VSNL banks on retail clients, data service

Videsh Sanchar Nigam hopes to sustain an organic compounded annual growth rate of 15 per cent in consolidated revenue over the next five years, Srinivas Addepalli, vice-president - corporate strategy, said.

Businesses from enterprise and retail clients for broadband and data services are seen helping the company to achieve the target.

In 2006-07 (April-March), VSNL's revenue stood at Rs 8856 crore, up 85 per cent from the previous year. However, a significant share of this growth came from Tyco Global Networks and Telegloble, the companies that VSNL had acquired earlier. Prior to consolidation, VSNL's standalone organic growth that year was 6 per cent year-on-year.

VSNL is currently laying two new large cables - one intra-Asia and the other between India and Europe. While the intra-Asia cable would be ready this financial year, the India-Europe cable may be completed only by mid-2008, Addepalli said.

The total cost of the project is around $600 mn (Rs 2445 crore), of which VSNL is likely to spend only 50 per cent. Partners will bear the remaining cost, he said.

VSNL has proposed a capital expenditure of around $500 mn (Rs 2037 crore) for 2007-08. This includes expenditure on cables and a WiMax project to set up 1,700 base stations to boost last-mile connectivity.

Of this, 1,300 base stations will be spread across five cities and will be used for retail customers. The remaining 400 are meant for contracted enterprise customers, Addepalli said.

The enterprise business, which accounts for around 35 per cent of the company's total revenue, is likely to remain a profit centre, he said.

Volume in the enterprise business is seen increasing faster than the company's growth, as the boom in business in India alone will create huge demand for such services, he said.

Also, operating margin of the enterprise business at 40-45 per cent far exceeds the company's growth of around 15 per cent in 2006-07. Global majors have been able to sustain 35-45 per cent margin on this segment, despite pressure due to competition.

VSNL would also target the same margin, Addepalli said. Last-mile connectivity is still a hurdle that VSNL faces in servicing the small and medium Indian enterprise clients. Addepalli hopes to resolve at least part of the problem once the WiMax rollout is complete.

The investment in South Africa's Neotel, in which the company bought 26 per cent stake in 2006, is going to bear fruit this financial year.

A surge in demand for bandwidth in South Africa from retail as well as enterprise users will result in rapid growth for Neotel, Addepalli said.

VSNL has also undertaken some minor capacity expansion projects in Africa and Europe, where it will seek partners in exchange for usage rights.

Some investors were worried that falling rates in the international long distance segment may rub off on VSNL.

Operators, including Reliance Communications and Bharti Airtel, have dropped call tariff to the US and United Arab Emirates recently. However, VSNL only received Rs 0.50 per minute for its international long distance services, and sees the price sustaining for next three years.

"In fact, may be our revenues from the segment could rise as the rate cuts may result in increased traffic," Addepalli said. VSNL shares were at Rs 460.50 on National Stock Exchange, down 1.03 per cent from Monday's close.