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VSNL, what next?

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DQW Bureau
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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.

Uncharted 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.

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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.

DLD Market in Future

DLD Assumptions  FY2002  FY2003  FY2004  FY2005  FY2006  FY2007  FY2008

Percentage drop in prices 

15% 25% 20% 15% 10% 10% 10%

Usual increase in demand 

15% 17% 20% 20% 20% 20% 20%

Market Size (Rs bn) 

151.2 155.9 170.6 192.3 222.2 255.6 294.0

Inter circle market size (Rs bn) 

75.6  78.0 85.3 96.2 111.1 127.8 147.0

VSNL’s market share

 5% 10% 15% 15% 15% 15% 15%
Net revenue from DLD (Rs mn)  3,780.5 7,795.8 12,797.6 14,424.2 16,668.6

19,172.2
22,051.9
Source: SBI CapitalMarkets Ltd

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.

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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

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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

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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 curb 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.

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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

Source: www.voicendata.com

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