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VSNL: Concerns galore

Jul 30, 2002

Videsh Sanchar Nigam Limited (VSNL), the privatised international long distance (ILD) service provider, has posted a sharp drop in profits and telecom revenues for the first quarter ended June 2002. The re-negotiated tariffs with international and domestic players applicable since April 2002 has had a signficant impact on its revenues.

(Rs m) 1QFY02 1QFY03 Change
Sales 15,283 13,731 -10.2%
Other Income 1,138 554 -51.3%
Expenditure 11,099 9,952 -10.3%
Operating Profit (EBDIT) 4,184 3,779 -9.7%
Operating Profit Margin (%) 27.4% 27.5%  
Interest - 23 -
Depreciation 307 349 13.7%
Profit before Tax 5,015 3,961 -21.0%
Extraordinary item 229 (37) -
Tax 1,589 1,312 -17.4%
Profit after Tax/(Loss) 3,655 2,612 -28.5%
Net profit margin (%) 23.9% 19.0%  
No. of Shares (eoy) 285 285  
Earnings per share (Rs)* 51.3 36.7  
P/E (x)   3.3  

Following the drastic fall in tariffs, traffic volume during the quarter increased by 24%, which is significantly higher than the corresponding period of the previous year. The elasticity of demand to rate cuts has historically not been proportionate. Also, VSNL faces threat from internet telephony. Despite the aforesaid threats, the growth in telecom traffic is a big positive. Though traffic has increased, a 30% fall in accounting rates has resulted in a 10% fall in revenues. A 40% reduction in ILD tariffs post the entry of Bharti will further fuel traffic growth in the coming quarters. We expect telecom traffic to increase by 25% for FY03.

Other income has also declined sharply in 1QFY03 on account of lower cash and bank balance (cash balance stands reduced by Rs 23 bn as of March 2002 on account of special dividend declared prior to divestment). Operating margins however, has gone up despite modifications in the ILD policy (15% of gross revenue as against around 11% in FY02). Extraordinary item in 1QFY03 and 1QFY02 pertains to prior period adjustments. Excluding such adjustment, net profit has actually declined by 22%.

The company had planned to invest Rs 12 bn in Tata Teleservices, the basic service provider in select Southern states, in order to have the last-mile connectivity (Read VSNL: Valuation conundrum). Without last mile access the company is forced to share ILD revenues with MTNL/BSNL and other private operators. VSNL also does not have pricing power as it has to take consent of basic service providers before reducing tariffs. Though it may have to shell out more for a stake in Tata Teleservices initially, the long-term benefits are promising. After divestment, the ILD service provider strategically fits well into the Tata’s telecom strategy with free license to provide DLD services and well-spread infrastructure. Though the core business i.e. ILD, faces pressure from competition, falling tariffs and Internet telephony, expansion into basic telephony and acquisitions would be the key growth drivers in the future. Value unlocking from its investments in some global companies is also on the anvil.

At the same time it has to be mentioned that revenue growth prospects in the near-term remain challenging after the recent tariff reduction, which also translate into lower revenue share. As a result, the risk-profile of the company increases. The stock currently trades at Rs 122 implying a P/E multiple of 3.3x annualised 1QFY03 earnings.

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