CRISIL's ratings on the bank facilities of Tata Teleservices Ltd (TTSL; part of Tata Tele) continue to reflect the strategic importance of Tata Tele to the Tata group's telecommunications (telecom) plans, and the support it receives from the group and NTT DOCOMO Inc (Docomo; rated 'AA/Negative/A-1+' by Standard & Poor's). These rating strengths are partially offset by Tata Tele's weak market position leading to low profitability, and its high gearing and modest debt protection metrics because of large, debt-funded capital expenditure (capex). 

The Tata group operates its mobile telecommunication business through TTSL and TTSL's associate, Tata Teleservices (Maharashtra) Ltd (TTML). For arriving at its ratings, CRISIL has combined the business and financial risk profiles of TTML and TTSL, together referred to herein as Tata Tele. This is because both companies are in the same line of business and under a common management.

Tata Tele is strategically important to the Tata group in expanding its presence in the telecom space. The Tata group, through Tata Sons Ltd (Tata Sons; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+') and other entities, holds about 59.5 per cent equity stake in TTSL and 27.9 per cent stake in TTML. Tata Tele's presence in mobile services complements the national and international long-distance services provided by group company, Tata Communications Ltd (rated 'CRISIL A1+'). Furthermore, Tata Tele derives financial and management support from the Tata group; the group has regularly infused equity into Tata Tele in the past. The Tata group has infused equity capital of around Rs.47 billion over the past five years in Tata Tele, reflecting the group's long-term commitment to its telecom business. CRISIL believes that Tata Tele's association with the Tata group will continue over the long term, enabling it to leverage the Tata brand in marketing its products. Also, management, personnel, and funding support from the Tata group to Tata Tele are expected to continue. Tata Tele also derives technological support from Docomo, which has a 26 per cent stake in TTSL. Docomo is a market leader in the cellular phone market in Japan, and has strong technological capabilities in rolling out new services using 3G and long-term evolution technology. 

Tata Tele has been providing code division multiple access (CDMA) services in 19 circles, while it is present in 18 circles in global system for mobile communication (GSM) services. However, its all-India subscriber market share remained moderate, at 7.07 per cent as on January 31, 2014, due to delayed entry into the GSM space. Tata Tele had average revenue per user (ARPU) of about Rs.162 per month in the quarter ended December 31, 2013, as compared with the average ARPU of about Rs.202 per month for the top three telecom players. Although Tata Tele has been able to increase its subscriber base through innovative pricing, its weak market position arising from its late entry and lower ARPU has led to its unfavourable cost structure and hence low profitability. For the first nine months of 2013-14 (refers to financial year, April 1 to March 31), Tata Tele reported operating profit of Rs.5.35 billion (operating margin of about 5.38 per cent), as against an operating loss of Rs.1.87 billion (negative margin of  1.84 per cent) in the corresponding period of the previous year.

Tata Tele's capital structure remains highly leveraged, despite the Rs.24.0-billion equity infusion in January 2014 from Tata Sons through a convertible preference shares issue. Tata Tele had a total debt of around Rs.315 billion as on December 31, 2013. Tata Tele had large debt-funded capex in the past to launch and expand its GSM services. It has also funded the licence fees of Rs.58.64 billion for 3G spectrum blocks in nine circles through debt. Over the next two years, Tata Tele, in order to expand its network, is likely to undertake a capex programme of about Rs.15 billion, which will be partly debt-funded. 

TTSL has a 53 per cent stake in the passive telecom infrastructure company Viom Networks Ltd (Viom), a joint venture with Quippo Telecom Infrastructure Ltd (a SREI Infrastructure company). CRISIL has factored in the financial flexibility that TTSL enjoys on account of its equity stake in Viom.

CRISIL believes that Tata Tele will continue to receive timely support from the Tata group and technological support from Docomo, over the medium term. The outlook may be revised to 'Positive' if Tata Tele reports a significantly better-than-expected operational and financial performance, or if its capital structure improves substantially, most likely because of larger-than-expected equity infusion. Conversely, the outlook may be revised to 'Negative' if Tata Tele's capital structure and debt protection metrics deteriorate considerably, or if it is adversely impacted by any change in regulations for telecom operators. 

About Tata Tele
TTML provides wireless and fixed-line services in the circles of Mumbai, Maharashtra, and Goa, while Tata Tele provides GSM services in 18 circles and has a presence in 19 circles in CDMA. It has also launched 3G services in all the nine circles for which it has 3G spectrum. Tata Tele had a wireless subscriber base of 63.19 million, and fixed-line subscriber base of about 1.51 million, as on January 31, 2014.

For 2012-13, TTSL, on consolidated basis, reported a net loss of Rs.48.58 billion on net sales of Rs.107.08 billion, against a net loss of Rs.42.28 billion on net sales of Rs.98.97 billion for the previous year. For the nine months ended December 31, 2013, TTSL, on a consolidated basis, reported a net loss of Rs.34.85 billion on an operating income of Rs.78.95 billion, against a net loss of Rs.37.94 billion on an operating income of Rs.81.9 billion for the corresponding period of the previous year.