It will help if the directors can give an explanation of how this company functions
Cross wired Communications
(For the benefit of the greenhorns, Tata Communications was originally conceived in corporate form as Videsh Sanchar Nigam Ltd (VSNL), a 100% central government owned offspring in 1986. It was, in its original avatar, the monopoly service provider of the international long distance voice communication business. The majority shareholding in the company was sold to the Tata group in 2002, and it subsequently took on its present avatar in 2008. The central government still holds a 26.12% stake in the company, while the Tatas make do with a majority stake of 50.03%.)
The telecommunication industry is still in the 'ever' evolving mode - that is for sure. One wonders whether the dust on the interpretation of the policy guidelines will ever get to settle down. The annual report of Tata Communications lists a chock full of cases lying in various courts and with the TDSAT (Telecom Disputes Settlement And appellate Tribunal ) on the interpretation of laws framed by the DoT (Department of Telecommunications) on the one hand, and on the interpretation of the direct tax laws affecting the functioning of the industry on the other. Either individually or as an industry group, disputes are being continually fought in various fora. The company says as much. On the direct tax front it has made certain tax holiday and expense claims based on its understanding of the tax laws, which has been disallowed by the tax authorities. It adds that if the disputes are decided against the company it could have an adverse financial implication. Another ongoing court battle with the government is on the compensation to be paid to the company as a full and final settlement against the premature international long distance de-monopolisation. Then there is the license fees of Rs 1.1 bn paid under protest.
A complex organisation which is difficult to comprehend
The company today appears to have a bizarre organisation structure, given among other matters, its scale of operations. This is especially so given the medley of subsidiaries and joint ventures that it boasts of. However on the face of it, the company does not appear to have achieved any value addition as a result, and besides, the purpose behind its structuring is a trifle too difficult to comprehend to a rank outsider. Suffice to say that its operational income is presently divided under three business segments -'Global Voice Solutions', 'Global Data and Managed Services' and, 'Others'. In 2010-11 the share of revenues was divided 28%, 67% and 5% respectively among the business segments. According to the segment results, the global voice solutions business recorded a negative gross margin, while the two other business segments recorded sharply positive margins. But after deducting other operational expenses, the company was almost scraping the bottom of the barrel. (It must however be added here that Tata Communications has had a glorious past - but that is very much in the past. Just consider the evidence. Bonus shares account for close to 74% of its paid up equity of Rs 2.9 bn. What is interesting here is that the last bonus issue was affected in the year 2000, just prior to the divestment by the government.)
The revenues that it generates accrue across several hemispheres. The India generated revenues account for close to 80% of all incomes. Other country specific contributors who have been disclosed individually, but whose contributions are in the low single percentage digit category include the UK, USA, Singapore, UAE and Saudi Arabia, and, an omnibus item labelled as 'Others'. The 'Others' category however accounts for 12% of all revenues and includes significant revenues generated in the Netherlands. (Why the revenues generated from the Netherlands have been clubbed with 'others' is not known.)
More importantly, the company hosts seven direct subsidiaries, 33 indirect subsidiaries, two directly owned direct ventures and two indirectly owned joint ventures making a grand total of 44 enterprises. These subsidiaries and joint ventures cover a huge swath of countries across Europe principally, but also include North America, the Middle East, the Far East, South Asia, South Africa, and what looks like a small slice of the Caribbean. The total book value of the investment holdings in the equity and preference capital in its subsidiaries and joint ventures by the parent adds up to a sizeable Rs 17.9 bn against Rs 21 bn previously.
How the scene is played out
The way the scene is played out, Tata Communications earned gross revenues from telecommunication services of Rs 36.1 bn (standalone), up 12.2% over that of the preceding year. Trade debtors at year end account for less than 22% of the revenues, but the provision for doubtful debtors is a not very nice Rs 1.3 bn against Rs 1 bn previously. Who are these defaulters please? The company also managed to rope in other income, including interest income of Rs 1.9 bn against Rs 1.7 bn previously. (The other income includes a not very judicious 'below the line' amount going by the nomenclature of 'provisions no longer required'. But let that be).
After accounting for all revenue expenses including interest and depreciation, the pre-tax profit amounted to Rs 1.75 bn against Rs 910 m previously. If one tallies this bottom-line figure with the other income, it becomes easy to see where the margins are kicking in from. After some accounting tricks, the company trotted out a book entry profit before tax of Rs 1.6 bn against Rs 4.8 bn previously. (The book entry profit for the preceding year includes a write-back of income tax provision including interest, amounting to Rs 2.8 bn based on a favourable income tax appellate ruling. The income tax department ahs however appealed against this ruling in the Bombay High Court).
Assets not generating income streams
There are several issues confronting this company in its ability or otherwise in generating adequate returns via its revenue streams. First and foremost is the fact that it is fixed asset heavy and has very little to show for it. On a year-end gross fixed asset base of Rs 82 bn (excluding work in progress) it could generate revenues of only Rs 36 bn, or a fixed asset to turnover ratio of a mere 0.44 times. This is even more lethargic than the previous year ratio of 0.47 times. During the year the company added fixed assets worth Rs 13.7 bn (including the amalgamation of its wholly owned subsidiary Tata Communications Internet Services Ltd) but the revenue streams grew only 12.2%. And, thanks to the humungous gross block, there is the depreciation element to be factored in. Not including the amounts that it has to spend under repairs and maintenance. Secondly, the investments of Rs 17.8 bn in the capital of its siblings etc yield no monetary accretals. That is only a part of the big picture
What other spinoff benefits is netted in by the parent as a result of its dalliance with its siblings, including the transfer pricing mechanism that the parent deploys is not separately disclosed and hence not decipherable in the context of the capital investments that the parent has made in them. In any event such entries are merely transfers from the left hand to the right hand or some such. Thirdly, the HR cost, one of the major constituents of the revenue expenditure side of the equation, seems to be accelerating far beyond the growth in its top-line. The payout to employees rose almost 25% to Rs 5.2 bn from Rs 4.18 bn previously. Last but not the least; the parent has a debt burden of Rs 22.1 bn which has to be serviced every which way. If this is not enough, there is the issue of loans advanced to subsidiaries which at year end added up to Rs 9 bn. It has advanced loans to 27 subsidiaries, though just two companies hog the vast bulk of the dispersals. The company has not received any interest on these loans though an interest income of Rs 279 m has accrued on the same. And would one like to add to this list the stupendous amounts of guarantees and comfort letters that it has issued on behalf of its siblings? The guarantees furnished add up to Rs 64 bn, while the letters of comfort tote up to another Rs 12 bn! And what of the commissions payable to banks for executing these guarantees please? Further, the consolidated statements reported revenues of Rs 121.8 bn, but also a loss before taxes of Rs 7.1 bn.
This does not for a very pretty picture make. And if you take a look at the individual performance statistics of the siblings then the heart beat will go up by more than a notch. The company has appended the brief performance results of 38 siblings. In all but four companies the reporting currency is the US dollar. In three companies the reporting currency is the Indian rupee, while in one the reporting currency is the Sri Lankan rupee. The big boys in this list, revenue wise, include Tata Communications Canada, Tata Communications America, Tata Communications UK, Tata Communications Germany, Tata Communications Services, Bermuda, (this is one of the two companies based out of Bermuda) and Tata Communications International Pte Ltd. The latter is possibly the outfit based out of Singapore. The big daddy here is the Yankee offspring with a turnover of Rs 25.7 bn, followed in close order by the Canadian venture with a turnover of Rs 22.9 bn. A distant third is the UK operations with a turnover of Rs 10.8 bn. Way down the list at No. 4 is the German operations with revenues of Rs 4.7 bn and so on. At the bottom of the big boys list is the Singapore outfit with a turnover of Rs 3.1 bn.
The working results of these companies are a fascinating compendium of the art of making the impossible the possible. What is interesting in this medley mix is that the paid up share capital, its financial well being as measured by the quantum of reserves, and the total asset capitalisation of a company has no bearing whatsoever on the revenues that accrue from the siblings. The company with the highest equity base of Rs 6.3 bn, and also boasting the second highest asset base of Rs 22.2 bn, is the Singapore unit. It recorded a low turnover and made a loss before tax to boot. But bagging the sweepstakes is the Netherlands based sibling with a capital base of Rs 1 bn, assets of Rs 73 bn, a turnover of a mere Rs 660 m and a massive loss of Rs 1.77 bn. How in heavens name can such figures be in realm of possibility? How can such humungous assets generate such pipsqueak revenues? Is there no accountability here please? How can such a loss making company have positive reserves of Rs 3.5 bn?
Nuggets of all hues
Cut to another nugget. Tata Communications Bermuda - one of the two Bermuda based siblings. This worthy has a paid up capital of Rs 0.5 m, negative reserves of Rs 12.7 bn, a total asset base of Rs 28.4 bn, total liabilities of Rs 41.1 bn, revenues of Rs 1 bn, and a loss before tax of Rs 4.5 bn. Figures that basically add up to nothing. The other Bermuda based offspring is almost as colourful. On an identical capital base it had positive reserves of 858 m, total assets of a like amount, revenues of Rs 3.6 bn and a pre-tax profit of Rs 2.8 bn. This company therefore represents the other end of the spectrum. Anything goes it appears. Besides, how does a piffling British governed island generate such volumes? Or do tax havens have the capacity to pull rabbits out of a hat perhaps? The two companies with the highest revenue accretions recorded individual losses before tax. How does one explain the performance results of Tata Communications America? On a zero capital base it had total assets of Rs 4.8 bn, revenues of Rs 25.7 bn, and a loss before tax of Rs 660 m. How can a joint stock company (which it presumably is) have a zero capital base to start with?. In line with these puzzling statistics is the results of VSNL SNOSPV Pte Ltd. This company has reported a pre-tax profit of Rs 416 m on non-existent revenues. This one beats me all ends up.
Will the Ministry of Corporate Affairs please wake up?
It should be made de-rigueur for companies to give a detailed written bashan on the performance results of its siblings. As matters stand today, managements appear to be singularly non accountable to the shareholders of the parent company for the lackadaisical performance of their wards. Especially in cases such as this when the stakes are so great. The Ministry of Corporate Affairs needs to take strong action in such matters.
To put matters in perspective this company is nothing short of an Amazonian jungle.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.