There seems to be no respite in sight for Videsh Sanchar Nigam Limited (VSNL), the privatised international long distance telephony (ILD) operator. For yet another quarter, the company has posted a sharp drop in both revenues and profitability. In 2QFY03, net profit has nose-dived by a significant 33% for the quarter ended September 2002. The company meanwhile, has finalised on its proposed investment in Tata Teleservices Limited (TTSL), the basic service provider under the Tata Group.
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Income from telecom operations have dipped by 22% to Rs 12 bn. This despite a 16% rise in paid-minute calls highlights the woes of the company. The concerns for VSNL started in 1QFY03 when ILD sector was opened up for private participation. This combined with the second round of ILD tariff restructuring that resulted in a straight 40% fall for a one minute call to US (accounts for a bulk of the ILD traffic). Following the entry of Bharti in the ILD segment, the private sector major offered to transmit ILD traffic through its network at a rate that was almost 40%-50% lower than VSNL's revenue share. With both tariffs and share of VSNL in the tariff falling at a steeper rate, VSNL has suffered significantly.
But the 2QFY03 results do not account for the ongoing negotiations with BSNL and MTNL, the dominant public sector majors in basic telephony segment. One will not be surprised if VSNL adjusts both revenues and earnings once negotiations conclude. We expect the company to report more than 50% fall in net profits in FY03. Other income during the quarter has dropped significantly, which is on account of lower cash balance with the company following special dividends in FY02. Operating margins however, have increased during the quarter on the back of lower license fee outgo after the new ILD policy.
The company has disclosed that MCI WorldCom and Teleglobe that have filed for Chapter 11 bankruptcy in the US. "These carriers are continuing their operations and have been remitting dues and are continuing to settle the accounts". If one were to adjust for the sharp fall in other income and extraordinary items in both the quarters, net profit has actually declined by 18% in 2QFY03.
In yet another significant development, VSNL has finalised its proposed investment in TTSL. The committee that was appointed by VSNL has proposed that VSNL should invest Rs 8.4 bn over a period of seven years, of which Rs 6.4 bn will be invested in the first four years. This amounts to a 19.9% stake in TTSL. If the investment is cleared, the company will have presence in basic telephony segment, which is vital from a long-term perspective. However, one is not sure whether a 20% stake ensures a captive ILD traffic from VSNL. Moreover, it remains to be seen whether a 20% stake is enough for VSNL to take complete advantage of TTSL's presence in basic services in Andhra Pradesh, Tamil Nadu, Gujarat, Delhi and Karnataka.
The stock currently trades at Rs 103 implying a P/E multiple of 3x annualised 1HFY03 earnings. The stock has been on the decline due to uncertainty over the ongoing revenue share negotiations with BSNL and MTNL. Since the government had assured that all ILD traffic would be routed through VSNL in the first two years after disinvestment (i.e. FY03 and FY04), the company has some breathing space. But since both the dominant players are threatening to route traffic through Bharti if VSNL fails to match costs with the private operator, growth prospects in the near term are in jeopardy. We expect the stock to remain weak in the near-term. But over the long-term, one will not be surprised if VSNL is integrated with other Tata Group telecom companies like Tata Teleservices and Hughes Tele.com, which will give VSNL the leverage.
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