VSNL's dialling its way to the global top
Daily News & Analysis — April 7, 2006

It has been quite a turnaround. In the stock bourses, Videsh Sanchar Nigam Ltd (VSNL) outperformed other Tata group companies including the illustrious TCS and Tata Motors to register the maximum gains for the last fiscal year ended March 31, 2006. The VSNL share was up 141% from Rs 194.80 on April 1, 2005, to Rs 469.70, on March 31, 2006. While the TCS share rose 34% in the same period, Tata Motors did better, rising 125%. How did the dial turn thusly? VSNL is in the business of carrying international voice across countries and owns one of the largest submarine cable bandwidth across continents.

Almost 55% of its business comes from carrying voice across countries. So, has the market sensed a turnaround in the sector where VSNL operates? Over the years, there has been a surfeit of capacity in the industry that resulted in wafer-thin margins and a huge shakeout. VSNL profited from it by acquiring troubled Teleglobe, at a distress sale of $239 million, almost 10% of the cost of setting up the international mobile, data and voice networks with coverage of more than 240 countries. Times have changed.

Margins are improving, as excess capacities have disappeared with voice traffic increasing without a corresponding increase in capacities. So VSNL is now dreaming bigger. It is pulling out all stops to become the world's leader in the wholesale voice business in the next few years as it reaps the advantages of its recent acquisitions. "Our objective is to become a market leader in a profitable manner, as fast as possible," said Srinivasa Addepalli, head -corporate strategy at the carrier.

The company has carved up a 17% market share in what is a 200 billion minute voice market that's growing annually at an impressive 8%. Its rivals, US giants AT&T and MCI, can be seen on the horizon, with 17.5%-to18% spoils. VSNL's confidence stems from the Teleglobe acquisition it made last year, which has brought it within touching distance of its global peers. The deal adds a billion dollars or Rs 4,450 crore to VSNL's annual revenues since the integration is over. But the company's next leap would not be that easy as each player will protect his turf.

"The good thing is," says Addepalli, "the excess global capacity in the industry has virtually disappeared." VSNL made its acquisitions when the industry was down in the dumps. A few years ago, the global long distance telephony industry reeled under excess capacity, with businesses trying to survive by cutting tariffs and bankruptcies became the order of the day. It escaped the bloodbath because it was insulated from market vagaries by picking up companies at close to 10% of the original cost of setting them up.

Thus, it picked up Tyco Global Network, the world's largest submarine cable network, and later Teleglobe, at very cheap rates. "The industry margins will only get better." Addepalli says. VSNL will continue to invest "rationally" in infrastructure. "The spare capacity has almost gone." Some five years ago, many cynics had written off the voice telephony business. The threat hasn't dissipated. With disruptive technologies floating around, VSNL is on high alert. "How do we stay relevant when others (technologies) are trying to kill our business?," says Addepalli, is the multibillion dollar question.

VSNL has inherited a capable R&D team through its acquisitions and they are investing and creating new technologies by benchmarking themselves with its global peers. VSNL has also inherited a slew of holding companies and subsidiaries across the world. Singapore is the hub for VSNL's international operations. The number of its subsidiaries dotting the globe is about 50, and VSNL will prune it to 30 in two years. This will cut costs. Ever since the Tatas took control of the company, they have had more than a fair share of difficulties and legacy issues. That's all over now. Today, VSNL is braced to hit broadband speed in growth. That ring you hear is from the cash register.