VSNL: Ringing right

VSNL's acquisition of Tyco unit is a good bargain buy

The markets cheered VSNL's acquisition of Tyco Global Network, which has three times as much as the combined capacity of the other players on the India-US route, and will enable VSNL to leverage the growth in the country's IT and BPO businesses.

The deal has been priced attractively, primarily because Tyco is in trouble and wants to get rid of its non-core businesses. Tyco's routes are also underutilised, and have ample scope for growth. With the deal being funded by sale of investments, the deal is undoubtedly earnings accretive for investors.

Concerns about pricing pressures in the international long distance telephony business have driven down the VSNL stock to a point where it trades below book value.

But VSNL has been diversifying its services, and services other than international telephony and related segments accounted for a quarter of revenues in the second quarter of the current fiscal, compared to 14 per cent in the first quarter.

Even more encouraging is the fact that these services accounted for 45 per cent of profits, compared with 31 per cent in Q1. Nevertheless, revenues from the ILD business have continued to fall in Q2, compared to Q1, which doesn't support the contention that the worst is over for this segment. However, higher revenues from other services have offset the decline in the ILD business in Q2.

Although profits before tax in Q2 are much higher than profits in Q2, FY 2004, that's because of a large extraordinary expense on account of VRS last year. If that expense is excluded, net profits actually fell in the last quarter.

Moreover, while operating profits are higher by 46 per cent on a year-on-year basis, they were lower in Q2 than in Q1. In short, while VSNL is moving in the right direction, it is by no means out of the woods.

Nestle India

It's not only Hindustan Lever that's struggling in the FMCG space. Nestle India has reported a decline in its net profit for the third successive quarter. Last quarter, Nestle's net profit fell 9.4 per cent, following the 23.4 per cent fall in profit in the first six months of the fiscal.

Nestle's troubles start right at the topline - sales growth has been in single-digits throughout the year, and much lower than the near double-digit growth recorded last year, and analysts say that's due to lower sales in the chocolates segment.

Last quarter, sales growth stood at 4.8 per cent. With sales being flat and with Nestle not being able to raise prices, profitability also fell for the third consecutive quarter.

In the September quarter, operating margin fell by 70 basis points. For most of the quarter, milk and other input costs were considerably higher, and with no increase in selling prices, profitability was bound to be hit.

The company wrote back provisions worth Rs 7.5 crore last quarter, which helped restrict the fall in net profit. The rationale for making huge provisions has always been questioned, but the write-back last quarter shows that they can be useful in bad times. Without the write-back, the fall in net profit would have been almost 20 per cent.

Nestle trades at almost 20 times estimated CY05 earnings, which is a rather rich valuation considering that the short-term to medium-term outlook is not looking too bright for the company.

IOC-acquisition a long-term benefit

Indian Oil Corporation will partner Iran's Petropars to develop a gas block in Iran and the two companies will also put up a liquefaction plant there, which is designed to make 9 million tonnes per annum of LNG available for exports to India and other countries.

However, no rapid growth in profit is anticipated for IOC from this deal in the short term, as it is understood that once all the agreements and techno-feasibility studies have been completed, it will take 3 - 4 years for the proposed plant to go onstream. However, Iran is expected to pay IOC a fixed rate of return on the capital it invests in developing the South Pars gas field.

IOC's overseas operations are much smaller in comparison to its domestic market share. Its existing foreign operations include a wholly owned private subsidiary in Sri Lanka, Lanka IOC Pvt Ltd which operates about 150 retail outlets and it is understood to have captured 25 per cent of that market.

The company is planning to add another 50 retail outlets in Sri Lanka and floating a global IPO. IOC's Sri Lankan operations earned a profit of Rs 29 crore in FY04, but profits are expected to rise significantly this year.

Another subsidiary Indian Oil Mauritius Ltd (IOML) has commissioned a petroleum storage terminal and is setting up a retail network throughout that country. Its Mauritian subsidiary lost Rs 80. 39 lakh in FY04.

In other words, IOC's Iran venture marks its first major overseas foray, considering the much smaller scale of its other overseas operations.

With contributions from Mobis Philipose and Amriteshwar Mathur