Tata Sons comes to rescue of Tata Play as it faces growth headwinds

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Tata Sons’ anticipated buy-back of Temasek’s 20 per cent stake in Tata Play marks the third instance in recent years where the Tata Group has offered an exit to a foreign partner. In 2018, Tata Sons disbursed $1.27 billion to acquire Docomo’s 26 per cent stake in Tata Teleservices. This was followed by the purchase of AirAsia Berhad’s 49 per cent stake in AirAsia India across two transactions, culminating in its complete ownership in 2019.


Most of these buy-backs arose from the challenging financial situations of the joint ventures, which rendered the stakes unattractive to other potential investors. For instance, Tata Teleservices registered a net loss of Rs 17,630 crore against net sales of Rs 5,156 crore for the financial year ending March 2018. Its net worth plummeted to -Rs 25,023 crore by March 2018 due to these sustained losses. Likewise, Aix Connect Pvt Ltd, previously known as AirAsia India, posted a net loss of Rs 2,750 crore against net sales of Rs 4,310 crore during FY22-23.


Media speculations suggest that the Tata Play deal with Temasek could value the former at approximately $1 billion, translating to around Rs 8,300 crore. Consequently, Temasek’s 20 per cent stake might be worth $200 million or Rs 1,660 crore.


Given Tata Play’s present low valuation, some analysts believe that if the transaction materialises at the anticipated price, it would essentially be a rescue operation by Tata Sons. Based on Tata Play’s FY23 balance sheet, its enterprise value is pegged at $372 million or Rs 3,093 crore.


Tata Play is grappling with financial challenges, given the burgeoning appeal of streaming platforms like Netflix, YouTube, and Amazon Prime. An analyst from a domestic brokerage highlighted that sector valuations have diminished over the past two and a half years due to aggressive competition and modest sector growth. For context, Bharti Airtel purchased Warburg Pincus’ 20 per cent stake in its direct-to-home TV division for Rs 3,126 crore in February 2021, which valued the business at 7.6 times its operating profit.


In FY23, Tata Play reported a net loss of Rs 105 crore, with its net sales declining 5.1 per cent year-on-year to Rs 4,499 crore. This indicates a contraction of roughly 27 per cent from its peak net sales of Rs 6,104 crore in FY19. A declining revenue stream made profitability elusive for Tata Play, which went from a net profit of Rs 462.9 crore in FY19 to a net loss of Rs 70.8 crore in FY20.


A combination of dwindling revenues and eroding profitability has weakened its balance sheet, leading to a reduction in shareholder equity. By FY23, its net worth had declined to -Rs 499 crore from -Rs 395 crore the previous year and -Rs 45 crore in FY19. Accumulated losses continued to escalate, reaching Rs 2,857 crore in FY23 from Rs 2,753 crore the preceding year.


To offset its declining pay television service, Tata Play ventured into the broadband sector via its wholly-owned subsidiary, Tata Play Broadband Pvt Ltd. Although nascent and currently loss-making, the company has also expanded into over-the-top (OTT) platforms and streaming with Tata Play Binge.


However, analysts opine that achieving substantial growth in these new areas to counterbalance the downturn in the core business will necessitate years of investment.


Temasek, which owns approximately 20 per cent of the content distribution platform, first invested in Tata Sky (its former name) in 2007.