"If they break our monopoly they will need to compensate us fully...." - Views on News from Equitymaster

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  • Aug 5, 2000 - "If they break our monopoly they will need to compensate us fully...."

"If they break our monopoly they will need to compensate us fully...."

Aug 5, 2000

The government’s announcement diluting VSNL’s monopoly over bandwidth does not seem to have upset the plans of the company. Infact the company is more aggressively than ever tightening its grip over the market by improving the standard of services. And in all this, Mr. Amitabh Kumar, who currently holds the responsibility of Director (Operations) in VSNL, has played a key role. Sitting his hi-tech office, Mr. Amitabh Kumar continues to exhibit confidence in the company’s business plan, which includes bidding for 3G licenses once the government opens the sector.

In a conversation with Equitymaster.com, Mr. Kumar spoke of the fallout of the government's recent decisions and the company’s plans to generate growth in coming years. Ofcourse, Mr. Kumar also spoke on the potential of the Internet for the company.

EQM: A key concern facing VSNL presently is generating growth both in topline and bottomline. The company’s international telephony business has come under pressure by the rate cuts announced by the TRAI. Its new value added ventures have yet to attain critical mass and are already facing intense competition. How does VSNL plan to plug this concern?

Amitabh Kumar: In case of growth in international telephony business there is an aberration as the TRAI has not carried forward the process of a reduction in rates this year. They have announced a three year programme of rate reduction, under which a 23% cut was implemented last year. A further rate cut of 20% each has been proposed for the current year and the forthcoming year. The rate cut, which was to be implemented in May has been deferred to September, as the Department of Telecommunications (DoT) has posted a loss.

For VSNL it is important to have high volumes. We already have large volumes but they are not captured in our network due to the high tariff. The tariff from India is about Rs 50 per minute, which is very high. Globally tariffs are also coming down and therefore to capture the traffic there is a need to reduce the accounting rate. Infact VSNL’s recommendation to the government has always been to reduce the calling tariff from India significantly and also the accounting rate, as that will structure the traffic flowing into India.

EQM: What is the accounting rate that you get?

Amitabh Kumar: Last year, the accounting rate was US$ 1.08, which means a settlement rate of 54 cents. This year we expect it to fall to anywhere between 85 – 90 cents and in the coming year it could fall to approximately 70 cents. What that means, for example in the case of an accounting rate of 90 cents, a settlement of 45 cents. This means that the calls can be offered from our country at 50 cents per minute. Now the rate needs to fall further to capture all the traffic and that is very important.

EQM: Even within volumes does it make a difference whether they are incoming minutes or outgoing minutes?

Amitabh Kumar: It does not matter for VSNL. We get Rs 10 per minute less a license fee, which is approximately Rs 3 per minute. So we get paid about Rs 6 to Rs 7 per minute. So irrespective of incoming or outgoing, we get Rs 6.5 or around 12 cents per minute. So far as we are concerned we are quite happy with the rates coming down to even as low as 23 cents. So our view is that the rates need to come down so that volumes can grow dramatically. We have yet to tap this elasticity. In the domestic market, the growth in telephony is decent. About 5 million lines will be added this year and another 8 million lines next year. Now traditionally we get 100 minutes of traffic per line. This has been consistent over the last three years. This is for outgoing traffic.

For incoming traffic, the growth can be much more provided the accounting rate comes down. There is tremendous potential in India. Our capacity today is 65,000 international circuits whereas we operate only 19,000 circuits. So far as we are concerned if traffic increases we will have to bear little incremental costs in boosting capacity. The accounting rate is bound to come down within this year.

EQM: What happens if the government were to dilute VSNL’s monopoly over international traffic prior to FY04?

Amitabh Kumar: If they break our monopoly they will need to compensate us fully. I think that scenario we can leave aside. I think the ground reality is that the DoT is going to be the largest service provider atleast for the next five years. So far as the DoT is concerned all the traffic will be routed through VSNL, which was especially set up to take up this specialised service.

EQM: How do you see value added services performing in view of the rise in competition?

Amitabh Kumar: The competition is rising, but at the same time the rate of growth is also very high. If you take value added services, our revenue this year has been over Rs 6 bn. This is pretty significant if you compare this with our net telephony revenues of Rs 15 – Rs 16 bn. Of this, Rs 3 bn is from leased lines, Rs 2 bn from Internet and the remaining is earned from video up linking and other services. And all these segments are growing more than 100%. And I think that the growth will sustain in coming years.

EQM: What is your view on the valuation of VSNL?

Amitabh Kumar: In terms of valuations I think the PSU sentiment is largely responsible for our poor valuations. Satyam Infoway (Sify) enjoys a valuation of US$ 1.5 bn as compared to US$ 2 bn that VSNL commands. We have twice the number of Internet subscribers as compared to Sify. Caltiger recently purchased an ISP at US 1,000 per subscriber. On these terms we should be valued at atleast US$ 4 bn, as we have nearly 0.5 m subscribers. We have a very strategic positioning in the Internet sector. All ISPs connect to VSNL and so do all corporates. We are the only company that is operating an all India network. The entire DoT backbone will be connected to VSNL with 500 nodes. Nobody has that positioning in the market. Therefore, even if you assign a zero value to our telephony operations, even then our valuations as compared to Sify are ridiculous. Probably the market is discounting something else, which we do not know about.

EQM: What is your deal with Indiainfo.com?

Amitabh Kumar: We will attach their portal so that all our customers are taken to Indiainfo.com. The final agreement has however not been signed. We stand to receive Rs 2 bn plus a 30% equity stake in the company.

EQM: Please shed some light on your new ventures?

Amitabh Kumar: We are trying to focus all our activities around the Internet. We will be participating in national long distance telephony. Our system will carry voice, data and broadband traffic. And for that reason we are trying to acquire a satellite from ISRO. This is expected to cost us Rs 8 bn. The move will help us handle voice traffic as well as data broadcasting.

EQM: How do you see the ISP business developing from here on given that there is intense competition that resulted in a decline in rates? Then there are multiple options that users have in the form of cable or dial up.

Amitabh Kumar: See in the Internet sector there is still a lot of latent growth. The number of customers/accounts is still only about 1.2 m. Even though some ISPs claim they have a million accounts, they are for free. And this does not take you very far as a user can have multiple accounts. If you see China and Korea you realise that the growth has yet to come in. Most of this growth will be in the smaller towns. What we are looking at is an all India license for providing ISP services.

EQM: The growth in the ISP business is in terms of revenues or volumes, as there is heavy discounting in the market place?

Amitabh Kumar: I think the revenues will be under pressure but you can get other revenues in the form of transactions. We plan to have a presence in all cities where we have gateways and in all major cities. Once we get an all India licence, we see our customer base jumping from 0.5 m to over 2 m to 2.5 m with in a year. Just to give an example the excise department wanted to set up an all India network where people can fill in the excise online. Just because we did not have an all India license we could not offer this service. Presently we operate in six cities – four metros and Bangalore and Pune.

EQM: Please could you put in perspective the recent policy announcement of the government regarding bandwidth and what impact do you think it will have on VSNL?

Amitabh Kumar: We do not see any impact. Basically the government has granted permission for 108 stations six months back. So far only two are operational and the total bandwidth they are providing is 8 MB. In comparison to that in the coming three months we will be providing more than 800 MB. This is just one percent and so we do not see any impact.

EQM: When one picks up the paper these days one reads of AT&T tying up with the Tatas the Birlas. The there is news that Reliance is entering the sector and so is Enron. When you read this what is your reaction given that they have freedom to operate?

Amitabh Kumar: There is no doubt that there is a lot of investment going in the industry. Lot of companies are laying optical fibre cables. But ultimately whether this will translate into earnings for these people is doubtful because the DoT itself will have a big network and the therefore prices will come down, particularly for domestic long distance telephony. A service provider will be able to take leased lines at very low cost. To give you an example, the price of a trans Atlantic cable in 1996 was US$ 20 m. In 1998 it was US$ 8 m. In 1999 it was US$ 2.5 m, the price at which we bought a cable. Now the price is US$ 0.8 m. And this is for lifetime use. So those who bought earlier have incurred losses. Ultimately it does not benefit them just to lay the cables.

With Internet and high bandwidth applications gaining popularity, the telecom operators have a natural advantage. Major international carriers are now becoming Internet super carriers. That advantage will always remain with them. We are defacto moving in the same direction. We have recently sought proposals for nearly 500 – 600 MB of bandwidth. There are plans to buy another 250 MB of bandwidth in Bombay and Cochin. We are also buying 200 MB space on satellites. We have ineffect blocked all satellite capacity for the next few years. Some capacity that is available for competition is very costly. It is not going to be easy for the new entrants.

EQM: What is your view for cellular telephony services and does it fit in your business plan?

Amitabh Kumar: Yes, cellular telephony fits in. Unfortunately we were not permitted to bid in the first round. The market in India is very closed, with two operators in each circle, with a license for 15 years. We are trying to see whether we can get a 3G license. Then we would be able to offer wireless Internet. The market for wireless telephony is extremely large and we will be definitely bidding for that.

EQM: There was some plan to hive off the value added services to a subsidiary…

Amitabh Kumar: Yes, that plan is still there. We are still deciding what exactly is to be hived off.

EQM: What is your view on the deal entered by Bharti in MP where users do not incur telephony charges while accessing the Internet? Instead, the ISP shares its revenues with the telecom service provider?

Amitabh Kumar: We see this happening and atleast some revenue sharing will come. We have ties up with Hughes Telecom in Bombay and they are willing to share half the cost. Ultimately this should happen everywhere.

EQM: What is your view on a merger between MTNL and VSNL?

Amitabh Kumar: One needs to look at the two companies closely before deciding on this issue. Take for example manpower. MTNL has 60,000 employees. We have 3,000. It is not that simple.

EQM: Which are your favourite books?

Amitabh Kumar: Re-engineering the Corporation is a good book. Infact what we have done for VSNL, like online registration is a major re-engineering operation. We have pushed all the jobs being done to the customer in case of Internet services. Another book that I like is ‘Striving for Excellence’.

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