VSNL: Weak call

VSNL fares badly in September quarter even as it is struggling to turn in better show in future.

VSNL has turned in disappointing numbers for the September quarter with a sequential standalone revenue growth of just 4.5 per cent at Rs 966 crore.

The operating profit margin fell by 256 basis points q-o-q to 20.5 per cent, primarily on account of higher sales and general expenses, most of it front-ended, which rose 46 per cent q-o-q. As a result, the operating profit at Rs 198 crore was lower by 7 per cent sequentially.

While the wholesale voice segment suffered owing to competitive pressures, resulting in a fall in volumes, the enterprise and carrier segments did not do too badly.

However, with the domestic long distance market becoming increasingly competitive as more new players enter the bandwagon, VSNL will find it difficult to show growth and, hence, profitability.

The total voice traffic stood at 2.4 billion minutes, up 12 per cent sequentially. Of this, the national long distance volumes shot up 18 per cent q-o-q to 1.2 billion minutes, while the international long distance rose 6 per cent sequentially to 1.2 billion minutes.

The international businesses "" global acquisitions of Tyco Global Network and Teleglobe "" will take time to get integrated, and they are unlikely to contribute significantly in the near term.

If the de-merger of the surplus land into a separate company "" valued at around Rs 600 crore "" goes through soon, all VSNL shareholders stand to gain substantially. Analysts have attributed a value of Rs 169 per share for the land.

At the current market price of Rs 438, the stock trades at 30 times estimated FY07 standalone earnings and just under 24 times FY08 earnings.

On an EV/EBITDA (enterprise value/earnings before interest, depreciation and tax) basis, the valuation is 13.5 times estimated FY07 earnings and around 11 times FY08 earnings.

The stock has underperformed the broad market for almost a year now, given the poor domestic numbers. Unless there are signs that the benefits from the overseas business are kicking in, the stock could continue to be a laggard with much of the upside on account of the land de-merger, already factored in.

Gateway Distriparks: Buyout booster

Logistics company Gateway Distriparks, which was lacking in the cold chain logistics area, today announced to have acquired 50.1 per cent stake in Snowman Frozen Foods. The company will buy the stake for Rs 48.12 crore, of which Rs 36.11 crore will be fresh equity infusion.

The company paid Rs 12 crore to pick up 14.3 per cent stake of Snowman's existing capital at Rs 17.5 per share, valuing the latter at Rs 84 crore.

On Snowman's annualised results for FY07, this purchase at 2.9 times sales and 17.5 times operating profit may appear on the high side, but that is because it is an expensive business to set up, and Snowman is still in the growth phase, say analysts.  There is huge demand for transportation and storage of products that require refrigeration in the country. Snowman's 16 cold stores with a total capacity of 8,600 pallets, and 90 erefrigerated truck operations will help Gateway's foray into this area and make it an integrated logistics player.  Gateway is cash-rich to fund the acquisition on the back of the capital raised through its GDR issue last year.  Also, the remaining 35.8 per cent stake has come at a lower price of Rs 10.50 a share, which is a decent price. With global major Mitsubishi and Nichirei Logistics Group holding the remaining 48.69 per cent stake, Snowman will not have any shortage of technical assistance in managing this business.  Gateway is not a new player in such joint ventures. It has 60 per cent stake in two container freight station JVs at Kochi and Visakhapatnam. For the September 2006 quarter, Gateway's top line improved 6.5 per cent, mainly owing to 20.7 per cent growth in volumes.  Realisations dropped 12 per cent y-o-y under competitive pressure. Operating profit declined 5.9 per cent as transportation costs increased 112 per cent on account of the ban on overloading of trucks.  Operating profit margin slumped 754 basis points but is still quite high at 57.41 per cent. Net profit rose 8 per cent, aided by higher other income owing to its high cash balance on account of the GDR issue.  After the Snowman acquisition announcement, the Gateway stock gained 3 per cent and trades at about 18 times estimated FY07 earnings and 15 times FY08 earnings.