Neotel shows massive loss, but not unexpected

Mergers, Acquisitions and Financial Results

Neotel shows a loss of around R1.5-billion according to results from shareholder Tata Communications, but analysts say it is not surprising

Tata Communications, which has a 49.1% shareholding in Neotel, recently announced its year-end quarter financial results for the fiscal year 2009-10.  The company reported a net loss of Rs 598 crore (R983-million) for the year that ended in 31st March, 2010.

According to Light Reading Asia the consolidated net loss for the year includes a loss of Rs 464 crores (R763-million) for the company’s holding in Neotel, South Africa.  Considering that Tata Communications holds a 49.01% share in this South African company, the total loss from Neotel seems to be R1.55-billion.

While some speculate that this is an indication that something is seriously wrong at the company, analysts say that it is nothing strange for a new entrant in the telecoms market.

World Wide Worx MD Arthur Goldstuck says the he would have been worried if Neotel was not running at a loss of this magnitude. “They announced at launch they would be investing something like R9bn in infrastructure during their build-out phase - presumably over the following five years. This means that up to half of that could already have been invested - although unlikely. We can therefore expect them to report even greater losses in the next year or two,” said Goldstuck.

Neotel’s residential strategy seems to be a weak point for the company.  Many consumers feel let down by the company, and Neotel appears to have lost its appetite to compete in this market.

 “If there is one weakness it is their consumer offering. It appears that the consumer is still playing second fiddle to the more lucrative corporate customer base. Their consumer offerings have been based on poor market insights, and the offerings have been viable for only a limited segment of their target market,” says Goldsuck.

“They will need to invest far more heavily in their consumer offering if they want to prevent it from going the way of Sentech's MyWireless, and they will then have to invest equally heavily in marketing it. This means they can expect to go even more deeply into loss before they start generating substantial profits in this area.”

Neotel was asked what caused the losses and what is being done to remedy the situation, but the company merely said that it “has no comment to make in this regard”.