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VSNL: Competitive pressure continues - Views on News from Equitymaster
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  • Oct 31, 2003

    VSNL: Competitive pressure continues

    VSNL announced its September quarter results yesterday, reporting topline and bottomline declines of 35% and 74% on a YoY basis. Even the performance for the half-year period was depressing as sales and profit for this period declined by 37% and 75% respectively. While operating margins were under tremendous pressure for both the periods, the fall was more prominent for 1HFY04 (decline of over 1,200 basis points).

    Financial performance: A snapshot
    Rs m 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Sales 11,986 7,755 -35.3% 25,757 16,119 -37.4%
    Other Income 557 463 -16.9% 1,087 1,362 25.3%
    Expenditure 9,362 6,582 -29.7% 19,236 14,040 -27.0%
    Operating Profit (EBDIT) 2,624 1,173 -55.3% 6,521 2,079 -68.1%
    Operating Profit Margin (%) 21.9% 15.1%   25.3% 12.9%  
    Interest - -   - -  
    Depreciation 364 406 11.5% 712 793 11.4%
    Profit before Tax 2,817 1,230 -56.3% 6,896 2,648 -61.6%
    Extraordinary items (1) (578)   (38) (965)  
    Tax 958 165 -82.8% 2,347 538 -77.1%
    Profit after Tax/(Loss) 1,858 487 -73.8% 4,511 1,145 -74.6%
    Net profit margin (%) 15.5% 6.3%   17.5% 7.1%  
    No. of Shares 285.0 285.0   285.0 285.0  
    Diluted Earnings per share* (Rs) 26.1 6.8   31.7 8.0  
    P/E Ratio (x)   17.6     14.9  
    (* annualised)            

    The dismal topline performance of VSNL, the privatized international long-distance (ILD) service provider (now part of the Tata group), may be attributed to the recent trends in the tariff structure (reducing tariffs, that is) in the Indian telecom sector and the high levels of interconnect charges that the company has to pay to domestic carriers (like BSNL and MTNL) for routing its international calls through their networks. International telephony and related services, which now form around 87% (91% in 2QFY03) of VSNL business, witnessed a revenue decline of over 37%, leading to the substantial fall in the topline. Decline in revenues from other services (IP-VPN services, VoIP services, satellite mobile communications, etc.) added to the topline woes.

    Segment-wise performance
      2QFY03 2QFY04 Change
    International telephony & related services      
    Revenue 10,936 6,820 -37.6%
    PBIT margin 27.6% 22.8%  
    Other services      
    Revenue 1,050 935 -11.0%
    PBIT margin 53.3% 65.7%  
    Revenue 11,986 7,755 -35.3%
    PBIT margin 29.8% 28.0%  

    The performance on the operational fronts speaks out a mixed story for VSNL. While PBIT margins for the international telephony business have declined by almost 500 basis points, those for its other services have improved by over 1,200 basis points. Rise (as percent of revenues) in all cost heads resulted into the fall in margins for the international telephony business. The biggest item, network cost, has risen as a percent of revenues, from 70% in 2QFY03 to 73% this quarter.

    Cost break-up
      2QFY03 2QFY04 Change
    Network costs 8,412 5,640 -33.0%
    % of revenues 70.2% 72.7%  
    Operating & other expenses 609 534 -12.3%
    % of revenues 5.1% 6.9%  
    Employee costs 341 408 19.6%
    % of revenues 2.8% 5.3%  
    Total costs 9,362 6,582 -29.7%
    % of revenues 78.1% 84.9%  

    The opening up of the ILD services sector to competition has led to increasing pressure on VSNL and the same has been showing in the company’s financial performance. However, there have been certain initiatives that VSNL has taken recently towards expanding businesses into other areas, and internationally as well. In one such initiative, VSNL recently announced the formation of VSNL America Inc. to provide IP-VPN services. In another such initiative, the company was granted the permission to offer ILD voice and data services to the Sri Lankan market.

    At the current market price of Rs 120, the stock is trading at a P/E multiple of 14.9x its annualised 1HFY04 earnings. While the prospects of VSNL remain under a cloud of uncertainty, both on the tariffs and international telephony fronts, the fact that the company has increased its share of revenues from value-added services (as mentioned above) augurs well for its prospects going forward. However, for that to happen much would depend on how VSNL is able to handle competition arising from private players. However, apart from a string of poor financial performance, another concerning factor for VSNL is that the ‘most favored customer’ status given to VSNL by fixed line majors like MTNL and BSNL is likely to go away in FY04. Also, 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 be a huge setback for the latter as this would deprive it of a huge customer base.



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