VIDESH SANCHAR NIGAM LTD: Leading from the Front

We

are witnessing a telecom revolution in India. The fierce

competition and increasing pressure from national and

international operators has forced the monopoly players to

rethink their strategies.

Videsh Sanchar Nigam Ltd (VSNL)

is gearing up to face the competition in the changing telecom

scenario. VSNL is currently quoting at Rs 2,099 with a 52-week

range of Rs 3,250 and Rs 560. The Government controls 53 percent

of its Rs 95 crore capital. Holders of its Global Depository

Receipts (GDRs) are the next largest holders with 30 percent

share while FIIs and Indian Financial Institutions hold another

15 percent with a paltry 1 percent held by the public.

Background:

Monopoly Player

In

1870, the first private cable was set up for telegraph

communications by British Indian Submarine Telegraph Company.

Wireless communication services commenced with the formation of

the Indian Radio Telegraph Company, which were later merged to

form Indian Radio and Cable Communication Company in 1932.

In 1947, these companies

were nationalized to form the Overseas Communication Service (OCS)

and after almost forty years of existence, OCS was converted

into a wholly-owned government company–VSNL–in 1986. The

next milestone for VSNL was the divestment of government stake

to financial institutions in the early nineties and more

recently its GDR issue in March 1997 when its shares were

offered to overseas investors at $13.93 per share. The issue

raked in almost $500 million making this issue one of the

largest by any Asian company.

Growth at VSNL has really

taken off in the last six years with its revenues increasing

from Rs 2,928 crore in 1993-94 to Rs 7,177 crore in 1997-99

showing a CAGR of 16 percent. At the same time profits after tax

have shown a CAGR of 41 percent.

Operations:

Based on Telephony

VSNL

has the sole licence to operate international phone services and

exclusive right to provide basic international voice telecom

services till March 2004. The company currently provides

additional value-added services like telex, facsimile, data

transmission, value-added network services, maritime and

aeronautical communication services.

Telephony is the main

business of VSNL comprising almost 93 percent of its total

revenues of Rs 7,177 crore for the year ended 31 March 1999. The

basic telephone services of the company include international

telephone services, home country direct services, telex and

facsimile. It provides the switching and transmission

infrastructure to connect the Indian domestic telecommunication

network with foreign networks. It has an excellent

infrastructure with international gateways at Mumbai, Calcutta,

Delhi, Chennai, Eranakulam, Jalandhar, and Gandhinagar which

route international traffic to and from the domestic telecom

network using both satellite and undersea cable links. The

company has an agreement with DoT for the international calls

and as per the current agreement, it is ensured of revenues of

Rs 10 per minute. The recent tariff-rebalancing, which reduced

the long distance tariffs is also expected to benefit VSNL.

VSNL also provides

specialized services, which include leased-lines, data

communication services, e-mail, satellite mobile communication,

video conferencing, television relay, and Internet access. Of

these, the major is the Internet service. Private operators have

to buy bandwidth from VSNL. The company will now face

competition from the private Internet operators as they have

been allowed to set up their own gateways. However, VSNL is aggressively increasing its bandwidth capacity to meet any

competition in future. VSNL

plans to set up a subsidiary to provide the value-added services

and has already received permission from the shareholders.

Apart from increasing

its own infrastructure, VSNL has invested in number of JVs

that include Iridium, Intelsat, and Inmarsat among others. The

company has also formed a JV with ILFS and Telstra for

providing VSAT services to domestic customers. Apart from

these, the company is also increasing capacity of its

under-sea cables including the use of Fibre-optic-Link around

the Globe (FLAG), SEA-ME-WE3 among others. VSNL has invested

$150 million for a 7 percent stake in the ailing satphone

company, ICO Global Communications. 

Future Plans:

Massive Investments

With

a wide range of capacity additions and alliances VSNL hopes to

become a global player and become a carrier’s carrier. The Rs

50 billion investment plan during 1998-2003 has been revised to

Rs 70 billion. The company plans to make major investments of

about Rs 31.70 billion in its core business such as undersea

cables, satellite capacity, switching, international gateways,

satellite earth stations, and other transmission. Investment in

value-added services is projected at Rs 8.60 billion whereas new

business will have a share of Rs 20.10 billion. The projected

capital expenditure outlay in the next three years is estimated

at Rs 11 billion, Rs 26.44 billion and Rs 16.50 billion.

While the monopoly to

offer international telephone services will end in 2004, the

company’s monopoly on international gateway has come to an

end. This will increase the competition in the Internet

services. While a number of ISPs have commenced operations, VSNL

continues to enjoy higher rating in terms of quality of Internet

service. The value-added services will be hived off as a

separate subsidiary, which will enable it to compete with the

other ISPs in the country. VSNL also plans to come out with an

ADR issue and list the shares at the New York Stock Exchange in

the current year.

Financial

Performance: Dollar Returns

VSNL

reported impressive financials during the year ended March 1999.

The total revenues have increased from Rs 6,436.13 crore to Rs

7,175.56 crore. Net profit has spurted 42 percent to close at Rs

1,376.10 crore in the same period. The company reported splendid

growth in the value-added services, especially related to the

Internet. However, in the first nine months of the current

financial year, VSNL reported a marginal improvement in the

turnover at Rs 5,018 crore compared to Rs 4,898 crore last year

with the value-added services showing impressive growth. The net

profit declined from Rs 1,004.40 crore to Rs 1,000 crore.

Investment

Potential: Valuations to Improve

VSNL is

currently traded at Rs 2,099 discounting its projected March

2000 EPS by 15 times and March 2001 EPS by 13 times only. The

major strength of VSNL is the strong infrastructure it has built

over a period of time, which is very difficult to replicate. On

the ISP front too, its user base, especially in the corporate

sector, is locked in due to problems associated with change in

e-mail IDs. The DoT had earlier planned an investment of Rs

5,000 crore in the 9th Five Year Plan (1998-2002).

However, this has now been revised upward to Rs 7,052 crore. The

company plans to invest a substantial amount in transmission,

switching, and Internet related services. With the company

gearing up for a NYSE listing, the valuations should further

improve. The government had recently offered shares at a price

of Rs 750, which was at a 25 percent discount to the then

prevailing market price of about Rs 1,000. The shares thereafter

touched a high of Rs 3,250 and have declined to the Rs 2,000

mark. Considering VSNL’s core operations and value-added

services, the growth from the massive investments and the

valuations of ISP, the shares of VSNL provides ample

opportunity. Buy.

Sushanto

Mitra



is a financial consultant with Technology Capital

Partners.