Sunil Jain: Signal's getting stronger

RATIONAL EXPECTATIONS

With both Maruti and VSNL privatised around the same time in 2002 (VSNL's post-privatisation anniversary is tomorrow), it's natural to compare the two. Their pre-privatisation revenues were not too different though Maruti was making losses while VSNL was hugely profitable. But both controlled nearly all the market in their respective areas""perhaps why the government got similar money for ceding control. It got Rs 1,439 crore for VSNL from the Tatas, and Rs 1,993 crore for Maruti (Rs 1,000 crore of control premium from Suzuki and Rs 993 crore from the IPO).

VSNL versus Maruti
Year	Revenue		Profits
	Maruti	VSNL	Maruti	VSNL
2000-01	5357	7965	-269	1779
2001-02	6175	7111	118	1407
2002-03	7126	4812	146	780
2003-04	9345	3371	542	378
2004-05	10910	3413	854	708
2005-06	12003	4797	1189	69
2006-07	14,200**	8646*	1590**	288*
* based on half-year results, 2006-07 profits are PBT ** based on first nine months' data

Five years later, it is obvious Maruti is the better bet. Revenue has shot up from Rs 6,175 crore in 2001-02 to a likely Rs 14,200 crore in 2006-07 and profits from minus Rs 269 crore to around Rs 1,590 crore; VSNL's revenue dipped dramatically and will now probably be a fifth higher than that in 2001-02 but profits are projected to be just a fifth of what they once were. Then disinvestment minister Arun Shourie's words ring loud and clear: "VSNL is just a chungi (an octroi post) ... once you abolish the chungi and have free movement, it has no value."

So was Shourie right? Analysts have divergent views on its future, but there is little doubt VSNL is no longer the chungi it was, getting a monopoly rental over every one of the four billion minutes of calls that either came into or left India's shores in 2002. Whether that's good enough remains to be seen, but VSNL has several aces up its sleeve.

The first few years were a disaster, and it did appear the Tatas were banking on the chungi status remaining. When long-distance tariffs collapsed once the regulator clamped down on super-profits, the company's revenues more than halved. So, in the middle of 2005, Tata-VSNL filed a suit in the Mumbai High Court asking the government to pay Rs 3,475 crore as damages for cutting short its monopoly by two years""the problem with this was that everyone, including the Tatas, knew this was going to happen, before they'd bid for the company. It didn't help that it required just a few hundred crores to replicate the VSNL model and, unlike the others, VSNL didn't have captive customers who would be calling overseas and generating international minutes for it.

The company also mishandled the investments in Tata Teleservices since the unilateral decision didn't go down well with the government and, combined with VSNL's refusal to see the writing on the wall and lower tariffs fast enough, this resulted in it losing a large part of BSNL and MTNL's international minutes. Though the Tatas do not accept this, there is a view the Flag issue was also badly handled""Flag's damages claim of $406 mn from VSNL (VSNL has appealed the arbitration court's ruling) could wipe out several years of profitability""no provisioning has been done for this so far.

To the Tatas' credit, they changed focus quickly after the first few years, spending around a billion dollars to do so. Tyco was bought in 2005 for $130 mn to add 60,000 km of valuable international cable capacity; buying Teleglobe for $240 mn helped add around Rs 4,500 crore to just this year's revenue since the firm is one of the world's largest aggregators of international long-distance minutes. Another Rs 850 crore was spent to roll out fibre as well as get a long lease from Bharti to set up an all-India national long-distance backbone of over 40,000 km. Most important, VSNL has what's called the TCS advantage. With the global market for IT/ITeS growing 25-30 per cent annually, and group company TCS a big player in this market, VSNL has a huge advantage when it comes to getting business from global firms for what are called managed data services and complete IT solutions. VSNL's broadband acquisition gave it 50,000 customers and the company has aggressive plans to set up Wimax-based broadband services by the end of the year.

The firm's dependence on the ultra-price sensitive voice traffic has declined from 85 per cent in 2002 to 65 per cent. By the end of the decade, this is projected to fall to 40 per cent, the enterprise business will grow to a similar size and broadband will make up the rest. To augment its attractiveness, VSNL has tied up with Shemaroo for video rights and the Indian Music Association for audio rights (it has 600,000 audio/video rights); it is tying up with coaching classes to broadcast across the country, and has several retail/SME applications already""again, the TCS association here is an advantage. The efforts are beginning to pay off, and this year's first-half revenue was just marginally lower than those in the whole of last year.

Since the Tatas bought VSNL, it underperformed the Sensex by a huge amount, but if you normalise both from VSNL's low of April 2003, it has outperformed the market significantly after that. That is, the market recognises its change, though this pales in comparison with Maruti.