VSNL: Offering synergy - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

VSNL: Offering synergy

Feb 6, 2002

It is finally announced. The government has sold a 25% stake in Videsh Sanchar Nigam Limited (VSNL) to the Tata Group at Rs 202 per share. The Government of India held a 53% stake in VSNL. Following the disinvestment, Tata Group would be required to announce an open offer for another 20% stake in the company. Against the company…
VSNL’s earnings growth has slowed over the last two years in light of falling international long distance telephony rates (ILD) and revision in accounting rates (TAR) with international telecom carriers. Besides, the company’s agreement with the Bharat Sanchar Nigam Limited (the re-christened DoT) for revenue share terminates in April 2002. This, to an extent, has been insulating the company from the declining TAR till now. Following the tariff rationalisation, though paid-minute calls have been on the rise, it is not commensurate with the fall in tariffs. As a result, revenues have slowed down. Another big threat for VSNL is Voice over Internet Protocol (VoIP), which could have a material impact on VSNL’s profitability. With private players set to enter the ILD segment, competition is set to heat up, which could slower growth prospects.

For the company…
VSNL has a solid network infrastructure and its investments in various undersea cable lines (SEA-ME-WE, FLAG and Gulf Cable) and satellites (Intelsat and Immarsat) bode well in the long run. VSNL currently has 38 earth stations, 12 gateway switches, 5 cable systems and 22 Internet network nodes spread across the country. Given the fact that its core business i.e. ILD is slowing, VSNL has ventured into domestic long distance telephony (DLD), which was hitherto dominated by BSNL. The company would spend Rs 12 bn towards DLD and has already started building up the necessary infrastructure. VSNL is also the largest Internet Service Provider (ISP) in the country with a subscriber base of more than 630,000 in FY01.

The new VSNL…
VSNL seems to fit well within the Tata Group’s foray into the telecommunication sector. For one, Tata-Birla-AT&T (BATATA), which has presence in both basic and cellular segments could route all international calls through VSNL. This is an added advantage from VSNL’s perspective as well because with Tata’s taking over, the company now has an indirect presence in the basic telephony segment.

Besides, VSNL’s foray into DLD segment bodes well with the Tata Group on two counts. Tata Power has been laying fibre optic network and it intends to become the carriers’ carrier. VSNL could utilise this as a backbone for transmitting both data and voice traffic, which has been growing at a healthy rate. Secondly, as a part of the compensation package for bringing forward the end of its ILD monopoly by two years, VSNL is exempted from paying a 15% revenue share for DLD calls. Also, the government has announced that VSNL would be the preferred transmitter for international calls for both BSNL as well as MTNL. Given this backdrop, the combined entity has quite a lot of synergy.

Key valuation parameters…
Criteria Units VSNL MTNL
Price (Rs) 160 142
No. of shares (m) 285.0 630.0
Market Cap (Rs m) 45,600 89,460
Price to earnings* (x) 3.1 6.4
Price to cash flow (x) 2.8 3.8
Price to book value (x) 0.7 1.1
Market cap to sales (x) 0.6 1.2
Avg revenue per employee (Rs m) 24.0 1.1
RONW (%) 27.0%18.7%
Value add services/revenue (%) 11.2%7.5%
*9mFY02 annualised

The scrip currently trades at Rs 168 implying a P/E multiple of 3.1x nine months earnings. With the Tata Group expected to launch an open offer soon, there could be an upside revision in the stock. The open offer price could be either Rs 202 per share (the bid price) or the average of high and low prices of the last six months, whichever is higher. The highest and the lowest price of the last months were Rs 178 and Rs 114 respectively (excluding bonus of Rs 50 per share), which works out to an average price of Rs 146 per share.

Equitymaster requests your view! Post a comment on "VSNL: Offering synergy ". Click here!


More Views on News

Bharti Airtel Q4: Back to Quarterly Profit on Subscriber Additions & Data Usage (Views On News)

May 18, 2021

The company swung to quarterly profits as it added more subscribers and amid increased data usage.

Why Did Tata Communications Shares Plunge Today? (Views On News)

Apr 29, 2021

Key takeaways from Tata Communications Q4FY21 results.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 17, 2021 (Close)