Some people we know told us about Tata Teleservices Maharashtra Ltd (TTML) a few months back. They made good money on the stock and recommended it to us. It was hitting upper circuits every day, and we were curious to see what’s the underlying story and did some research.

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TTML or Tata Teleservices Maharashtra Services is a B2B provider of calling and internet services for clients in Maharashtra and Goa. The company is debt-laden and has been struggling with losses. It had a consumer telecom business that struggled and was sold off to Bharti Airtel. However, from its lows of about Rs 2 per share in March 2020, the stock has grown 75 times to around Rs 150 today. What’s happened here?

This is a turnaround story and looks very compelling. TTML is transforming itself as a comprehensive digital transformation partner for India’s Small and Medium-Sized Businesses. Assume you are a small investment firm that caters to individual investors and have 30 employees. TTML will equip you with conducting business digitally. You would want an internet connection, voice calling solution for a call center, a cloud platform for sharing documents, a CRM for managing clients, video conferencing, live chat etc - TTML will provide all these solutions as a single provider. It’s transforming itself as the preferred SaaS+Connectivity platform for Indian MSMEs. Digital is the future and TTML is participating as a key enabler of this transformation. Its existing relationships and reach gives it an advantage. The Tata group is backing this company and assured investors that all debt obligations will be met. There is new focus on TTML and it can also be seen in the completely revamped annual report for FY21. There is also talk about TTML being a beneficiary of Tata’s SuperApp and 5G plans. What’s there to not like about the story!

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But we see four problems that make us cautious -

Firstly the impact of the new digital SaaS solutions is yet to come. TTML’s revenue has been consistently in the ~275 crore per quarter range since 2019. Given the investor optimism in the stock price, we would have expected to see some movement in numbers coming from the new solutions. So currently, a lot of future performance expectation is incorporated into the stock price.

Secondly, the question of TTML’s relationship with its parent company Tata Teleservices (TTSL) and the overall Tata group is important to consider. TTML’s operating territory seems to be restricted to only Mumbai, Maharashtra and Goa regions while the rest of the regions come under TTSL. Also, it is not clear whether TTML owns all the assets and IP related to the SaaS+Connectivity solutions or whether it will work as a distributor of the services. Some investors are hoping for TTML to be the spearhead of Tata’s SuperApp and 5G ambitions but it seems very unlikely that TTML will be the main vehicle for those initiatives.

Thirdly, the valuations seem very expensive. TTML’s market cap today is worth 27,000 crore or $3.6 billion, which looks high and incorporates a lot of leap of faith assumptions in the future operating performance of the company. For comparison, Freshworks - a SaaS platform for ‘international’ small and large enterprises with a proven track record and $365mn revenue trades at a market cap of $7.5bn. If we take into account that TTML’s territory is restricted to only Maharashtra and Goa (not Pan India), then this valuation looks all the more expensive.

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The fourth and final point is the dynamics of how the company trades on the exchanges and narrative. Apart from promoters, TTML is almost completely held by retail investors and not any mutual funds or institutional investors. The stock trades on thin volumes and frequently hits 5 percent circuit levels. The company’s strong performance has probably created euphoria amongst investors. Search for TTML on YouTube and you will see lots of misleading videos pumping the stock and discussing every small news and stock price movement to keep the audience hooked. We worry that thin volumes can make the stock prone to lower circuits in the event of a drawdown and make any exit for investors difficult.

There are good things happening in the company, but we think the cart is ahead of the horse here. The stock price has grown spectacularly (hitting 5 percent upper circuit regularly) while the signs of business growth are not visible in any numbers yet. The relationship between TTML and TTSL is another aspect we are not sure of. That’s why we decided not to invest and would be cautious on this stock.

(Poddar is an independent research analyst and founder of Simple Investing, and Mohan is a fund manager at Moat PMS. The views are their own and should not be seen as a recommendation to either buy or sell the stock)

(Edited by : Dipti Sharma)