From delisting to potential restructuring, investors are betting on a variety of triggers for the stock to rally
A host of hopes such as delisting, settlement with the government, quicker turnaround of its South African business (Neotel), potential restructuring of Tata Group's telecom business, and the fact that it opted out of expensive broadband wireless auctions is creating interest around this company.
Tata Communications' stock price is in a good positive trend. Market punters are talking about a target of Rs450 (which means they expect more than 63% retracement from its previous high of Rs540 in August 2009). For now, from a low of Rs230 in early June, the stock has retraced almost 24%. The general consensus among punters is that if it crosses Rs303 and holds, it will be on its way to Rs350. The stock has already run up to Rs292.
The big rumour around Tata Communications is delisting (despite the government dithering on the 25% public holding norm). Promoters including the government hold about 76% of this company while LIC holds 9%. Market players have accepted that the land bank (773 acres, worth Rs8,000 crore-Rs10,000 crore inherited when it purchased VSNL) that is with Tata Communications will go to the government (although broker research indicates that the government is entitled to 51%). So the speculation is that Tata Communications will work out a deal with the government whereby they get the government's stake at a reasonable rate with minimum fuss and let go of the land bank claim in return. In any case, if the government and Tata Communications do arrive at a settlement on the land as well, this will be a further upside. The dispute has been on for almost eight years now and has remained in limbo. In 2002, the government decided to keep out 773 acres of surplus land owned by VSNL out of the sale.
The fact that Tata Communications has moved away from the Broadband Wireless Access (BWA) auctions is also seen as a big positive by investors. Tata Communications is planning to spend Rs10,000 crore over FY11 on voice and data solutions. But now that BWA is not in the picture, capex should stay at previously-announced levels and the next big trigger is expected to be Neotel's turnaround, in which Tata Communications has a majority stake.
Neotel is a South Africa-based communications network operator. It provides voice and data services for businesses, wholesale network operators and providers and consumers.
Another potential trigger for this stock is the restructuring of all the telecom businesses in the Tata Group. Rumours about a merger, between Tata Teleservices (Maharashtra) and Tata Teleservices, has been doing the rounds already. However, Tata Communication's management has said that there is no fixed targeted time for such a restructuring, if at all.
For Q1FY11, Kotak Mahindra Group expects Tata Communications (standalone) to post net sales of Rs870 crore and a profit of Rs14.6 crore while CLSA Asia-Pacific Markets expects this to be Rs880 crore and Rs29.9 crore respectively. HSBC expects it to post (consolidated) net sales of Rs2,860 crore and a net loss of Rs200 crore while Bank of America Merrill Lynch expects Rs3,000 crore and Rs390 crore. In general, long distance services core business pressures are expected to continue. In addition, this company is still plagued with high interest costs.
Tata Communications' business includes submarine cable networks, a Tier-1 IP network with connectivity to more than 200 countries across 400 points-of-presence (PoP), and nearly one million square feet of data centre and co-location space worldwide. It operates in enterprise data services, global international voice, has investments in operators in South Africa (Neotel, loss making), Sri Lanka, and Nepal (United Telecom Ltd).
A market-timing product from Pramerica Fund
Even as the market regulator is encouraging...
Under the new regime on ULIPs that is supposed to be in place from 1st September, private insurance companies would lose out to LIC
Unit-linked insurance plans (ULIPs), the mainstay of insurance companies, would become less attractive from 1st September. The Insurance Regulatory and Development Authority (IRDA) has set out new norms for ULIPs that mean lower commissions and lower surrender charges, which insurance companies bemoan may be good for the consumers but would deal a body blow to the insurance companies.
Since the new norms were announced, it is widely assumed that insurance companies would now prefer to sell traditional plans such as moneyback and endowment policies. But if that is so, it would also alter the competitive landscape. Not all companies are fully geared to sell traditional plans as well. Life Insurance Corporation of India (LIC), the oldest and largest insurance company, has been selling traditional plans for decades before the advent of ULIPs and its selling machine is
well-oiled to sell such plans. On the other hand, the private insurance companies are at a serious disadvantage in this regard.
"LIC has a different model with a large network of development officers (DOs) and a huge network of agents, which can engage the customer and explain to them the intricacies of traditional plans. No private insurance company has this," says the marketing head of a large private insurance company.
"The private insurance companies are comfortable selling ULIPs, which are far easier to sell. All that our agents need to do is explain that part of the money goes into the stock market and one gets an insurance cover along with it. It is much more transparent than traditional policies," the source from the private insurance company added.
This is why ULIPs have, by far, been the top-selling product for insurance companies in the past five years. Now, with the market having to shift gears and sell more of traditional plans, the selling process and strategy will have to be different. "In this, LIC will be at a significant advantage," concedes the source. Through its network of eight zonal offices, 100 divisional offices, over 2,000 branch offices and one million agents, built over 52 years, LIC is by far the most well-versed in selling traditional plans which are more opaque and so need customer attention and engagement. LIC agents can do this far better than private insurance companies. "LIC's model of having a network of development officers allows them to engage the customer much more. A DO's job, while selling policies, is also training of agents and meeting prospective clients. Private insurance companies don't have such an extensive, well-oiled system. They rely more on younger sales people and these people tend to change jobs more often. LIC's DOs don't quit their jobs as often, with the result that customer relationships are much stronger," says an LIC source.
It remains to be seen whether private insurance companies are able to quickly change their model and come back to the growth track. But to follow LIC's model would be expensive and time-consuming and having invested hundreds of cores of capital with no returns in sight so far, it would be hard for them to engage in another round of intensive long-term investment. This is especially critical because insurance companies are now planning public offerings. They would have to go the market with a partly broken business model.