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VSNL: Lower tariffs catch up

May 29, 2002

Videsh Sanchar Nigam Limited (VSNL), the Tata Group's international telephony services provider, has reported an 11% drop both in FY02 revenues and net profit. The lower revenues are due to reduction in settlement rates and tariffs with respect to IPLC (international private leased circuit) and Internet services.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net Sales 19,977 16,458 -17.6% 73,147 65,081 -11.0%
Other Income 1,406 1,529 8.7% 5,618 6,037 7.5%
Expenditure 14,752 12,575 -14.8% 53,676 48,832 -9.0%
Operating Profit (EBDIT) 5,225 3,883 -25.7% 19,471 16,249 -16.5%
Operating Profit Margin (%) 26.2% 23.6%   26.6% 25.0%  
Interest 0 227 - 0 227 -
Depreciation 345 339 -1.7% 1,179 1,304 10.6%
Profit before Tax 6,286 4,846 -22.9% 23,910 20,755 -13.2%
Extraordinary items 0 -70   -52 -10  
Tax -1,813 -1,614 -11.0% -8,082 -6,671 -17.5%
Profit after Tax/(Loss) 4,473 3,162 -29.3% 15,776 14,074 -10.8%
Net profit margin (%) 22.4% 19.2%   21.6% 21.6%  
No. of Shares 285.0 285.0   285.0 285.0  
Diluted Earnings per share* 62.8 44.4   55.4 49.4  
P/E Ratio   4.1     3.7  
(* annualised)            

VSNL, an erstwhile PSU, was privatized in March this year when the Tata's successfully bid for the Government's 25% stake in the company. Subsequently, the group's stake in VSNL has gone up to 45% as a result of the open offer that followed.

On the surface the results look unenthusing. However, as per the company's release, the international telephonic traffic handled by VSNL has increased by 16% over the previous year. The company's Internet subscriber base has also increased by 11% YoY. The company managed to decrease its operating expenses by 9% mainly on account of an 11% reduction in the staff costs.

Loss of monopoly status, increased competition and lower tariffs have affected the value numbers for VSNL. We had already stated this earlier in our reports. Competition is likely to only increase from here on. The positive for VSNL has been the change in management control to a professionally managed group. The Tata's have already made clear their intentions of becoming a big player in the Indian telecom segment. VSNL will definitely figure among the top of their list for development and expansion.

Apart from its strategic fit with the Tata Group, much has been talked about VSNL’s overseas investment and its real estate. The company has around 5% stake in Intelsat, which is expected to go public before December 2002. This would unlock value in its investments. VSNL’s investments range from satellites to undersea cable networks like SEA-ME-WE. Intelsat reportedly has a net profit of around US$ 505 m. Just assuming a 5% share of profits works out close to Rs 1.3 bn (9% of FY02 net profit). But the estimated value of Intelsat is much higher at around US$ 10 bn. Despite being a PSU, the management had invested in various promising ventures in the past, which augurs well in the long run.

It must be mentioned here that VSNL has been embroiled in a controversy regarding the Tata Group's move to fund the fixed line business of Tata Teleservices amounting to Rs 12 bn through VSNL. The government has objected to the move. However, one must note that VSNL is no longer a PSU and therefore can look at investing in the fixed line services, competing with PSUs like MTNL.

At Rs 182 the stock trades at a P/E of below 4x FY02 earnings. The valuation is on the lower side largely due to the stagnancy of its topline and the consequent affect on its bottomline.


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