Even as the Tatas are set to dominate the Indian telecom space from cellular networks to fixed line telephony, Internet access, etc, tiny Tata Telecom is fast emerging as an end-to-end telecom and networking solutions provider. Rajneesh De & Chitra Padmanabhan trace this company’s spectacular recent history, and chart its exciting future prospects

Which companies are the crown jewels of the Rs 38,000 crore Tata group? Ask most informed businessmen or analysts and they’ll pick Tata Consultancy Services (TCS), Tisco, Telco, the Taj Group of Hotels and now perhaps VSNL. These firms certainly make up the cream of the Tata Empire, but very soon this elite group looks all set to witness a new entrant—the Rs 263.16 crore Tata Telecom.

Tata Telecom certainly pales in comparison with the nearly Rs 5,000 crore TCS, the Rs 7,111.8 crore VSNL, or the Rs 7,607 crore TISCO. But with a growth rate of 31 percent over a not-so-insignificant base of Rs 200.46 crore, plus a net profit jump of 87 percent from Rs 8.37 crore to Rs 15.68 crore, Tata Telecom looks set to join the Tata big league. But the real story lies in the manner the company has gone about re-inventing itself.

Tata Telecom’s massive spurt in growth and profits in the last year has not gone unnoticed. The company’s stock has witnessed a spectacular bull run on the bourses—a testimony to the wide acceptance of its re-invention strategy in the market. From a low of Rs 40 per share around September 2001, Tata Telecom is now being traded in the vicinity of Rs 180 per share.

Rise from the ashes
It is now an accepted fact that not only the US but Europe too has accepted India as a business process outsourcing hub. Tata Telecom, in its joint venture avatar with global telecom leader Avaya, has carved out a lucrative niche in providing end-to-end solutions to this hot segment. In fact, it is a good proxy for the high growth potential of the Indian outsourcing story. What’s more, by dumping its loss-making Tatafone division last year, Tata Telecom has also eliminated a huge drag on its bottomline.

The re-invention strategy of Tata Telecom from an EPABX company to its present position as a leading player in end-to-end business communications solutions reads like a master strategy in brand repositioning. But what many tend to forget amidst all the euphoria surrounding the brand repositioning is that Tata Telecom has not dropped its EPABX business, but has very cleverly leveraged it to become the leader in the call centre solutions provider space in the country.

With 33 percent market share, Tata Telecom is still the leading PBX vendor in India. According to Frost & Sullivan, the voice market is pegged at Rs 600 crore and is expected to grow at 15-17 percent in the next two to three years. But the concern is that the domestic PBX market may have reached the end of its lifecycle. In fact, upgradation of existing systems presents a huge growth opportunity. With an installed base of 1.5 million lines, almost thrice as much as its closest competitors, Nortel and Siemens, Tata Telecom is set to derive sustained growth from this segment.

However, Tata Telecom was not willing to remain a leading PBX vendor alone. In its bid to move up the value chain, it leveraged this traditional strength in voice solutions to offer high-end call centre solutions. With an increasing number of global companies outsourcing to India, the country is seeing a deluge of call centres. And considering this glut in call centres in India today, besides the staggering march of Business Process Outsourcing (BPO), it’s no wonder Tata Telecom has hit a virtual gold mine here. A Nasscom-McKinsey study expects the industry to grow from Rs 850 crore in 2001 to over Rs 20,000 crore in 2008. Tata Telecom, with a 60 percent share in call centre solutions, is ideally placed to attract a good chunk of this business.

It is interesting to trace this growth curve from being a mere PBX leader to a giant in call centre solutions. In 1998, Tata Telecom was a market leader in the EPABX market with a strong customer base of over 6,000 customers and over 1 million installed ports. It had proven manufacturing capabilities and a strong distribution network spread all over India. However, government policies on privatisation offered new opportunities and challenges. With the local manufacturing advantage fast eroding, the company had to restructure its operations and transform itself from a manufacturing-centric organisation to a customer-centric organisation. Most importantly, Tata Telecom managed to do this in the last three years without any further infusion of funds from promoters.

However, the company has not restricted itself to only providing voice solutions for call centres in its bid to move up the value chain. It also offers convergence solutions today. These add data and video to its traditional stronghold in voice solutions. It has also been actively pursuing partnerships with system integrators to position itself as an enterprise class solutions provider. As part of its growth strategy, the company wants to leverage its current customer base in voice solutions to augment its presence in the data space. Similarly, it wants to use its current customer base in the data segment as reference cases for future growth. As the company is relatively new in this segment (it entered the data segment only about a year back), it wants to strengthen its brand as the converged solution provider for enterprises. Finally, Tata Telecom will leverage its relationships with systems integrators for growth.

An important strategic change geared towards Tata Telecom’s new identity of being an end-to-end solutions company has been the complete re-engineering of its business processes from the operational excellence model to the customer responsiveness model in the last two years. The company now focuses on VPNs, CRM solutions, and voice and data applications such as telemedicine and distance learning. With a vision of reaching the Rs 500 crore mark by 2005 and aims of being in the league of Cisco and 3Com, the company boasts of growth rates in the 25-30 percent range, while the telecom industry in general has been witnessing a mere 16 percent growth. “We look forward to having a stake of over 66 percent in the call centre area, and 34 percent in the voice communication area,” says Niru Mehta, vice chairman, Tata Telecom.

Tata Telecom’s client roster includes names like GE Capital, which is its largest account, Citibank, United Airlines, Virgin Atlantic and Birla AT&T. With the trend clearly towards migrating an increasing amount of work offshore, volume growth from these customers would be high. As they scale up, Tata Telecom will reap the benefits. The Avaya connection has also paid rich dividends. Avaya is one of the world’s leading solutions providers in converged voice and data networks, customer relationship management and call centres. With such strong backing, Tata Telecom has ready access to cutting-edge products and services for the domestic market. Moreover, its wide distribution network is a real advantage when competing with global players like Nortel, Siemens and Panasonic, even as they aggressively eye the Indian market.

Players like Cisco are trying to traverse the reverse course—from data networking to voice, which, of course, is a cumbersome process. A large unsaturated base of voice solutions will prove to be extremely cost-effective for customers. Annual maintenance contracts (AMCs) also played an important role, accounting for 12 percent of revenues in the FY01. As the overall installation base increases, this business will continue to provide a steady stream of revenues. Moreover, as the percentage of AMC revenues in the topline increases, profit margins will increase more than proportionately. This is since fixed costs in the AMC business are low.

Tata Telecom recently introduced multi-service networking infrastructure (MSNI) solutions, including 10 Gigabit Ethernet technology and wireless technology for India. 10 Gigabit Ethernet networks, a protocol which allows high bandwidth connectivity, are designed to help enterprises optimise their business by expanding infrastructure bandwidth. However, there might be a catch to Tata Telecom’s foray into the data networking space where it is quite a late entrant. This space in India is already dominated by world-class networking companies like Cisco, Nortel, Siemens and D-Link. As a new entrant, Tata Telecom faces the daunting challenge of catching up.

One way Tata Telecom could do that would be to grow inorganically. The firm has drawn up a plan to grow inorganically through mergers and acquisitions in the future. Mehta feels that growth over the last three years has been on the back of a turnaround in its business operations and future growth needs to be fuelled by inorganic growth. The company is in the process of identifying prospects that would enhance its end-to-end capabilities. The challenges remain in due diligence and seamless integration of the proposed acquisition or merger.

Mehta doesn’t rule out a merger with the other telecom companies of the Tata group, though it is definitely not in the offing in the near future as synergies between them haven’t been drawn out. There is another school of thought that believes that the Tatas might sell out their entire stake to Avaya, just like they had done in the case of Tata Liebert with Emerson. However, most analysts rule this out in the context of the growth plans Tata Telecom envisages currently.