VSNL: The tariff restructuring effect

Videsh Sanchar Nigam Limited (VSNL), the state owned international telephony service provider, has reported a 6.1% rise in profits for the second quarter ended September 30, 2001. However, revenue from telephony services have fallen by 4.5% to Rs 15,954 m.

(Rs m)	2QFY01	2QFY02	Change	1HFY01	1HFY02	Change
Sales	16,710	15,954	-4.5%	33,668	31,237	-7.2%
Other Income	1,539	1,488	-3.3%	3,092	2,626	-15.1%
Expenditure	12,849	11,756	-8.5%	25,445	22,855	-10.2%
Operating Profit (EBDIT)	3,861	4,198	8.7%	8,223	8,382	1.9%
Operating Profit Margin (%)	23.1%	26.3%		24.4%	26.8%
Interest	-	-		-	-
Depreciation	289	344	19.0%	554	651	17.5%
Profit before Tax	5,111	5,342	4.5%	10,761	10,357	-3.8%
Extraordinary item	-	(110)		-	119
Tax	1,639	1,547	-5.6%	3,460	3,136	-9.4%
Profit after Tax/(Loss)	3,472	3,685	6.1%	7,301	7,340	0.5%
Net profit margin (%)	20.8%	23.1%		21.7%	23.5%
No. of Shares (eoy) (m)	95.0	285.0		95.0	285.0
Diluted number of shares	285.0	285.0		285.0	285.0
Earnings per share (Rs)*	48.7	51.7		51.2	51.5
(*annualised)

While the telephone traffic has grown by over 13% during the quarter, the income from operations (excluding income from intelsat) has shown a decline by about 3% due to reduction in TAR (total accounting rates) as well as significant reduction in tariffs for Internet and leased channel services. With effect from 1QFY02, the TAR are atleast lower by 20% compared with the corresponding quarter of the previous year. This along with the reduction in international tariffs by the Telecom Regulatory Authority of India (TRAI) has affected telephony revenues. The results are in with our estimates and one can similar trend in the coming quarters as well.

The sharp rise in operating margins is primarily on account of withdrawal of excess provision of Rs 256 m towards staff costs written last year. Operating margins for the first half of the current financial year have gone up from 24.4% in 1HFY01 to 26.8% in 1HFY02. Though net profit for 2QFY02 has increased by 6.1%, it is stagnant at last years' levels for the first half of the current year. We expect the company to report around 15% fall in profits for FY02.

The scrip is currently trading at Rs 228 on a P/E multiple of 4.4x the annualised 1HFY02 earnings.