported active equipment and software and current embargo on Chinese vendors may adversely affect the Company in short term and may impose additional costs. The Company may be required to obtain additional 2G spectrum in the future on payment basis which may impose additional financial burden on the Company. Delay in receipt of contracted spectrum of 6.2 MHz may create quality of service issues and may result in customer dissatisfaction. To address this, the Company may be required to rollout more cellsites, thereby substantially increasing the operating expenditure. Not winning 3G spectrum in Mumbai may result in some GSM customers churning out to competitors. Technological Risks: Changes in technology may render the Companys current technologies obsolete or require it to make substantial capital investments for upgradation. The telecommunication industry has seen rapid changes in technology. Although the Company strives to keep its technology up to date in accordance with the latest international technological standards, the technology currently employed by it may become obsolete or subject to competition from new technologies in the future. Financing Risks: The Company is a telecommunication service provider and requires significant funding on an ongoing basis for expanding telecom infrastructure including services to be offered using GSM technology. Approximately half of the project cost is funded by way of debt that is subject to a number of terms and conditions including periodic review of the business plan. Besides, the Company has also borrowed additional funds for making 3G spectrum payment. Implementation of the project would be materially affected if the Company does not achieve financial closure for the project costs in a timely manner. Interconnection Risks: No operator has been able to win pan-India 3G spectrum and hence roaming arrangements will assume great importance. The Company and TTML will also require roaming arrangements in 13 circles where they have not been able to win 3G spectrum. Augmentation of capacities or creation of separate interconnection facilities for GSM services are some of the business requirements which are dependent on co-operation of other operators. Competition Risks: The Indian telecommunication industry has recently witnessed intense competition with the entry of 4-5 new operators leading to further fall in tariffs. To match the competitors, the Company has to provide subsidies on CDMA handsets sold by its distributors to prospective customers. Dependency on the Promoters: The Company benefits from the goodwill associated with the Tata Indicom brand that Tata Sons Limited has permitted the Company to use for marketing its CDMA products and services and Tata DoCoMo brand that Tata Sons Limited and NTT DOCOMO, INC., have permitted the Company to use for marketing its GSM products and services. The Company offers roaming services to its CDMA/GSM mobile subscribers, who can roam in the service areas where TTML network is operational and vice-versa. Although all the above positively impact the Companys performance, if the Company is viewed as a stand alone enterprise, this inter-dependency may be perceived to be an area of concern. Company has also utilized Tata name in all its offering related to Fixed line Wireless as well as Wireless data Access products through Tata Walky and Tata Photon brands. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY: An Audit Committee of the Board of Directors has been constituted as per the provisions of Section 292A of the Companies Act, 1956 (Act). The internal audit function is looked after by internal team as well as independent firms, which conduct reviews and evaluation and present their reports to the Audit Committee and the management at regular intervals. The Internal Auditors Reports dealing with internal control systems are considered by the Audit Committee and appropriate actions are taken, wherever necessary. ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: The financial statements have been prepared in accordance with the requirements of the Act, the Indian Generally Accepted Accounting Principles (Indian GAAP) and the Accounting Standards as prescribed by the Institute of Chartered Accountants of India. The Board of Directors believes that it has been objective and prudent in making estimates and judgements relating to the financial statements and confirms that these financial statements are a true and fair presentation of the Companys operations and loss for the year. DEVELOPMENTS ON HUMAN RESOURCES FRONT: The entry of new service providers has substantially increased competition in the market. Increase in choices means more effort and higher decibel volumes in acquiring and retaining subscribers which in turn makes it imperative to retain valuable and skilled intellectual capital. The offer of higher monetary compensation by other operators and other service sectors like retail and media have also increased the challenges of retention. The initiatives undertaken by the Company have been described in the Directors Report. The Company had 8954 employees on its rolls as on March 31, 2010. KEY FINANCIAL INFORMATION & OPERATIONAL PERFORMANCE: Revenues from Telecommunication Services: During the year, revenue from telecommunication services increased to Rs.6,212.46 crores from Rs 5,534.28 crores recorded last year (growth of 12.25%). The growth was attributable mainly to the increase in the subscriber base from 285.46 lakhs as at March, 2009 to 541.04 lakhs as at March, 2010 primarily due to launch of GSM services coupled with a 32% growth in enterprise business segment. The above growth in revenue was achieved in spite of having a fall in tariffs in the market and also in termination charges for Interconnect Revenue. The above revenue for the current year includes Rs 260.17 crores earned from data services through positioning of Photon+ which was launched during the year. Other Income: Other income at Rs. 236.66 crores (previous year Rs. 320.06 crores), includes subsidies received from the Universal Service Obligation Fund towards provision of Rural Household Direct Exchange lines (RDELs) in specified Short Distance Charging Areas (SDCAs) amounting to Rs. 172.37 crores (previous year Rs. 146.77 crores). As RDELs scheme has come to an end, the Company will not get these subsidies. Earnings Before Interest, Taxation, Depreciation, and Amortisation (EBITDA) During the year, EBITDA decreased by 314.82% from Rs. 201.59 crores to Rs.433.07 crores (-ve) primarily due to launch of GSM services coupled with significant fall in tariffs. In initial years, these services are expected to register losses but in the medium term, these are expected to be the growth drivers for the Company. Net Loss: The Companys net loss decreased to Rs. 1,333.68 crores during the year (previous year loss Rs. 1,814.31 crores) in the wake of profit on sale of long term Investments and improvement in performance of legacy business. The Company has also commenced services using GSM technology during the current year, which will have adverse impact on profitability in initial years. The Company launched its full mobility services only in the year 2004-05, and it is not uncommon for large green field infrastructure telecom projects to incur losses during the initial few years of project implementation. Fixed Assets: The Company continues to grow its network in twenty circles where it operates. The year-end Gross Block at Rs.17,677.33 crores has increased by Rs. 5,712.24 crores over previous year. Major increase was on account of GSM network roll out in terms of installation of switches, cell sites and backbone amounting to Rs. 4,761.73 crores. The year-end Net Block has increased from Rs. 6,743.95 crores to Rs. 11,032.88 crores. The year-end Capital Work-in-Progress was reported at Rs. 1,958.21 crores (previous year Rs. 1,902.75 crores). The net Intangible assets as at March 31, 2010 was Rs.2,554.69 crores comprising of Indefeasible Right to Use(IRU) procured from Other operators and License Entry Fees paid. Current Liabilities: The Current Liabilities increased from Rs.4,663.90 crores to Rs. 6,788.85 crores primarily due to increase in Capex Creditors from Rs. 1,074.28 crores to Rs. 1,679.82 crores and accrued expenses from Rs. 1,160.07 crores to Rs.1,789.20 crores. Finance Charges: The Finance Charges for the year amounted to Rs. 861.95 crores as compared to Rs. 853.44 crores for the previous year. The increase in interest cost was marginal despite the substantial capital expenditure incurred. This was achieved due to lower interest rate.