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ICRA Credit Perspective

L. Shivakumar +91-22-30470000 Vikas Aggarwal +91-124-4545300

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 ICRA’s 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


ICRA Rating Services

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and NCD Series II for Rs. which affects profitability Financial risks arising out of high gearing (because of accumulated losses in the past) Continuing. and structured payment mechanism for timely servicing of interest/principal on the rated NCDs Financially strong promoters committed to the business Tata Group’s integrated telecommunications operations TTSL’s wide geographical presence. which can increase investment requirements in the long term. The SBLC will amortise by 40%. Overall. This is further supported by a structure that provides for the timely invocation as well as acceleration of the underlying guarantees. albeit lower. with operations in 20 of the 28 licence areas in India (referred to as circles) Credit Concerns § § § Relatively low average revenues per user (ARPUs). 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. the Series II NCDs were issued as deep-discount bonds and are repayable in bullet at the end of seven years. Irrevocable and unconditional SBLC from ICICI Bank for 30% of the aggregate issue amount for NCD Series I. On the other hand. The rating also factors in the reduced uncertainty in the regulatory framework and the improvement in the inherent profitability of the wireless business.29 billion against NCD Series II. 0. 9. 17th and 21s t quarters respectively. from the date of issue. respectively. the partial guarantees are so structured as to provide higher coverage in the later years than in the initial ones. 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. The current outstanding amount s are: Rs.76 billion against NCD Series I and Rs. This has been achieved by combining the fixed and amortising guarantees from TSL and ICICI Bank. 40% and 20% each at the end of 13th. in view of the moratorium of three years and the low debt service obligations in the early years. respectively. the rating is constrained by TTSL’s high gearing levels (because of accumulated losses in the past). The interest payment is made quarterly. and the technology intensive nature of the business. primarily because of the significant reduction in network capital costs and financing costs. the intense competition that characterises the mobile telephony industry.ICRA Credit Perspective Tata Teleservices Limited Credit Strengths § § § § Credit enhancement through partial guarantees from Tata Sons Limited (TSL) and ICICI Bank. TTSL made the first principal payment of NCD Series I in July 2007 without invoking the guarantees. However. regulatory uncertainty Rating Rationale The overall rating is credit enhanced by the partial guarantees provided by TSL and ICICI Bank. (b) the Tata Group’s integrated telecommunications operations.70 billion.29 billion. Page 2 § § ICRA Rating Services . TTSL’s credit quality is favourably influenced by (a) the strength of its promoters and their demonstrated support to the venture. 7. 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).10 billion. and (c) the strong growth and favourable demand potential for the wireless telephony business in the country. Irrevocable and unconditional revolving guarantee from TSL for one interest payment outstanding. This guarantee will continue unamortised throughout the tenure of the NCDs. 0. Structure Details While the size of the initially rated NCD Programme of TTSL was Rs. the company placed NCDs under two tranches : NCD Series I for Rs. NCD Series I has a door-to-door tenure of seven years and a moratorium of three years.

ICRA Credit Perspective Tata Teleservices Limited Thus. Karnataka. respectively. which is one of the largest. 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. while the SBLC is subject to amortisation in accordance with the given schedule. Mumbai. Kerala. with interests in manufacturing. 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. Further. to acquire majority stake in Hughes Tele. the TSL guarantee will not decline over the life of the instrument. oldest and most reputed groups in India. the investors would be paid on the due date through the invocation of TSL’s guarantee. Based on the same. Gujarat.e. services. Telecommunications is a focus area of the Tata Group. 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. This account is funded in a time-bound manner so as to effect timely servicing of interest/principal obligations on the rated NCDs. the Designated Bank regularly sends a statement of the Payment Account to the Trustee. Tata Teleservices (Maharashtra) Limited ICRA Rating Services Page 3 . The Trustee monitors the balance in the Payment Account from time to time and takes the necessary steps as provided. Bihar. Maharashtra2. a no-lien account termed as “Payment Account” has been created. Orissa. Ispat Group. the redemption of the NCDs will be accelerated along with the invocation of the guarantees. The debenture holders have exclusive charge on the amounts credited in the Payment Account. 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. In case the guarantee is invoked. the interest/principal due date immediately following the due date on which the shortfall occurred). TTSL signed an agreement with Hughes Network Systems (HNS). TTSL commenced its operations in the Andhra Pradesh circle in 1999. 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. TTSL expanded its coverage and is currently offering services in 20 Indian circles1. TSL will reinstate the lapsed guarantee amount. at least seven working days prior to the forthcoming due date. During the tenure of the NCDs. In the event of shortfall in the Payment Account. On acceleration. Rajasthan. if the guarantee is not reinstated within the curing period. In case of default in payment of any interest/principal by TTSL. An independent Trustee (Axis Bank) monitors the operations in the Payment Account. and this account is being utilised exclusively for servi cing the NCDs on the due dates. TTSL makes payments to investors directly from the Payment Account. Structured Payment Mechanism The rating places considerable emphasis on the payment mechanism. Delhi. Under the mechanism. infrastructure. the Trustee. TSL and ICICI Bank shall deposit into the Payment Account the respective outstanding guarantee and SBLC amounts. However. and neweconomy businesses. On invocation of the guarantee. TSL may (not mandatory though) reinstate its guarantee even if TTSL fails to reimburse TSL. Punjab. viz. 1 2 TTSL holds a Unified Access Services Licence for these 20 circles Licence for Maharashtra and Mumbai is held in an associate company. the amount falling due at least seven working days prior to the forthcoming due date. Such deposit would have to be made at least three working days prior to the forthcoming due date. 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. the Trustee is required to send a notice of invocation of the guarantee to TSL. However. the basic service operator in Maharashtra and Goa. Madhya Pradesh. TSL would first deposit into the Payment Account the requisite funds for meeting the shortfall subject to the overall limit of its However. the guarantee from TSL shall not be reset downwards until the amount outstanding on the NCDs falls below the TSL guarantee level. Haryana. Chennai. the entire principal outstanding on the NCDs would be payable to the investors. the Trustee will accelerate the redemption of the NCDs. Kolkata. and Alltel Corporation. In addition. with the approval of the Trustee. ICRA may recommend a downward reset in the guarantee from ICICI Bank. Subsequently. In case TTSL reimburses TSL within the stipulated curing period of 90 days. at least one working day prior to the forthcoming due date. Consequently. in case of shortfall. TTSL deposits into the Payment Account. Andhra Pradesh. determines the adequacy of funds to make payments to the investors. Company Profile TTSL was incorporated in 1996 as a 100% joint venture of the Tata Group. Himachal Pradesh. All withdrawals from the Payment Account are made only after obtaining approval from the Debenture Trustee. On acceleration. In December 2002.

Mar. 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. On the operational side. thus setting off a process of consolidation within the industry. VSNL.Mar. but also offers enterprise communications solutions though Group company Tata Consultancy Services (TCS). calling card services. in 2000-01 the Tata Group acquired majority stake in Videsh Sanchar Nigam Limited (VSNL). In ICRA’s opinion.74 million in December 2007. Uttar Pradesh (W est). 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. As a result. Moreover. Uttar Pradesh (East). Reduced cost-disadvantage for CDMA operators and deeper network penetration lead to larger market share for CDMA players Internationally.63 million as of December 2007—a CAGR of 69. TTSL offers mobile services and smart wireless services (based on the CDMA3 3G1x technology platform).09 million in March 2005 to 21.Mar. data cards. but the gap is getting bridged. the Tata Group is following an integrated approach in the telecommunications business.Mar. the leading International Long Distance (ILD) service provider in the country. the smaller regional players are expected to either merge or get acquired by the larger players. Thus. which translates into a market share of 9. especially with the build-up of CDMA subscriber volumes in various circles on the strength of higher network penetration. as a backward integration measure.Jun. repairs and maintenance.Dec. the cost of all mobile Figure 1: Change in Market Shares in Domestic Telephony equipment has declined significantly over the last two years.Mar.Jun. and wire line services. 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. and enterprise services.Sep. In these circles. with TTSL being one of them. 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. roaming. TTSL’s subscriber base increased at a Compounded Annual Growth Rate (CAGR) of around 197% from 1. and West Bengal. 3 Code Division Multiple Access ICRA Rating Services Page 4 . The number of mobile subscribers in the country increased from around 48.3%.ICRA Credit Perspective Tata Teleservices Limited Tamil Nadu. public booth telephony.01million as of December 2004 to around 233. Thus on an overall basis. USB Modem. ICRA expects this 60% differential to narrow even further in 40% future. 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. Integrated Approach of the Tata Group Under the Government of India’s disinvestment plan. the small and weak ones made way for providers with more experience and bigger financial muscle. Market Share (in %) 20% 0% Mar. and can distribute their marketing and operating costs over a larger base of subscribers. GSM handsets are still cheaper than CDMA handsets.5%—making India one of the fastest growing mobile telephony markets in the world. The Tata Group not only provides telecommunications services. In addition. The company’s other offerings include value-added services such as voice portal. Wi-Fi Internet. ICRA expects five to six large players to remain in the field in the medium to long term. the New Telecom Policy of 1999 (NTP-99) allowed players the option to exit their joint ventures. post-paid Internet services.Sep02 03 04 05 06 06 06 06 07 07 07 Source: ICRA On the handset front. Subsequently. large operators can have better terms with vendors for capital equipment. three-way conferencing. acquired a National Long Distance (NLD) services licence in 2002-03 and has since set up a pan-national network. group calling.

following the increase in operating expenses.ICRA Credit Perspective 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.25 billion in the first half (H1) of 2007-08. Correction in ARPUs TTSL’s ARPUs had been on a declining trend during the last few financial years because of factors such as increased competition from other private players. 16. depreciation.09% in March 2005 to 9. Thereafter. building up a mobile subscriber base of 1. amortisation and interest expenses because of rollout. 46. 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. Currently however.09 million by March 2005. which resulted in relatively low ARPUs. Starting its operations from Andhra Pradesh in 1999.74 million as at endDecember 2007. 20. and addition of marginal subscribers. This and the significant interest and depreciation costs affected the company’s profitability and net worth. Although the company’s ARPU level remains lower than that of other industry players. Depreciation and Amortisation (EBITDA) of Rs.67 billion to around Rs. However. continual reduction in long distance calling rates. TTSL reported robust growth in operating income from Rs. 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.3% in December 2007.63 billion in 2006-07. with higher focus on customer acquisition and expansion of operations from 10 to 20 circles . TTSL’s losses increased from Rs. and its market share increased from 2. having built up a significant subscriber base. TTSL’s subscriber base increased to 21. 0. fixed wireless and public telephony have seen improvement since September 2007. This is reflected by the company’s positive Earnings before Interest. its incremental ARPUs in most segments including prepaid mobile. TTSL initially offered significant incentives in the form of free talk time and messaging bundled with subsidised handsets to attract customers. ICRA Rating Services Page 5 . TTSL increased its presence to 10 circles. 13. overheads.48 billion as the company benefited from both.64 billion in 2004-05 to Rs. TTSL has reduced handset subsidies considerably and become more cautious in customer acquisition. rollout of network in new circles and higher penetration in current circles.

January 2008 ICRA Rating Services Page 6 . This. ICRA believes that given the increase in the number of circles covered by TTSL. Profitability and overall financial profile expected to improve over the medium term on the strength of higher operating efficiencies. which in turn is a result of the Tata Group’s strong financial position and commitment to its telecommunications venture. the stand-alone credit quality of TTSL is supported by its financial flexibility. 50 billion in the company (figure as of March 31. High gearing and low coverage levels notwithstanding. to a new company. besides the Tata Group’s commitment to infuse an additional Rs. TTSL has plans to divest its tower division. and improvement in its financial profile. TTSL is in a position to increase its market share in a growing mobile market. primarily on the strength of declining handset prices and increasing marketing efforts by mobile service companies and handset manufacturers. is expected to significantly improve the latter’s financial profile and reduce its interest burden. Overall. 18 billion equity in TTSL in 2007-08. Moreover. ICRA expects TTSL’s profitability and cash flows to improve over the medium term on the strength of the expected growth in its subscriber base. subject to lender approvals. parental support. 2007).ICRA Credit Perspective 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. the company’s significant network expansion plans. 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. and the integrated nature of the Tata Group’s operations. reduction in handset subsidy . The proceeds from the proposed sale of partial equity in the tower company would be used to lower TTSL’s overall debt.

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