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VSNL: Dial C for Concern - Views on News from Equitymaster
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  • Sep 5, 2003

    VSNL: Dial C for Concern

    VSNL, who only a couple of years ago was a monopoly in the business of ILD(international long distance) telephony, is finding itself in the midst of intense competition, following the decision taken by the government to open the business of ILD telephony services to private players in 2002. In this article, we will therefore try and review the performance of the company and have a look at what steps the company is taking to protect its market share from private players.

    The company’s performance in FY03 left little doubt about its diminishing fortunes in its core business of ILD telephony. In the past, VSNL was able to charge higher prices for its ILD telephony services, thus reaping a windfall. It was able to do this because it was a monopoly. However, the entry of private players forced it to tone down its tariffs this was because settlement rates as well as interconnect rates fell due to competition. As a result, the revenues of the company fell by 32% whereas the bottomline slipped 40% in FY03. Although, the value added services segment reported substantial growth, this is unlikely to cause any significant impact on the earnings in the medium term, as 82% of the company’s revenues still come from its ILD business.

    Within months of opening the sector to competition, VSNL had to face two competitors and the immediate effect was the drop in tariffs. The tariffs fell by 50% inside the first six months and with the settlement rates for incoming calls also falling, the company suffered a huge decline in its revenues. If the fall in tariff was a bad news for the company, the future does not look too good either. The ‘most favored customer’ status given to VSNL by fixed line majors like MTNL and BSNL is likely to go away in FY04 and with BSNL acquiring an ILD license of its own, it will make little sense for the company (BSNL) to route its calls through VSNL’s network. This will deprive VSNL of a huge customer base.

    Given the unfavorable developments, VSNL, we believe will have to adopt a two pronged strategy. First, it will have to try hard to protect its market share from the new entrants by resorting to aggressive pricing of its services and also by developing a NLD (national long distance) network of its own. VSNL has a vast experience of almost 130 years in ILD telephony and has a long-standing relationship with majority of international clients. This will help the company to offer services at competitive rates. Moreover, with tariffs falling drastically, the volumes are likely to go up and this will benefit all the players. But for VSNL to cash in on this opportunity, it will have to build an NLD network of its own.

    Earlier, being a monopoly, VSNL did not feel the need to develop an end user base of its own since it had the customer base of MTNL and BSNL. But with the opening up of the sector, both MTNL and BSNL are likely to become VSNL’s direct competitors, thus making it imperative for the company to acquire customer base of its own. This is where the synergies with Tata group will come into play. The Tata group in FY02 acquired VSNL and this acquisition seems to be a win-win situation for both. With the acquisition of VSNL, the group will have its presence across the entire telecom value chain, while VSNL will have an access to the end user customer base of the Tata group.

    Tata group was among the first private sector entrants in the industry and has a presence in all the key circles of the country, both in basic as well as mobile telephony. VSNL services will now be provided under the Tata Indicom name, an umbrella brand for the group’s various offerings in telecom. Thus, the integrated services from VSNL and Tata group will help them provide services across the entire telecom chain through the optimum use of infrastructure, investments and expertise. VSNL has also entered the NLD services business and this is likely to reduce its dependence on other basic operators.

    VSNL will also have to try to reduce its dependence on its core business of ILD telephony and augment revenues from its other offerings such as the internet and other value added services. The company is a leading player in value-added services such as international private leased circuits (IPLC), video conferencing, packed switched data transmission and the like. It accounted for 18% of traffic revenues in FY03 as compared to 12% in FY02. However if one considers absolute figures, the revenues from these services have actually fallen by a marginal 3% thus indicating the pressure on this front as well.

    The company is currently trading at Rs 122, a P/E of 3.5x its annualised 1QFY04 earnings. Going forward, the company’s performance will depend on how well it is able to deal with the competition from the private players and at the same time increase its revenues from its offerings of value added services. At this stage the stock prices and valuations reflect the apprehensions that investors have regarding the future strategies of the company and how they will benefit the company in the long-term.



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