TATA COMMUNICATIONS: Emerging markets growth strategy

Ankit Jain – F023

Satyajeet Kulkarni – F030

Pratik Nandekar – F040

Kumar Nirnay – F043

Subhojit Bagchi – F002

Mitali Bansal – F006

Rajat Bansal – F007

Bharath Ram – F017

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– AT & T– BT– Orange business services

Operating margin:

20%

Break-even

2012 2017

$ 2.1 bn $ 2.7 bn

@ 5.1% p.a

• Network presence outside India was weaker compared to the other competitors.

• Globally

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

Does TCL need a second home market?

New

wor

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unic

ation

s Emerging markets focus

IP and cloud services

Asian touch customer experience

Does TCL need a second home market?

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

Latest Technologies. Offer innovative pricing. Pay per use.

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 marketParameter Distance

Different languages FAR

Different ethnicities FAR

Different religions FAR

Lack of trust NEAR

Different values, norms and dispositions

FAR

Parameter Distance

Lack of colonial ties NEAR

Lack of shared regional trading bloc

NEAR

Lack of common currency

FAR

Political hostility FAR

Parameter Distance

Physical distance FAR

Lack of land border FAR

Differences in time zone

MODERATE

Differences in climates

FAR

Parameter Distance

Rich/poor differences

FAR

Low PCI FAR

Economic size MODERATE

Natural resources FAR

C A

EG

FAR MODERATE

FAR FAR

But since it is service sector, Geographical distances wont make much of an impact

Russia vis-à-vis other EMGDP 2011 (USD Bn)

GDP growth(11-16 E)

(%)

Population(Mn)

Ease of doing business ranking

Urban Population

(%)

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 terms 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 about US 1Billion$

There is tough competition in the Russian broadband services market. It is dominated by Rostelecom, a govt. owned company.

3. And it’s competencies at collaborating

Valuation of Pascal for TCL

Pascal

Total Equity : USD 50 million

Total Debt : USD 25 million

Company Name EV/EBITDAVimpelCom

3.6

Mobile TeleSystems (MTS)

4.4

Rosetelcom

3.3

Sistema

2.6

Average 3.5

Other Russian Firms

For 2012 (PASCAL)

EBITDA : USD 20 million

Enterprise value : 20*3.5 = USD 70 million

Equity value : Enterprise value – Total debt + cash

= 70-25+3 = USD 48 million Parameters 2012 2013 2014 2015 2016 2017Total Cost

65.3 74.7 82.1 89.5 95.6 99.9

Direct Cost

5.5 7.2 8.5 9.6 10.8 11.7

Indirect Cost

59.8 67.5 73.6 79.9 84.8 88.2

Saving 6.5%of IC

3.887 4.39 4.78 4.8 5.51 5.73

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

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

Premium paid = USD 102 million

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

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

Establishment of relationships and partnerships to enable TCL to meet our customer’s needs

Challenges and risks if TCL acquired Pascal:

Understanding the local culture and its distinctive business practices

Making connections with local businesses

Finding skilled staff

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%, however a Gartner report claims that enterprise market growth is likely to stay flat at about US 1Billion$

Challenges and risks if TCL acquired Pascal:

Thank You