VSNL arrests revenue fall in the third quarter

The Tata group owned Videsh Sanchar Nigam Ltd. reported higher-than-expected sales for October-December, or the third quarter of 2004-05 (April-March), on the back of growth in value-added services and the volume of international and national long distance traffic, analysts said Tuesday.

Sequentially, net sales and net profit in the third quarter were up 6.2 per cent and 61.5 per cent , respectively.

Late on Monday, VSNL said it has posted net sales of Rs 827 crore, up 6.9 per cent year-on-year, while net profit was down 21.3 per cent to Rs 1423 crore.

"VSNL's operational efficiency has improved substantially and the operating profit has jumped 24.9 per cent for the third quarter," said Sharad Jain, analyst, Cholamandalam Securities Ltd.

VSNL's main expense""networking cost""fell 7 per cent for the quarter to Rs 5359 crore. Staff cost, however, rose sharply by 77 per cent for the quarter to Rs 41.3 crore.

Operating and other expenses have also risen significantly by 96.54 per cent to Rs 90.8 crore because of the increase in sales and marketing costs on account of rollout of retail services like global calling card and the planned foray in broadband services, Jain said.

"Nearly Rs 18 crore of other expenses includes a provision for doubtful debt on account of delay in receipt from an international client. There is another one-time cost of foreign exchange loss of Rs 8.5 crore," Jain said.

Depreciation costs have also risen 36.21 per cent to Rs 58.3 cropre due to acquisition of assets and goodwill from Dishnet. "The completion of cable between Chennai and Singapore during the quarter has also been depreciated for part of the quarter. Here, Rs 8.33 crore would be attributed to the cost amortisation on the Bharti deal, where VSNL has the right to use Bharti's national long distance backbone for Rs 500 crore," Jain said.

Rise in revenue from value-added services is seen making up for the fall in the ILD revenues of the company and improved margins on account of better realisation from the ILD business.

Revenue from ILD services was at 72.9 per cent of total revenue as against 86.5 per cent in the same quarter last year.

Value-added services have increased their share in total revenue by 100 per cent , rising 27 per cent from 13.5 per cent on sequential basis and to 25 per cent from 13 per cent for the first nine months of the current fiscal.

Other services in the third quarter grew 114 per cent to Rs 223.6 crore from Rs 104.4 crore a year ago.

For the nine-month period, or April-December, value-added services revenue grew to Rs 602.9 crore from Rs 306.9 crore last year.

The 21.3 per cent year-on-year drop in profit after tax of VSNL in the third quarter was primarily due to higher operating and other expenses coupled with an increase in salaries and depreciation.

The other main reason is a 27 per cent fall in extra-ordinary income from sale of investment to Rs 68 crore from Rs 94.1 crore last year, analysts said.

Most of the analysts have retained a 'buy' rating for VSNL shares after the third quarter results.

Jain of Cholamandalam Securities has revised upwards the 12-month share price target to Rs 275 by June, while Kotak Securities has retained its price target of Rs 180.

Kotak Securities estimates the earning per share of VSNL for FY05 and FY06 at Rs 12.5 and Rs 8.1 rupees, respectively.

Jain of Cholamandalam Securities estimates EPS of Rs 18.34 rupees for FY05.

Here's what analysts expect for the fourth quarter:

VSNL's revenues to decline sequentially in January-March, if the Telecom Regulatory Authority of India implements tariff cuts in the IPLC (international private leased circuit) segment.

The acquisition of Tyco Global's assets will increase the choice of global data services to its existing customers.

The company may recover Rs 40-50 crore from international carriers, which has been written off as bad debts.

Has bid for NLD and fixed-line operator status in South Africa and Pakistan

Would launch its broadband services in India in February.