The Hindu Business Line : VSNL: Hold

However, those with a shorter horizon (of say, six to nine months) may consider pruning exposures in the stock on every uptrend as the financial performance of VSNL may not improve sharply over the next couple of quarters. At the current market price, the stock trades at a price-earnings multiple of 10 times the per share earnings (without considering extraordinary items) for 2003-04.

Even as the unimpressive run of earnings performance for the fourth quarter continues on account of a slump in international telephony business, VSNL has been engaged in steadily shifting its business focus.

The company is focussed on broadbasing the revenue streams by strengthening its NLD (National Long Distance) foray, capitalising on the retail broadband business opportunity and firming up the DTH (Direct-to-Home) plans. But all these plans are capital-intensive, entail high risk and the returns from these will accrue only over the medium-to-long term. On the downside, however, in the near term, the expected decline in bandwidth prices and competitive pressure in international telephony business may put sustained pressure on margins. And the restructuring to consolidate all telecom assets within the Tata group also remains an uncertain variable.

The key highlights of VSNL's earnings performance for the fourth quarter ended March 31, 2004 were:

Revenues at Rs 778.1 crore saw a 15 per cent decline over the corresponding previous period and was flat on a sequential basis.

The operating profit margin dipped by over four percentage points to 21.4 per cent during the same period. But on a sequential basis, it has improved, largely on account of a substantial reduction in network costs and better control over salaries and related costs.

The post-tax earnings (without extraordinary items) fell by over 50 per cent to Rs 87.8 crore during the same period and has inched up marginally on a sequential basis.

VSNL's performance is expected to be driven by the following factors:

International telephony business: In the latest quarter and for 2003-04, the international telephony business suffered on account of sharp decline in international settlement rates, fierce competition and a sharp rise in the grey market for international calls. The intense competition in the segment has spilled over to this year also, with VSNL substantially dropping the settlement rates on all outgoing calls routed by BSNL.

Even as VSNL faces competitive pressure on both incoming and outgoing calls, there may be some relief on the way.

That is, if TRAI switches the prevailing access deficit charge regime to a revenue sharing arrangement with effect from October 2004.

Apart from offering greater flexibility in pricing and negotiating tariffs, international traffic volumes handled by VSNL may rise sharply as the flourishing grey market for calls get curbed.

It is estimated that over 25 per cent of the 3.5 billion incoming minutes terminating in India are being captured by the grey market operators.

Working on multiple fronts: VSNL is slowly but surely diversifying its focus from international telephony to other lines of business. First of all, it is widening its existing retail Internet presence into the broadband arena.

To expand its range of Internet offerings, especially in broadband, in end-March, it purchased the Internet Service Provider business of Dishnet DSL for Rs 270 crore.

Second, in its NLD foray, it has entered into a 15-year agreement with the Bharti group involving a right to use a good chunk of the latter's NLD infrastructure.

Finally, it is also working on the joint venture with STAR TV to launch DTH services in India, which is likely to become operational by the end of this year.

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