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VSNL reels under tariff cuts, loss of monopoly

NetScribes/Ganesh Ramamoorthy

The message is loud and clear: Videsh Sanchar Nigam Ltd (VSNL) will see no more easy profits or huge growth rates. Increased competition from private players, loss of monopoly in the ISP business and tariff cuts in long-distance telephony have taken their toll on VSNL's topline as well as bottomline for the quarter ended September 30, 2000.

VSNL has reported net sales of Rs 16.71 billion for the second quarter of this fiscal - a mere 0.33 per cent growth from Rs 16.65 billion in Q2 2000. Net profits have also managed only a marginal 0.2 per cent growth to Rs 3.47 billion from Rs 3.46 billion.

Compare this with the double-digit growth figures the company used to report until last quarter and VSNL clearly has to do much more to maintain its numero uno position in the post-monopoly era.

Analysts attribute the flat growth in sales mainly to a fall in the accounting rates during the quarter. "The total accounting rates have gone down on an average by 20 per cent, affecting revenue from operations," said an analyst with Mumbai-based Asit C. Mehta Brokerage.

Revenues would have been impacted to a greater extent had it not been for the 17.8 per cent growth in traffic volume. "The growth in traffic volume was mainly due to tariff cuts announced by the TRAI during the quarter," the analyst said.

That, however, was not enough to prevent a dent in profit margins. "Tariff cuts in the main businesses without a significant increase in traffic has resulted in a decline in operating profits," said the analyst.

Operating profit is down 12.5 per cent to Rs 3.86 billion this quarter from Rs 4.41 billion in Q2 2000. Operating profit margins have dipped to 23.1 per cent from 26.5 per cent. Net profit margins, however, remain steady at 20.8 per cent mainly due to a lower tax provision of Rs 1.64 billion in the quarter, compared to Rs 1.93 billion in the year-ago quarter.

Other income for the quarter is up 25.8 per cent to Rs 1.54 billion mainly on account of interest income from surplus GDR proceeds retained abroad.

With the cut in international call rates, analysts say that VSNL's topline will be severely affected in the future if it does not tap additional revenues by providing value-added services.

"The contribution of value-added services currently stands at about 15 per cent of total revenues. However, this will have to more than double if VSNL wants to maintain its topline growth," said an analyst with a Mumbai-based securities firm.

Among the very few encouraging signs for VSNL this quarter is a 77 per cent growth in its Internet customer base to 507,538 following an over 15 per cent reduction in Internet tariffs.

On Wednesday, the VSNL stock closed at Rs 209.90 on the Bombay Stock Exchange (BSE), down 0.52 per cent from its previous close of Rs 211. The counter saw volumes of around 50,484 shares.

Based on this quarter's results, VSNL is trading at a P/E multiple of 4.2 to its annualised FY01 earnings.

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