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VSNL: A few jarring tones

Krishnan Thiagarajan

PRIMA facie, it may appear that Videsh Sanchar Nigam has recorded a robust 88 per cent growth in post-tax earnings for the year ended March 31, 2001. But this growth masks the fact that the strong growth is attributable to a major non-recurring provision made by VSNL in its books in 1999-2000.

In 1999-2000, it had made a one-time non-recurring write down of investment in ICO Global Communications (Holdings) of Rs. 512.70 crores, following its voluntary petition for reorganisation under Chapter 11 of the US Bankruptcy Code. This had depressed t he post-tax earnings of VSNL in 1999-2000 to Rs 840 crores. Hence, the comparison of the post-tax earnings at Rs. 1577.60 crores in 2000-01 to that of 1999-2000, after adjustment of extraordinary items reflects a 88 per cent rise in post-tax earnings.

Ignoring this extraordinary item, on a sustainable basis, Videsh Sanchar Nigam (VSNL) has turned in only a modest financial performance for the year ended March 31, 2001. While the revenues have risen by 3.6 per cent to Rs 7314.70 crores, the post-tax ea rnings (excluding extraordinary items) have grown by 17 per cent to Rs 1582.80 crores.

Even this rise in post-tax earnings has been aided to a large extent by a sharp growth in other income component to Rs 561.80 crores in 2000-01 from Rs 262.90 crores. The rise in other income is attributable to foreign exchange fluctuations and interest earned on its substantial cash reserves.

Similarly, in the fourth quarter ended March 31, 2001, while the revenues (excluding other income) have dropped by 0.40 per cent to Rs 1997.70, the sharp rise in the other income component has helped VSNL record a 43 per cent jump in post-tax earnings to Rs 447.3 crores. The other income component in the fourth quarter of 2000-01 rose to Rs 140.60 crores from Rs 15.7 crores in the corresponding quarter of the previous year. From the financial performance of the fourth quarter, the following trends were evident :

* Even though the volume of voice traffic grew by 20 per cent, the decline in the accounting rate has contributed to a 0.40 per cent decline in revenues of VSNL

* Despite a fall in revenues, it was encouraging to note that the operating profit margins of VSNL rose by 2.44 percentage points to 26.16 per cent in the fourth quarter.

However, the financial performance for the year has only a limited bearing on the future earnings and growth potential of VSNL as the ground realities in the telecom industry have changed over the past nine months. The company's prospects has to be seen in the light of the following :

* In September 2000, the Government announced an early termination of VSNL's monopoly over the provision of basic international telephone service from the year 2004 to 2002 (March 31, 2002). While the Government is planning to compensate VSNL for the los s of its monopoly status, the terms of the compensation package have not been finalised completely. The critical challenges which VSNL faces on the revenue front are rapidly falling international telephony tariffs and the pressure from the US regulator t o reduce the settlement rate benchmarks to $ 0.23 per minute. This combined with the early termination of monopoly creates the risk of a rapid market share erosion in a competitive marketplace.

* In order to make VSNL more competitive, early this year, the Government announced the divestment of a 25 per cent equity stake to a strategic investor. This holds the key to the future growth potential of VSNL as a strategic investor, with management c ontrol, will be in a position to aggressively protect the existing market share of VSNL in the international voice telephony business. However, both the quick completion of the divestment process and the pricing of the share will be crucial to maintain t he long-term competitive position of VSNL. In addition, the terms of the compensation package for the early termination of monopoly still hangs in balance (although a foray into national long distance is on the anvil).

Given, these uncertainties, fresh exposures may be avoided, till more details emerge on the divestment process and the compensation package.