ICRA Credit Perspective

TATA TELESERVICES LIMITED

Contacts
L. Shivakumar shivakumar@icraindia.com +91-22-30470000 Vikas Aggarwal vikas@icraindia.com +91-124-4545300

Rating
ICRA has reaffirmed the LAA (SO) [pronounced L double A (Structured Obligation)] rating assigned earlier to the Rs. 8.05 billion Long-Term Non-Convertible Debenture (NCD) Programme of Tata Teleservices Limited (TTSL). LAA is the high-credit-quality rating assigned by ICRA. The rated instrument carries low credit risk. The letters SO in parenthesis suffixed to the rating symbol stand for Structured Obligation. An SO rating is specific to the rated issue, its terms, and its structure. SO ratings do not represent ICRAs opinion on the general credit quality of the issuers concerned.

Instrument Details
Principal Amount Rs. billion Amount Outstanding Rs. billion 7.76 0.29 Maturity Date

NCD Series I NCD Series II

9.70 0.29

July 22, 2011 July 22, 2011

January 2008

Key Financial Indicators

2004-05 Operating Income OPBDIT PAT Equity Capital Net Worth OPBDIT/Operating Income (%) PAT/Operating Income (%) PBIT/(Total Debt + Net Worth +Deferred Tax Liability) (%) OPBDIT/Interest & Finance Charges (Times) Net Cash Accruals/Total Debt (%) Total Debt/Net Worth (Times) 13.67 -5.06 -16.64 42.09 5.13 -37% -122% -17% -1.50 -14% 13.16 2005-06 25.99 -3.92 -18.78 59.03 19.47 -15% -72% -16% -0.96 -11% 3.73 2006-07 46.48 -1.67 -20.63 61.03 1.39 -4% -44% -19% -0.36 -9% 56.98

OPBDIT: Operating Profit before Depreciation, Interest and Tax; PAT: Profit after Tax; PBIT: Profit before Interest and Tax Note: Amounts in Rs. billion

Website www.icraratings.com www.icraindia.com

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ICRA Credit Perspective

Tata Teleservices Limited

Credit Strengths

Credit enhancement through partial guarantees from Tata Sons Limited (TSL) and ICICI Bank, and structured payment mechanism for timely servicing of interest/principal on the rated NCDs Financially strong promoters committed to the business Tata Groups integrated telecommunications operations TTSLs wide geographical presence, with operations in 20 of the 28 licence areas in India (referred to as circles)

Credit Concerns

Relatively low average revenues per user (ARPUs), which affects profitability Financial risks arising out of high gearing (because of accumulated losses in the past) Continuing, albeit lower, regulatory uncertainty

Rating Rationale
The overall rating is credit enhanced by the partial guarantees provided by TSL and ICICI Bank. This is further supported by a structure that provides for the timely invocation as well as acceleration of the underlying guarantees. TTSLs credit quality is favourably influenced by (a) the strength of its promoters and their demonstrated support to the venture, (b) the Tata Groups integrated telecommunications operations, and (c) the strong growth and favourable demand potential for the wireless telephony business in the country. The rating also factors in the reduced uncertainty in the regulatory framework and the improvement in the inherent profitability of the wireless business, primarily because of the significant reduction in network capital costs and financing costs. However, the rating is constrained by TTSLs high gearing levels (because of accumulated losses in the past), the intense competition that characterises the mobile telephony industry, and the technology intensive nature of the business, which can increase investment requirements in the long term.

Structure Details
While the size of the initially rated NCD Programme of TTSL was Rs.10 billion, the company placed NCDs under two tranches : NCD Series I for Rs. 9.70 billion, and NCD Series II for Rs. 0.29 billion. TTSL made the first principal payment of NCD Series I in July 2007 without invoking the guarantees. The current outstanding amount s are: Rs. 7.76 billion against NCD Series I and Rs. 0.29 billion against NCD Series II. NCD Series I has a door-to-door tenure of seven years and a moratorium of three years. The interest payment is made quarterly, and repayment of the principal is to be done in five annual instalments starting from the end of three years (first principal payment made in July 2007). On the other hand, the Series II NCDs were issued as deep-discount bonds and are repayable in bullet at the end of seven years. Overall, in view of the moratorium of three years and the low debt service obligations in the early years, the partial guarantees are so structured as to provide higher coverage in the later years than in the initial ones. This has been achieved by combining the fixed and amortising guarantees from TSL and ICICI Bank, respectively.

Credit Enhancement and Structured Payment Mechanism

Credit Enhancement The credit enhancement on the NCDs has been ensured through a partial guarantee and a stand-by letter of credit (SBLC) from TSL and ICICI Bank, respectively. The guarantees covering the interest and principal obligation partially are as under:

Irrevocable and unconditional guarantee from TSL for 30% of the aggregate issue amount for NCD Series I and for 70% of the aggregate issue amount for NCD Series II. This guarantee will continue unamortised throughout the tenure of the NCDs. Irrevocable and unconditional revolving guarantee from TSL for one interest payment outstanding. Irrevocable and unconditional SBLC from ICICI Bank for 30% of the aggregate issue amount for NCD Series I. The SBLC will amortise by 40%, 40% and 20% each at the end of 13th, 17th and 21s t quarters respectively, from the date of issue.
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Tata Teleservices Limited

Thus, while the SBLC is subject to amortisation in accordance with the given schedule, the TSL guarantee will not decline over the life of the instrument. Consequently, the total guarantee and SBLC cover on the rated NCDs will increase from the initial 60% to 100% of the principal outstanding in the seventh year. In case of default in payment of any interest/principal by TTSL, the investors would be paid on the due date through the invocation of TSLs guarantee. In case TTSL reimburses TSL within the stipulated curing period of 90 days, TSL will reinstate the lapsed guarantee amount. In addition, TSL may (not mandatory though) reinstate its guarantee even if TTSL fails to reimburse TSL. However, if the guarantee is not reinstated within the curing period, the redemption of the NCDs will be accelerated along with the invocation of the guarantees. Structured Payment Mechanism The rating places considerable emphasis on the payment mechanism. Under the mechanism, a no-lien account termed as Payment Account has been created, and this account is being utilised exclusively for servi cing the NCDs on the due dates. This account is funded in a time-bound manner so as to effect timely servicing of interest/principal obligations on the rated NCDs. TTSL deposits into the Payment Account, the amount falling due at least seven working days prior to the forthcoming due date. The debenture holders have exclusive charge on the amounts credited in the Payment Account. All withdrawals from the Payment Account are made only after obtaining approval from the Debenture Trustee. An independent Trustee (Axis Bank) monitors the operations in the Payment Account. TTSL makes payments to investors directly from the Payment Account, with the approval of the Trustee. The Trustee monitors the balance in the Payment Account from time to time and takes the necessary steps as provided, in case of shortfall. Further, the Designated Bank regularly sends a statement of the Payment Account to the Trustee. Based on the same, the Trustee, at least seven working days prior to the forthcoming due date, determines the adequacy of funds to make payments to the investors. In the event of shortfall in the Payment Account, the Trustee is required to send a notice of invocation of the guarantee to TSL. On invocation of the guarantee, TSL would first deposit into the Payment Account the requisite funds for meeting the shortfall subject to the overall limit of its guarantee. Such deposit would have to be made at least three working days prior to the forthcoming due date. In case the guarantee is invoked, TTSL would be required to immediately facilitate the reinstatement of the guarantee through reimbursement to TSL of the amount funded by it and the guarantee would stand restored to the stipulated level. However, in the event that the TSL guarantee is not reinstated as mentioned above latest by seven working days prior to the next due date (i.e. the interest/principal due date immediately following the due date on which the shortfall occurred), the Trustee will accelerate the redemption of the NCDs. On acceleration, the entire principal outstanding on the NCDs would be payable to the investors. The Trustee will forthwith send a notice of acceleration of the guarantee and SBLC (if the SBLC has not fully amortised) to TSL and ICICI Bank, respectively. On acceleration, TSL and ICICI Bank shall deposit into the Payment Account the respective outstanding guarantee and SBLC amounts, at least one working day prior to the forthcoming due date. TSL and ICICI Bank shall be given two business days notice to deposit into the Payment Account the requisite funds pursuant to the invocation of guarantee and SBLC. During the tenure of the NCDs, if ICRA is of the view that the guarantee level required for maintaining the rating of the NCDs at LAA(SO) is lower than the prevailing level, ICRA may recommend a downward reset in the guarantee from ICICI Bank. However, the guarantee from TSL shall not be reset downwards until the amount outstanding on the NCDs falls below the TSL guarantee level.

Company Profile
TTSL was incorporated in 1996 as a 100% joint venture of the Tata Group, which is one of the largest, oldest and most reputed groups in India, with interests in manufacturing, services, infrastructure, and neweconomy businesses. Telecommunications is a focus area of the Tata Group. TTSL commenced its operations in the Andhra Pradesh circle in 1999. In December 2002, TTSL signed an agreement with Hughes Network Systems (HNS), Ispat Group, and Alltel Corporation, to acquire majority stake in Hughes Tele.com, the basic service operator in Maharashtra and Goa. Subsequently, TTSL expanded its coverage and is currently offering services in 20 Indian circles1, viz. Andhra Pradesh, Bihar, Chennai, Delhi, Gujarat, Himachal Pradesh, Haryana, Kerala, Karnataka, Kolkata, Madhya Pradesh, Maharashtra2, Mumbai, Orissa, Punjab, Rajasthan,
1 2

TTSL holds a Unified Access Services Licence for these 20 circles Licence for Maharashtra and Mumbai is held in an associate company, Tata Teleservices (Maharashtra) Limited

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Tata Teleservices Limited

Tamil Nadu, Uttar Pradesh (East), Uttar Pradesh (W est), and West Bengal. In these circles, TTSL offers mobile services and smart wireless services (based on the CDMA3 3G1x technology platform), public booth telephony, and wire line services. The companys other offerings include value-added services such as voice portal, roaming, post-paid Internet services, three-way conferencing, group calling, Wi-Fi Internet, USB Modem, data cards, calling card services, and enterprise services. On the operational side, TTSLs subscriber base increased at a Compounded Annual Growth Rate (CAGR) of around 197% from 1.09 million in March 2005 to 21.74 million in December 2007, which translates into a market share of 9.3%. Integrated Approach of the Tata Group Under the Government of Indias disinvestment plan, in 2000-01 the Tata Group acquired majority stake in Videsh Sanchar Nigam Limited (VSNL), the leading International Long Distance (ILD) service provider in the country. VSNL, as a backward integration measure, acquired a National Long Distance (NLD) services licence in 2002-03 and has since set up a pan-national network. The Tata Group not only provides telecommunications services, but also offers enterprise communications solutions though Group company Tata Consultancy Services (TCS). Thus on an overall basis, the Tata Group is following an integrated approach in the telecommunications business.

Business and Competitive Position

Indian mobile telephony market fastest growing globally The presence of multiple players and declining tariffs have expanded the mobile telephony market significantly in India over the last few years. The number of mobile subscribers in the country increased from around 48.01million as of December 2004 to around 233.63 million as of December 2007a CAGR of 69.5%making India one of the fastest growing mobile telephony markets in the world. ICRA expects the domestic mobile industry to maintain a healthy growth rate primarily on the strength of continually declining handset prices and increasing marketing efforts by mobile service companies and handset manufacturers. Consolidation: India plays the subscriber numbers game The initial allocation of cellular licences in 1996 was based on a tender process that allowed several nonserious players to enter the sector. Subsequently, the New Telecom Policy of 1999 (NTP-99) allowed players the option to exit their joint ventures. As a result, the small and weak ones made way for providers with more experience and bigger financial muscle, thus setting off a process of consolidation within the industry. In ICRAs opinion, cellular companies with operations in a large number of circles have a better bargaining power with other operators and long distance carriers as compared with players who operate in one or two circles. In addition, large operators can have better terms with vendors for capital equipment, repairs and maintenance, and can distribute their marketing and operating costs over a larger base of subscribers. Thus, ICRA expects five to six large players to remain in the field in the medium to long term, with TTSL being one of them; the smaller regional players are expected to either merge or get acquired by the larger players. Reduced cost-disadvantage for CDMA operators and deeper network penetration lead to larger market share for CDMA players Internationally, the cost of all mobile Figure 1: Change in Market Shares in Domestic Telephony equipment has declined significantly over the last two years. Moreover, Fixed GSM CDMA improved growth prospects for CDMA 100% equipment have led to a decrease in the 80% cost differential between CDMA and GSM networks. ICRA expects this 60% differential to narrow even further in 40% future.
Market Share (in %) 20% 0% Mar- Mar- Mar- Mar- Mar- Jun- Sep- Dec- Mar- Jun- Sep02 03 04 05 06 06 06 06 07 07 07
Source: ICRA

On the handset front, GSM handsets are still cheaper than CDMA handsets, but the gap is getting bridged, especially with the build-up of CDMA subscriber volumes in various circles on the strength of higher network penetration.
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Code Division Multiple Access

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Tata Teleservices Limited

Expanding coverage along with significant build-up of subscriber base leads to higher market share for TTSL TTSL has gradually expanded its coverage across the country during the past few years. Starting its operations from Andhra Pradesh in 1999, TTSL increased its presence to 10 circles, building up a mobile subscriber base of 1.09 million by March 2005. Thereafter, with higher focus on customer acquisition and expansion of operations from 10 to 20 circles , TTSLs subscriber base increased to 21.74 million as at endDecember 2007, and its market share increased from 2.09% in March 2005 to 9.3% in December 2007.
Figure 2: Comparison among Key Domestic Players in Telephony by Subscriber Base and Growth Rate

Source: ICRA

Being a late entrant in the telecommunications industry, TTSL initially offered significant incentives in the form of free talk time and messaging bundled with subsidised handsets to attract customers, which resulted in relatively low ARPUs. This and the significant interest and depreciation costs affected the companys profitability and net worth. Currently however, having built up a significant subscriber base, TTSL has reduced handset subsidies considerably and become more cautious in customer acquisition. This is reflected by the companys positive Earnings before Interest, Depreciation and Amortisation (EBITDA) of Rs. 0.25 billion in the first half (H1) of 2007-08. Correction in ARPUs TTSLs ARPUs had been on a declining trend during the last few financial years because of factors such as increased competition from other private players, continual reduction in long distance calling rates, and addition of marginal subscribers. Although the companys ARPU level remains lower than that of other industry players, its incremental ARPUs in most segments including prepaid mobile, fixed wireless and public telephony have seen improvement since September 2007.
ARPUs for TTSL (Rs. per month) Product Pre-paid Mobile Post-paid Mobile Fixed Wireless Phones Public Telephony Rural Telephony [April 07 Onwards]
Source: TTSL

Dec-06 134 577 394 662 -

Mar-07 133 556 401 605 -

Jun-07 131 476 366 891 84

Sep-07 108 488 367 754 69

Oct-07 115 473 376 784 69

Financial Position
Profitability impacted as costs increase following rollout in new circles During the period 2004-05 to 2006-07, TTSL reported robust growth in operating income from Rs. 13.67 billion to around Rs. 46.48 billion as the company benefited from both, rollout of network in new circles and higher penetration in current circles. However, following the increase in operating expenses, overheads, depreciation, amortisation and interest expenses because of rollout, TTSLs losses increased from Rs. 16.64 billion in 2004-05 to Rs. 20.63 billion in 2006-07.

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Tata Teleservices Limited

Support extended by promoters Telecommunications is a long gestation industry and the Tata Group has demonstrated its commitment to TTSL by infusing equity of around Rs. 50 billion in the company (figure as of March 31, 2007). High gearing and low coverage levels notwithstanding, the stand-alone credit quality of TTSL is supported by its financial flexibility, which in turn is a result of the Tata Groups strong financial position and commitment to its telecommunications venture. Profitability and overall financial profile expected to improve over the medium term on the strength of higher operating efficiencies, parental support, and expected hive-off of tower division The domestic mobile telephony industry is expected to grow at a healthy rate in the short to medium term, primarily on the strength of declining handset prices and increasing marketing efforts by mobile service companies and handset manufacturers. ICRA believes that given the increase in the number of circles covered by TTSL, the companys significant network expansion plans, and the integrated nature of the Tata Groups operations, TTSL is in a position to increase its market share in a growing mobile market. Moreover, TTSL has plans to divest its tower division, subject to lender approvals, to a new company. The proceeds from the proposed sale of partial equity in the tower company would be used to lower TTSLs overall debt. This, besides the Tata Groups commitment to infuse an additional Rs. 18 billion equity in TTSL in 2007-08, is expected to significantly improve the latters financial profile and reduce its interest burden. Overall, ICRA expects TTSLs profitability and cash flows to improve over the medium term on the strength of the expected growth in its subscriber base, reduction in handset subsidy , and improvement in its financial profile. January 2008

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Tata Teleservices Limited

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CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300; Fax: +91 124 4545350 Email: info@icraindia.com ; Website: www.icraratings.com, www.icra.in REGISTERED OFFICE 1105, Kailash Building, 11th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50; Fax: +91 11 23357014
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