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Saturday, November 27, 2010

Company :Tata Communications: Best Buy Stocks: Long Term only 5-10+ years


Tata Communications:
CMP: 258.35
Market Cap: 7362.98Cr
Following are the Consolidated figures as per Annual Report March 2010
Sales: 11194Cr
Debt : 7308Cr
Reserves : 4249Cr
Profit Before Tax: -ve 681Cr
EPS -ve 20.97

http://www.tatacommunications.com/
Annual Report March 2010


Tata Communications is a leading global provider of a new world of communications. With a leadership position in emerging markets, Tata Communications leverages its advanced solutions capabilities and domain expertise across its global and pan-India network to deliver managed solutions to multi-national enterprises, service providers and Indian consumers.

The Tata Global Network includes one of the most advanced and largest submarine cable networks, a Tier-1 IP network, with connectivity to more than 200 countries across 400 PoPs, and nearly 1 million square feet of data center and colocation space worldwide.

Tata Communications' depth and breadth of reach in emerging markets includes leadership in Indian enterprise data services, leadership in global international voice, and strategic investments in operators in South Africa (Neotel), Sri Lanka (Tata Communications Lanka Limited), and Nepal (United Telecom Limited).
===============
Tata Communications looks to be in dumps with a profit before tax of -ve 681Cr but lets dig a little deeper..
- look at Cash Flows from Operations one of the most basic numbers indication actual company health..

Net Cash from Operating Activities: 1552.80Cr
Cash Flow from Investing Activities: -ve 2502.85Cr
Cash flow from Financing Activities: 257.37Cr
Cash & cash Equivalents at the beginning of the year: 863Cr
Cash and Cash Equivalents at the end of the year: 257.37Cr

Tata Communications has invested 2502.85Cr in investment activity (new asset creation)

- To fund this .. cash flow from operations ie.. 1552.80Cr has been used..
- In addition 257.37Cr has been generated from financing activities
- In addition the company had cash in hand of 863Cr ..
So money flowing into the company from these 3 sources (Operations, Financing and Cash in hand from last year) has been used for investment..

So the company is making money at the operating level .. it is just that the company has so many deductions that it can report losses which will help in reducing taxes paid to the govt ..

Another very important number is Current Assets, Current Liabilities and Net Current Assets numbers:
Current Assets: 6141.74Cr
Current Liabilities: 7528.89Cr
Net Current Assets: -ve1387.15Cr

There are different valuation parameters
1. Off the hook valuation parameter is : If the Enterprise Value is less than Net current Assets then the company is selling for less than the cash in the system.
2. A more Sophisticated parameter is: If the Net current Assets is -ve which means you have more liabilities than Assets at the end of the year.. it means the company is in a position of strength (domination) and hence it is able to hold payments to its creditors (increasing liabilities) and extract money in advance from its debtors (reducing Current Assets) this results in a free float which the company can then use..

So a -ve Current Assets scenario shows that Tata communications is generating 1387Cr from its operations just by delaying payment to creditors and accepting cash from debtors .. this is possible only for very large well established companies.. in a commanding position in their area..and will result in interest savings of 138Cr (assuming 10% interest rate on 1387Cr float ..)

For Example let us look at Hindustan Unilever Limited (HUL)
Consolidated Current Assets:  5539Cr
Consolidated Current Liabilities: 6816Cr
Net Current Assets: -ve 1276.73Cr

So even HUL has a Net Current Asset number which is negative indicating it has a strong domination over the market.. can hold its creditors for longer period and expect debtors to pay upfront resulting in cash flows from its operations of 1276Cr which on a yearly basis at 10% interest works out to 127Cr
============================
In addition to the excellent and tight financial operating model that Tata communication has there is another investment bonanza for investors:

When the Govt dis-invested its stake in VSNL to Tata's there was a clause which said Tata's are supposed to release free hold land which measures 773.13Acres 85 acres in Chennai and majority of the rest of the land is in Pune .. some is in Delhi, Mumbai and Calcutta (these are the cities where VSNL had operations before takeover by Tata's)

- Share holders are supposed to receive compensation for the land.
- Since govt holds 25% and also sold 25% to Tata's with the same clause .. the majority of the beneficiary is going to be the Govt.
- Since VSNL disinvestment to public was done before selling of stake to Tata's... Individual investors will also get compensated for the Land bank..
- Individuals who tendered their shares when Tata's took controlling stake will also receive compensation..

Ofcourse the Tata's do say that the major beneficiary of the Land deal is Govt (which is true as the Govt  will receive 50% stake in the 773Acres land company that needs to be carved out of Tata Communication..

However Individual investors will also benefit and for the shares that they own in Tata Communications they will receive equivalent rights to the Property company that needs to be carved out of VSNL/Tata Communications.

So Right now Tata Communications is Tata Communications (operations) + 773Acres and the property company carved out will have Zero Debt...
 Ofcourse Tata Communications will try to wriggle out and try and reduce the amount of actual property transfer but its a long drawn out(Legal)  affair.. as this clause for a separate property company was part of the initial contract.. Also as part of the clause..Tata Communications cannot issue additional equity until the 773 Acres property is carved out of Tata Communications..

So the high debt is because Tata's have no way to grow other than debt..and now Tata's donot have the much wriggle room as debt is already pretty high...

This Value equation is well known to the Institutions..and is visible in the fact that actual Public holding in Tata Communications is  less than 2% and Institutional investors, Govt and Tata's own 98% stake in Tata Communications..

Conclusions: Tata Communications is a well oiled cash generator which is available Very Very Cheap. It also has a 773Acres Property company attached as a free gift. Go and buy !! It is a true Deep Deep discount stock and a multi-bagger but has a gestation period which could run into 2yrs or more..(when the property company is carved out..)  An addition into Best Value Buy For sure!!

12 comments:

galu said...

pl. read this and tell me that actul ho own land if tta then they will nothing gie to shareholder , ratan tata is big cheater ,
pl. reply me on my mail id silkpalace2@yahoo.co.uk

http://piracybay.blogspot.com/2010/12/voiceofindiagroup-tata-vsnl-takeover.html

What'sUp Prahalad said...

Galu:

1. As per the agreement of sale between Govt and Tata's the land has to be transferred into separate company and the shareholders of tata's are supposed to receive the shares of the new company.

2. Govt sold 25% and hold 26% so 51% of all shareholding of the land company should be with Govt of India..

Agreed that there is disagreement between Govt and Tata's about the land distribution ..

But the fact is govt has it as part of the original agreement of sale..

Now coming to the fact:
1.. we are trying to value tata communication as an investment destination.
2.. Tata as a value investment is based on its telecom assets
3.. land is but just a bonus if we receive it..

I hope that answers some of the questions..

=happy investment
whatsup-indianstockideas.blogspot.com

Praveen said...

what do you make of RelCom which has become very cheap... Can we start buying RelCom or Tata is still better?

--WishmeLuck

What'sUp Prahalad said...

WishMeLuck:

good to see you here..
Tata communications is the largest submarine cable network owner in the world.

It also has the largest number of endpoints .. which basically means it makes more sense for everyone to connect through tata communications than any other carrier..

It is also having services like ATM connectivity and point of sale connection (for credit card swiping )in India

Tata is the largest player in international voice calls (ISDN) Worldwide..not just india but Worldwide..

There is no comparision between Reliance Communications and tata communications..

Tata communications is a play on the move to more data centric world

And you have the 700Acres of land also included

=happy investing
whatsup-indianstockideas.blogspot.com

Anonymous said...

makes sense, rcom also has lot of competition.

just that so much of negativity around made me look at it.

started adding tata comm, very low amounts every month


---wishmeluck

What'sUp Prahalad said...

WishMeLuck:

The current price of Tata Communications is a great price to add more.. (180+)
This is truly a lifelong investment

=happy investing
whatsup-indianstockideas.blogspot.com

Anonymous said...

With Neotel turning profitable and growing 20% every year, its now even more attractive. Just give it 4-5 more quarters.

What'sUp Prahalad said...

Anonymous ji:

at the beginning of the year 2011-2012 the tata communications management said that this year the plan is focus on bottomline..

So we should expect the company to do well compared to last year(2010-11)

I think tcl or tata comm is a great buy even at current prices(222/=).. we are already seeing cost increases across the board.. and tata's are great at creating efficient companies be it steel.. chemicals etc.. so price increase and we will see a sharp increase in botomline numbers..

also with telecommunication being the cheapest mode (compared to physical travel.. air, rail or shipping)

all things that can be done electronically will be done electronically ..

Tata communications is the toll bridge of the future (information superhighway!!)

Its what we call a buffett true value company

=happy investing
whatsup-indianstockideas.blogspot.com

Anonymous said...

what's up Prahalad.... heres some info to back your comment for "information highway" - Cisco has updated its forecast for the growth in mobile internet traffic and now expects a compound annual growth rate of 78 percent over the next five years. Worldwide mobile data traffic is expected to reach 10.8 exabytes per month, or an annual run rate of 130 exabytes, by 2016, driven b­y growth in the number of internet-enabled devices and demand for streaming services. In the period 2011−2016, Cisco anticipates that global mobile data traffic will outgrow global fixed data traffic by three times. The number of mobile internet-connected devices is also expected to exceed the world's population in 2016, at an estimated 10 billion (including around 2 billion M2M modules) versus the UN's projection of 7.3 billion people in the world. Tablets are expected to lead the growth in mobile internet traffic and alone account for 1 exabyte of traffic per month in 2016. Other factors driving mobile internet growth are rising mobile network speeds, which Cisco expects will grow from an average 315 Kbps in 2011 to 2.87Mbps in 2016, and growing demand for mobile video, which will account for 71 percent of all mobile data traffic by 2016. The above forecasts include only cellular network traffic. If all types of mobility are included, such as cellular traffic, traffic offloaded from cellular networks and fixed/Wi-Fi traffic generated from portable devices, the total amount of traffic would be more than four times the amount Cisco forecast for cellular traffic alone in 2016. Cisco estimates the proportion of traffic offloaded to fixed/Wi-Fi networks will decrease to 80 percent by 2015, from 94.2 percent in 2011. However the volume of mobile device traffic on fixed/Wi-fi networks will still be more than five times that on cellular networks.

- InnoculatedInvestor

Anonymous said...

heres some infor to back your "information highway" statement - Cisco has updated its forecast for the growth in mobile internet traffic and now expects a compound annual growth rate of 78 percent over the next five years. Worldwide mobile data traffic is expected to reach 10.8 exabytes per month, or an annual run rate of 130 exabytes, by 2016, driven b­y growth in the number of internet-enabled devices and demand for streaming services. In the period 2011−2016, Cisco anticipates that global mobile data traffic will outgrow global fixed data traffic by three times. The number of mobile internet-connected devices is also expected to exceed the world's population in 2016, at an estimated 10 billion (including around 2 billion M2M modules) versus the UN's projection of 7.3 billion people in the world. Tablets are expected to lead the growth in mobile internet traffic and alone account for 1 exabyte of traffic per month in 2016. Other factors driving mobile internet growth are rising mobile network speeds, which Cisco expects will grow from an average 315 Kbps in 2011 to 2.87Mbps in 2016, and growing demand for mobile video, which will account for 71 percent of all mobile data traffic by 2016. The above forecasts include only cellular network traffic. If all types of mobility are included, such as cellular traffic, traffic offloaded from cellular networks and fixed/Wi-Fi traffic generated from portable devices, the total amount of traffic would be more than four times the amount Cisco forecast for cellular traffic alone in 2016. Cisco estimates the proportion of traffic offloaded to fixed/Wi-Fi networks will decrease to 80 percent by 2015, from 94.2 percent in 2011. However the volume of mobile device traffic on fixed/Wi-fi networks will still be more than five times that on cellular networks.

happy investing,

InnoculatedInvestor

What'sUp Prahalad said...

InnoculatedInvestor:

good to have people join in from US investment community..

well I am sure you have all the info with regards to tcl ..and maybe even one-to-one management meetings.. and all that I can say is tata communications is one of the recommended "Best Buy's" in my blog.

http://whatsup-indianstockideas.blogspot.in/2010/05/best-buys.html

=happy investing
whatsup-indianstockideas.blogspot.com

What'sUp Prahalad said...

InnoculatedInvestor ji:

Generally the flow of traffic on the global network is free.. which basically means.. if AT&T puts 10Mb of data into the pipe and the recipient is a tata comm user then:-

- Tata comm does not pay to AT&T and AT&T does not pay to Tata Comm.

What happens is Tata Comm charges its users and AT&T Charges its users and that how they earn money..

The mother carriers donot pay each other while all he users end up paying..

Now telco's generally donot have endpoints (landing stations) to connect to the submarine cables..

Players like Tata comm have submarine cables and they charge Telcos.. maybe $1 for 1GB while this service gets bundled with the phone plan.

Some telco's like AT&T have their own landing station's but they are limited in number.. Tata comm has the largest number of landing stations in the world.. and it makes sense for people(companies/telco's) to connect directly through the player with largest number of landing stations.. cause bandwidth in airwaves(mobile) is expensive to be wasted for heavy usage traffic movies/live broadcast.. its best to be used only for last mile..

Invariably everyone will be well served if they join tata comm.. and finally the cost of transportation is Zero as the mother carriers donot pay each other.. the only way to make money is to use all the bandwidth yourself..

tata comm with a price competitive tariff will ensure its the only major player.. wafer thin margins will also prevent further addition of cables as its very expensive..

End result is toll charges to the most busy network in the world!!

=happy investing
whatsup-indianstockideas.blogspot.com