VSNL What Next ?

Videsh Sanchar Nigam Ltd (VSNL) divestment has been in controversy ever since
the government announced its plans to sell off 25 percent stake to a strategic
partner. In the last eighteen months, VSNL’s market cap has plummeted by Rs
25,000 crore and is stated to drop further as the deadline for the termination
of monopoly is near. Already, many prospective buyers, frustrated by delays,
have pulled themselves out of the bidding process. To add to its woes, the
government has denied this state-run monopoly entry to cellular telephony, thus
depriving it of a new business opportunity.

Unchartered Waters

In September 2000, the government announced its intentions to allow private
players to provide international telephone services from April 2002, thus
terminating VSNL’s monopoly two years ahead of the schedule. The financial
loss to the company from the termination of monopoly is pegged at Rs 3,000 crore.

Moreover, over the last couple of years, VSNL’s net profit has been dented
by reduction in tariffs up to Rs 20 for international calls and falling of the
international accounting rates. Though it has witnessed a surge in the
international telephone traffic over its network, this has not translated into
revenue growth.

At present, VSNL offers telephone services to 237 international destinations
and operates seven international gateways in India. International long distance
telephony currently, accounts for more than 90 percent of VSNL’s revenue. It
is projected that the company’s market share would drop to 70 percent within
two years of opening up of the ILD voice sector. Further, tariff reduction as
proposed by TRAI over the next three years, would cause an increase in traffic,
which would increase volume but would hit the margins. But VSNL is likely to be
a beneficiary on account of higher call volume.

VSNL is confident that even after deregulation, it will remain India’s
dominant provider of international telephone services. There are reasons to
believe this claim–its cumulative investments in technology and infrastructure
over the last 15 years have resulted in assets worth Rs 24.13 billion, an
advantage any competitor will take a while to match. Besides, it has a ready
access to submarine cable and satellite bandwidth, and its existing bulk volume
will allow it to be a low-cost provider and still maintain profitability.

Besides, rapidly declining international accounting rates, which govern
payments for international telephone services among telecom providers of the two
different countries, provide little scope to private players for price
competition with VSNL. Also, the incumbency factor works out in favor of VSNL,
with its long standing relationships with almost every major international
carrier as well as exclusive arrangements with a number of carriers and domestic
telecommunications providers MTNL and BSNL.

Opportunities Galore

Analysts believe that while ILD business will remain a steady cash-generating
business, new opportunities such as Domestic Long Distance (DLD) will give
necessary de-risking and growth for VSNL. As part of the compensation package
for the early termination of monopoly, the company is entitled for a license to
operate DLD services and reimbursement by government for license fee, entry fee
and revenue-sharing fee, which it has to pay with respect to the license for
five years. Since the DLD business is price-sensitive, the waiver of the license
fee would give the company an edge in the business.

Undoubtedly, DLD is where VSNL would enjoy strategic positioning. It has made
plans to invest Rs 15 billion over the next three years for setting up a
backbone network for DLD services, which include ATM switching circuitry.
"This will allow it to route the traffic intelligently and will also
provide necessary switching capacity for traffic other than ILD and data",
says Jaspreet Singh, telecom analyst with UTI Securities Research Ltd. Since
small basic operators will be constrained for resources because of the highly
capital-intensive nature and economies of scale involved, VSNL can easily
capture the share of DLD. It does not have plans to invest in creating bandwidth
of its own and has recently called a limited tender for 7,000 km to 8,000 km of
DLD bandwidth. The company already has its switches at prominent locations in
the country, and all it needs now is bandwidth to switch on NLD services, which
is likely to start by December 2001. In an industry like DLD where the first
mover advantage might be very strong, VSNL is leaving no stones unturned to reap
this benefit. The SBI Capital Markets Ltd study projects a 5 percent market
share for VSNL in the first year of DLD operations, rising to 15 percent in
three years and stagnating at those levels, as competition comes in.

Growth Engines

One exciting growth area for VSNL for the last couple of years has been
Internet-related areas. Currently, it is the largest ISP in the country, with
6.5 lakh dial-up subscriber base and 1,500 Internet leased line subscribers. A
testimonial to the fact is that it can thrive in a liberated market environment.
As a part of the compensation package, VSNL will receive a category ‘A’ ISP
license, which would give it a nation-wide presence. It would be linked to DoT’s
vast infrastructure of 500 nodes, throughout the country. Though this will
surely help growing its ISP business manifold, one stumbling factor would be its
lack of last mile connectivity for broadband access. And this forms one of the
investment possibilities for the company. It could develop a broadband last-mile
strategy involving tie-ups with small cable operators or rolling out fiber-to
kerb linkages in key cities.

The recently liberalized up-linking policy has also thrown
open new opportunities for VSNL. It now provides TV up-linking through the
Intelsat system from Standard A earth stations at Chennai, New Delhi and
Ernakulam, to more than twelve regional channels. Though the policy allows
companies with a minimum Indian ownership of 51 percent to set up

up-linking hubs or teleport capabilities for their own use or for hiring out to
other broadcasters, smaller channels are likely to flock to VSNL stable due to
cost and efficiency advantages.

The company has also identified data-centric activities as
another thrust area. The company already has 200 co-located servers and is in
the process of building an Internet data center at Vashi, Mumbai. Through this
22,000 sq ft facility, it plans to offer dedicated hosting and ASP services
apart from server co-location. The company is also planning to become an
infrastructure provider for DTH services.

Threats

Would VoIP rock VSNL’s boat? Analysts do not see any threat from IP
telephony for VSNL till 2004-5 because of legal issues and technological
hindrance, such as the availability of IP broadband network on major routes. And
it is unlikely that voice traffic generated by corporate business will be routed
via the IP network due to an inherent advantage of circuit-switched voice
network.

However, what is hurting the company at present, is the lackluster way VSNL’s
divestment process is progressing. It has essentially constrained the current
management from taking strategic decisions till the time divestment process
reaches a logical conclusion. Also, VSNL has a workforce which needs to be fine
tuned to operate in a liberalized market environment and learn the basics of
customer service.

MT Jeevan