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VSNL: Compensation conundrum

Sep 11, 2000

Last week saw VSNL make the headlines in the top dailies, as its international monopoly is to be dismantled in 2002, two years earlier than the original schedule of 2004. For dismantling the monopoly prior to the promissed schedule the Governemnt has offered VSNL a compensation package amouting to Rs 7 bn.

The package includes allowing VSNL into domestic long distance (DLD) telephony without payment of the entry fee amounting to Rs 1 bn. Further, it will not be required to furnish bank gaurantees of Rs 4 bn. These guarantees are to be excercised only in case the service provider fails to roll out the network as per the schedule. The company will be exempted from revenue sharing for a five year period.VSNL will also be awarded a nationwide Internet service provider (ISP) license. This package has been valued at Rs 7 bn.

The questions remains, is it a commensurate compensation for business lost and should VSNL accept the offer? Equitymaster attempts to estimate the value of this package and whether it holds a good deal for VSNL.

(Rs m) FY00 FY01 FY02 FY03 FY04
Industry Revenue 70,241 80,393 90,658 101,364 112,169
Growth* 4.0% 14.5% 12.8% 11.8% 10.7%
Industry PAT 7,992 10,567 12,624 14,974 16,338
PAT Margin* 11.4% 13.1% 13.9% 14.8% 14.6%
Market share 100.0% 100.0% 100.0% 80.0% 60.0%
Revenue 70,241 80,393 90,658 81,091 67,301
PAT 7,992 10,567 12,624 11,979 9,803
Profit loss due to liberalisation - - - 2,995 6,535
Present value of lost earnings 6,119
* Preceeding 5 year rolling average
** Discount rate = 15%

In the model till 2002 the international telephony market consists only of VSNL and therefore VSNL enjoys 100% market share.

The above exercise gives an indicative compensation figure of Rs 6.12 bn. The package looks attractive unless VSNL's cost of capital is less than 15% or it believes that either the revenue growth rate, profit margin or market share will be higher than these projected levels.

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