• FEBRUARY 6, 2002

VSNL: Offering synergy

It is finally announced. The government has sold a 25% stake in Videsh Sanchar Nigam Limited (VSNL) to the Tata Group at Rs 202 per share. The Government of India held a 53% stake in VSNL. Following the disinvestment, Tata Group would be required to announce an open offer for another 20% stake in the company.

Against the company…
VSNL’s earnings growth has slowed over the last two years in light of falling international long distance telephony rates (ILD) and revision in accounting rates (TAR) with international telecom carriers. Besides, the company’s agreement with the Bharat Sanchar Nigam Limited (the re-christened DoT) for revenue share terminates in April 2002. This, to an extent, has been insulating the company from the declining TAR till now. Following the tariff rationalisation, though paid-minute calls have been on the rise, it is not commensurate with the fall in tariffs. As a result, revenues have slowed down. Another big threat for VSNL is Voice over Internet Protocol (VoIP), which could have a material impact on VSNL’s profitability. With private players set to enter the ILD segment, competition is set to heat up, which could slower growth prospects.

For the company…
VSNL has a solid network infrastructure and its investments in various undersea cable lines (SEA-ME-WE, FLAG and Gulf Cable) and satellites (Intelsat and Immarsat) bode well in the long run. VSNL currently has 38 earth stations, 12 gateway switches, 5 cable systems and 22 Internet network nodes spread across the country. Given the fact that its core business i.e. ILD is slowing, VSNL has ventured into domestic long distance telephony (DLD), which was hitherto dominated by BSNL. The company would spend Rs 12 bn towards DLD and has already started building up the necessary infrastructure. VSNL is also the largest Internet Service Provider (ISP) in the country with a subscriber base of more than 630,000 in FY01.

The new VSNL…
VSNL seems to fit well within the Tata Group’s foray into the telecommunication sector. For one, Tata-Birla-AT&T (BATATA), which has presence in both basic and cellular segments could route all international calls through VSNL. This is an added advantage from VSNL’s perspective as well because with Tata’s taking over, the company now has an indirect presence in the basic telephony segment.

Besides, VSNL’s foray into DLD segment bodes well with the Tata Group on two counts. Tata Power has been laying fibre optic network and it intends to become the carriers’ carrier. VSNL could utilise this as a backbone for transmitting both data and voice traffic, which has been growing at a healthy rate. Secondly, as a part of the compensation package for bringing forward the end of its ILD monopoly by two years, VSNL is exempted from paying a 15% revenue share for DLD calls. Also, the government has announced that VSNL would be the preferred transmitter for international calls for both BSNL as well as MTNL. Given this backdrop, the combined entity has quite a lot of synergy.

Key valuation parameters…
Criteria Units VSNL MTNL
Price (Rs) 160 142
No. of shares (m) 285.0 630.0
Market Cap (Rs m) 45,600 89,460
Price to earnings* (x) 3.1 6.4
Price to cash flow (x) 2.8 3.8
Price to book value (x) 0.7 1.1
Market cap to sales (x) 0.6 1.2
Avg revenue per employee (Rs m) 24.0 1.1
RONW (%) 27.0%18.7%
Value add services/revenue (%) 11.2%7.5%
*9mFY02 annualised

The scrip currently trades at Rs 168 implying a P/E multiple of 3.1x nine months earnings. With the Tata Group expected to launch an open offer soon, there could be an upside revision in the stock. The open offer price could be either Rs 202 per share (the bid price) or the average of high and low prices of the last six months, whichever is higher. The highest and the lowest price of the last months were Rs 178 and Rs 114 respectively (excluding bonus of Rs 50 per share), which works out to an average price of Rs 146 per share.

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