Newsletter
Tata Group’s Nelco fell 11% on Tuesday after the company announced a $20 million investment in US-based Lunar Holdco.
Lunar is a US satellite technology company working on ways to connect regular phones and other devices directly to satellites. Nelco helps businesses stay connected using satellites in places where regular mobile towers, fibre or broadband may not work well.
What’s going on: Nelco is investing but it isn't simply buying shares today. The investment is being made through Compulsorily Convertible Debentures or CCDs.
Think of CCDs as money Nelco is giving Lunar today that will eventually turn into shares of Lunar.
Until that conversion happens, the CCDs will earn Nelco a 7% annual compounded return.
Nelco doesn't control Lunar after this investment. We don't even know exactly how much of Lunar Nelco will eventually own because that will depend on when and how the CCDs convert into shares.
The Why: Nelco wants access to the satellite-based direct-to-device (D2D) and Internet of Things (IoT) connectivity in India and other markets. The partnership will let Nelco use Elveo’s satellites to provide internet connectivity and computing services to industries such as automobiles, shipping, energy and government.
D2D could allow regular devices such as smartphones to connect directly to satellites when normal mobile networks aren't available.
IoT takes that idea beyond phones. Think connected machines, vehicles, sensors or equipment in remote locations sending information through satellites.
For Nelco, the investment gives it a way to participate in this emerging satellite-connectivity market rather than only sticking to its existing satellite communication business.
But there's a catch: Lunar hasn't started commercial operations in India yet. Any launch here will require the necessary telecom and satellite approvals and licences.
Why stock fell: investors appear to be worried about the risk versus reward.
Nelco is committing roughly $20 million to a company that hasn't started generating commercial revenue in India yet. At the same time, investors don't currently know exactly how much of Lunar Nelco will eventually own.
And despite putting in that money, Nelco isn't getting control of the company.
Big picture: India already has mobile coverage across roughly 98% of its villages, but reaching the remaining remote areas is much harder. Satellite D2D and IoT can fill these gaps, connecting phones, vehicles, ships and machines in places where building mobile towers or laying fibre is difficult or too expensive.
