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VSNL in tune with the times

NetScribes/Ganesh Ramamoorthy

It's being seen as the transformation of a typical government company into a professional, market-savvy organisation. Analysts describe Videsh Sanchar Nigam Ltd's recent decision to slash leased line tariffs as a proactive and smart move.

"One major concern regarding VSNL was the lack of freedom for the management to take independent decisions, given the fact that it's a PSU. The decision to cut bandwidth rates gives the market some comfort level as it is now beginning to see the management taking independent decisions," said an analyst at a Bombay-based securities firm.

Although the hefty 75 per cent price cut might give rise to concerns of potential revenue loss to VSNL, analysts expect increased volumes to offset the loss in revenues. At Rs 848 million, revenues from leased lines made up about 5 per cent of VSNL's total revenues of Rs 16.71 billion in the quarter ended September 30, 2000.

"The new tariffs look very attractive and could prompt private Internet service providers (ISPs) to book additional bandwidth with VSNL. Any loss in revenues from the rate cut will be offset by a rise in volumes," said the analyst.

"The strategy is to cut tariffs and increase market share through increased volumes. It's a smart move as it will prevent most private ISPs from setting up undersea cable networks," he added.

Industry observers say that the rate cut will prompt ISPs to hasten their bandwidth booking. "Indian hosting services will also benefit," said a spokesperson of Netmagic Solutions, a Bombay-based Web hosting services company.

High bandwidth costs, coupled with low bandwidth availability, have been discouraging companies from hosting their Web servers in India. The servers are usually located in the US, where bandwidth costs are lower. Based on the 1:4 compression norm, the Telecom Regulatory Authority of India had fixed bandwidth cost at Rs 4.2 million per annum for 2 mbps. VSNL was charging this tariff till now.

But, with the decline in global bandwidth rates, private ISPs hiring bandwidth from VSNL have been demanding lower rates. "That's why they were not booking capacity in advance. The new rates are in line with private ISP's expectations," said the Netmagic spokesperson. A 2 mbps line will now cost only about Rs 1.25 million.

The price revision, effective from January 1, 2001, will also bring the tariffs closer to European and American rates.

For the VSNL scrip all this is good news. While maintaining a positive outlook on the scrip in the medium to long term, the analyst said the scrip would also gain from the Department of Divestment's decision to divest up to 20 per cent of the government's stake in VSNL.

"Valuations look quite compelling at current levels and we maintain a positive rating," he said. At Rs 288, VSNL is trading at a price-earnings multiple of five times its FY2001 estimated earnings of Rs 57 per share (ex-bonus of 2:1). At $8.87, the VSNL GDR is currently trading at a premium of 5 per cent to its local share price.

The scrip is also expected to gain significantly from VSNL's foray into the lucrative, Rs 150-billion domestic long distance telephony market.

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