Shyam Telecom continues to Fly into a different Orbit ! From Rs 16 in August to Rs 46 upper circuit now !

Disclaimer : Neither me nor my Family own Shyam Telecom as of yet and till date it has not been recommended to Clients,though some may have invested or be trading in it to take advantage of this smart movement in it’s share price in recent months

Shyam Telecom continues to Fly into a different Orbit ! From Rs 16 in August to Rs 46 upper circuit now !

It clearly derives some Value from the 380307 Equity Shares of FV Rs 10  of the total 766575760 Equity Shares that comprises 24% Equity Stake that the Shyam Group  holds in the unlisted Sistema Shyam Teleservices Ltd  (SSTL) that runs the MTS Telecom Service in India…the remaining is held largely by Sistema Russia and the Russian Federation….Actually as on March 31,2013 98.24 % of the Equity was held by just 25 shareholders and the remaining 1.76% was held by a scattering of 18034 shareholders !….SSTL remains unlisted

Shyam Telecom thus holds just 0.01% of the Equity of  SSTL which is Rs 3200 crs and just 0.05% of the 24% Stake that the Shyam Group holds in SSTL

Shyam Telecom itself had a lack lustre FY 13 with turnover dropping sharply from Rs 800 crs in FY 12 to just Rs 426 crs in FY 13 and consequently Profits dropping from Rs 2.74 crs to just Rs 5 lakhs in FY 13….The reason for this is that Shyam Telecom is the National Distributor of Handsets for SSTL and the Supreme Court Order of 2012 had cancelled many Telecom Operator Licenses (2G Scam)  which reduced the Circles of Operation including for SSTL too

Shyam Telecom has an Equity of Rs 11.27 crs (FV Rs 10) and Reserves of Rs 41.03 crs at March 31,2013 that gives it a Networth of Rs 52.3 crs and a Book Value of Rs 46.40……With SSTL Operations positioned to scale up big time in the next few years,it is expected that Shyam Telecom too will benefit from quantum jump in the National Distribution of Handsets for SSTL….The Potential for Profitability to cross FY 12’s Rs 2.74 crs seems on the cards in the next few years….This,and the small stake it holds in SSTL seems to be pumping the Share Price up fast  

The Big Question Mark now is is then what is the Value of  the unlisted SSTL !?…and here the markets and the pundits are agog with wanton speculation as SSTL continues to make exciting statements that it hopes to achieve Operating Profits by next year 2014 which would be it’s 6th year of Operations in India…It also has bagged the Right to Spectrum in the 800 Mhz auctions and a Unified Access Licence across many Circles

Just two days ago we have written a very detailed post on my company website which is linked below

Shyam Telecom : Rs 16 to Rs 42 inside two months and yet climbing ! ~ 10-Oct-2013

If you choose to go with this huge excitement being generated despite the Company Shyam Telecom clarifying to the Exchanges it has no idea why this sudden jump in Share Price then at least be acquainted with some of the Facts and the Financials of SSTL to assess the Risks involved

I am just stating a few here …..

SSTL commenced Indian Operations in 2009.

The actual audited FY 13 SSTL Financials have RED all over 

Currently, SSTL is still in a recovery phase from the crisis and is looking to scale its business in India.As at March 31,2013 the accumulated losses were more than 50% of the Networth.Though the Parent Company has remarked that it is not uncommon to have such huge losses in the initial years in a greenfield Infrastructure Project.Ron Summers,the Chairman of SSTL claims the worst is over and new exciting opportunities beckon in the next growth phase

On a Total Income of Rs 1203 crs the Operating Loss is Rs 834 crs ….The actual Net Loss for FY 12/13 is Rs 2882 crs after considering Finance Costs of Rs 919 crs and Depreciation of Rs 434 crs and some other costs

The Equity remains at Rs 3200 crs while Reserves are Negative at Rs 2935 crs computing to a Networth of just Rs 265 crs.

These Reserves actually have two components ~ Securities Premium of Rs Rs 8146 crs and Accumulated Loss of Rs 11081 crs .

The Long Term Debt stood at Rs 5355 crs of which over Rs 3100 crs are unsecured FX Loans (Rs 1249 crs from the Russian Parent payable in full in December 2014 at 3 months Libor + 2.5% mark up and Rs 1884 crs from Banks payable in half yearly instalments after moratorium periods of 30 to 36 months and at 6 months Libor + 1.25% to 3.50% mark ups

Rs 6000 crs have been infused by Insitel Services Pvt Ltd  into the Company last year through 0.01% Non Convertible and Non Cumulative Reedemable Preference Shares of Rs 10 each at Rs 10000 per share.These Preference Shares are reedemable after 10 years at an annual premium of 9.77% on Tranche of Rs 43900 and 9.63% per annum on the remaining Rs 16100….therefore although this Rs 6000 crs has been presented for the most part in Securities Premium A/c and therefore has been considered in setting of process of the huge Accumulated Loss it is Long Term Debt which will have to be repaid at a Premium after 10 years 

In March, 2013 the Government scheduled another auction for 800 MHz CDMA spectrum and reduced the prices by half. SSTL managed to score the CDMA Sprectrum for Rs 3640 Crs.The Government allowed the Company to set off the Rs 1626 crs paid in 2008 as the up front fee and stagger the remaining Rs 2014 crs through annual instalments

The company’s CEO Dmitry Shukov stated “We have already made $3.6 billion long-term investment in India and would need additional spectrum to meet the growing demand from subscribers for better quality services. SSTL is committed towards India, and are willing to continue to make investments in India.”

Just Last Week, SSTL announced that they received a Unified Access Licence with which they can use technology neutral spectrum in 8 Circles in Delhi, Gujarat, Tamil Nadu, Karnataka, Kerala, Kolkata, Uttar Pradesh and West Bengal. SSTL is the first telecom company to have got the Unified License. They can now provide Neutral Spectrum for 20 years.

SSTL currently has 3 carrier slots of 1.25 Mhz each in all 9 circles.

Looking forward, the Company is on the path of development with the 4G Long Term Evolution (LTE) services on CDMA and introducing low cost handsets. Their focus lies in data development and LTE. They also wish to build the MTS Brand. The company wants to provide a better services than 3G and has estimated an expenditure of US4 200 Mn for 4G.

SSTL hopes to begin making an Operating Profit from 2014….It had delayed plans for an IPO after the Supreme Court Verdict of 2012 that had cancelled the Licences 

The Licence Fees and the Right to Spectrum are accounted as Intangible Assets and amortized over 20 years.At March 31,2013 these were a Net Rs 3625 crs of which Right To Spectrum dominated at Rs 3516 crs 

Clearly Shyam Telecom is beginning to derive it’s Value from the small stake it has that is part of the Shyam Group’s 24% Equity Holding in SSTL which is aiming to be in the top three telecom companies in India, competing with Big Players.

Shyam Telecom serves as the National Handset Provider for SSTL and it should now revive after the 2012 blip when it was affected as many Circle Operations were closed due to the Supreme Court Order 

Therefore the Share Price or Value of the listed Shyam Telecom will depend on the revival of the Handset Business it takes care of for SSTL and  the Valuation of the unlisted SSTL and this Valuation will have to take into account the huge Investments being made and committed into this company and the bagging of Spectrum and Unified Telecom Licenses and the rolling out of Services to scale up Business

When we had a look at the Russian Parent’s Calender Year 12 Annual Report we observed that it’s subsidiary  Sistema Shyam Teleservices Ltd,India  held a Billion Dollar Debt and nearly half a Billion Dollar in losses for the year while Revenue Levels were just over US $ 300 million ~ The Russian Parent has targeted to bring down the level of debt and hopes the new business to be generated with the new spectrum and unified licences will create breakeven financials in mid 2014 and 2015 latest

So the Hype and Hoopla is more to do with the Potential that SSTL can unlock with going forward as it spread it’s footprint across more circles and launches new services    

If you look at the Market Caps of the three leading Telecom Players in India we observe the leader Bharti Airtel has a Market Cap of over Rs 130000 crs while Idea Cellular has a Market Cap of over Rs 60000 crs a and Reliance Communication has a Market Cap of over Rs 30000 crs…The Tata Tele has a Market Cap of just over Rs 1300 crs while Tata Com has a Market Cap of over Rs 6000 crs 

With the unlisted SSTL now positioned to roll out across more circles in India with added Spectrum and Unified License and even enabling itself for 4G and other value added services we can expect that sooner or later it will get listed either in reverse merger with Shyam Telecom or on it’s own through a planned IPO…or maybe even a Consolidation !…Post National Telecom Policy (NTP) 12 it is expected that the number of Players will reduce in many cirlces and the M & A Norms will be eased out to facilitate consolidation in the Telecom Industry

So will SSTL grab other Players or will they grab SSTL !

At Rs 46 Shyam Telecom has a Market Cap of just Rs 52 crs ! despite the Shyam Group holding a valuable 24 % Equity in unlisted SSTL !….assuming ,despite the high debt and losses in SSTL,the Market Cap is a hypothetical Rs 5000 crs  to Rs 10000 crs then Shyam Group can claim it owns 24% of this !….even with a haircut this value of investment has to be in hundreds of crores !…and some part of this will be apportioned to the listed Shyam Telecom for the 380307 shares it holds in SSTL

And Shyam Telecom has released a Clarification to the Exchanges that it has no idea why it’s Share Price is going Up !….Really ! ?….Smell Insider Trading ?

…whatever wonder why SEBI is not checking out this phenomenal rise ! that we are sure will gather more steam once the Valuation of unlisted Sistema Shyam Teleservices is discovered by all not just by the Insiders !  

Despite the Huge Accumulated Loss of  Rs 11081 crs in the unlisted SSTL at March 31,2013,Shyam Telecom at Rs 46 yet has got steam to move up sharply on the strength of it’s Equity Stake holding in SSTL and revival of the handset business which handles for SSTL  ………The Comfort Level is that SSTL remains backed by a strong commitment of a strong Russian Conglomerate Parent  and there is every possibility that SSTL  will get Listed or consolidate into one leading Telecom Player  or consolidate one of them into it !….Of Course the Consortium Route remains a more viable alternative  

After Years,Shyam Telecom Shareholders and the  new ones who are entering are making a killing in quick time by being rewarded with smart capital gains….many will be itching to exit with them…cannot blame them as a Bird in Hand is worth Two in the Bush !

However,my sense is that patience of a another two to three years may be more rewarding as SSTL begins to unlock it’s potential and begins wiping off accumulated loss….but one needs to be convinced of this as strongly as the Russian Parent is !

The Sun seems to be Rising on ‘Shyam’ Telecom !…perhaps it needs to be rechristened ‘Suraj’ or ‘Savera’  Telecom !

A word of Caution.…It’s a Growth Story in SSTL  that’s seems to be unlocking with several Growth and Revenue and Scale assumptions being made….Shyam Telecom may therefore not be an appropriate selection for Conservative and even Moderate Risk Profile Portfolios

SSTL Revenues in FY 13 were barely Rs 1200 crs and accumulated loss is over nine times at Rs 11081 crs !…..so clearly the Risks are there….although Telecom Players should continue to get Premium Valuations in India

Interesting Days ahead for the listed Shyam Telecom and the unlisted SSTL in which the Shyam Group has a 24% stake