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VSNL: Hit from all sides

Sep 4, 2002

The recent spat between the Communication Ministry and VSNL (effectively the Tata’s) has led to the stock price of the ILD major bring battered on the bourses. The stock is currently trading at its 52-week low levels. The reason for the lull is the ongoing debate over revenue share between VSNL on one side and BSNL-cum-MTNL on the other. The problem for VSNL is that international tariffs are on the decline. For instance, a minute call to US now costs around Rs 24 per min as compared to Rs 42 in FY02, almost 45% fall in just a matter of six months. This was after Bharti commenced its ILD (International Long Distance) service in 1QFY03. If this were not enough, VSNL’s share of this Rs 24 per minute call to US is also declining, at a faster rate. The trend is expected to continue in the future as well.

Just to put things in perspective, VSNL received Rs 8 per min as revenue share for an ILD call in FY02. In the worst-case scenario (if the current negotiations with BSNL and MTNL goes through), VSNL’s revenue share could fall to as low as Rs 4 per minute, which represents a straight 50% hit in its revenues. Even if one were to assume that rise in volumes (i.e. more ILD calls) would compensate for the fall in tariffs, it is still not enough to arrest the slide in both revenues and profitability.

VSNL, after divestment, was assured that both BSNL and MTNL would direct ILD calls through its network. This offered some breathing space for Tata’s. However, even this has come under scrutiny. The Communication Minister has hinted that on failure to arrive at a conclusion with VSNL, both BSNL and MTNL have the option to route ILD calls through other private players like Bharti and Data Access.

Another negative outcome for VSNL is the proposed merger of BSNL and MTNL. Besides, the government is also contemplating of allowing BSNL and MTNL to venture into ILD services. Obviously this is a big negative for VSNL.

Already BSNL is dominating the proceedings in the Indian telecom sector with almost 82% market share in the basic telephony segment spread across the country (barring Mumbai and Delhi). Now if the planned merger with MTNL goes through, we will have a company that controls more than 94% of the basic telephony segment. The private sector is still significantly smaller in terms of subscriber base with players like Tata’s and Bharti slowly increasing the coverage after setting up infrastructure for so long.

Instead of creating an equitable ground, the recent government policies have turned lopsided off late, which is a cause of concern. This not only affects the growth prospects of private sector, but also the industry as a whole. Private players are now being compelled to share higher revenues favoring BSNL considering the sheer size of the latter.

Given this backdrop, the near term prospects of VSNL remains extremely challenging and one has to watch how Tata’s gear up to meet the same. Until some clarity emerges on this front, one would be better off not considering any investment in the company.

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