BOMBAY, 18 February — Love is in the air. Valentine’s Day is over but the most talked about “marriage” continues to make news. The newly founded relationship between one of the premier corporate houses of India, Tata’s and the state-owned Videsh Sanchar Nigam (VSNL) is the talk of the town. Two high profile and extremely well-to-do corporate houses coming together is obviously a big time marriage.
In fact while addressing the press conference in Bombay, India, S K Gupta, managing director, VSNL, said, “VSNL grew as a girl under the government’s care and rose to become one of the highest earning member of the family.
Today, painful but inevitable parting time comes, when she has to be handed over to another family in the larger interest of the company and society.” And Ratan Tata, chairman, Tata Sons, said he was being the obedient son-in-law and assured his father-in-law that he would take good care of VSNL. The Tata’s have managed to grab 25 percent stake and management control of VSNL at Rs.1,439.25 crore (Rs. 202 per share) which was 18 percent over the reserve price of Rs. 1,218.37 crore set by the government.
VSNL, a domestic and NYSE listed company with a FY2001 turnover of Rs. 79.66 billion, has a workforce of around 3,000 employees. The company over the years has built up a very strong position in international long distance (ILD) services, Internet services and other value-added services. It also possesses a national long distance (NLD) license.
This acquisition of VSNL has now enabled the Tata’s to gain a foothold across the entire spectrum of telecom services. Taking over VSNL assumes more significance given the fact that its arch rivals — Bharti and the Reliance group have already obtained the license for national long distance (NLD) telephony services.
This is an extremely win-win situation for the Tata’s because as per the deal, they will not need to shell out Rs. 100 crore as license fee and Rs. 400 crore of bank guarantee for the NLD license. As part of the compensation package for advancing the end of its monopoly by two years, Tata’s also need not pay any revenue share while other private operators will have to. This will most certainly give the Tata’s an edge over their rivals in the highly competitive NLD market.
And not just this, even the public sector telecom organizations like Bharat Sanchar Nigam and Mahanagar Telecom Nigam (BSNL and MTNL) will have to continue to route their international long distance (ILD) traffic through VSNL’s gateway for two more years till 2004. There had been concerns that VSNL would lose its market share quite sharply post 2002, however the recent move would restrict the fall. But concerns still remains from competition from private players and from falling tariff’s.
Thus, VSNL will continue to be a cash-generating company despite the liberalization of ILD services post-April 2002. The Tata group seems to be on a very good footing. Earlier TISCO turned the corner, earning the title of the world’s least-cost steel company. Telco’s Indica also reported a 39.6 percent growth in the first ten months of the year, the highest for any model in this segment.
It is very clear now the way in which the Tata’s have planned this shift from generic and commodity businesses to communications, IT, services, indicating very strongly that it has indeed moved with the times. Today the share of its core business, materials and engineering, is only 43 percent and with the acquisition of VSNL that is estimated to come down further.
It is, therefore, only a matter of time before the complexion of the Tata group undergoes a complete sea-change. But then what are the immediate implications of this marriage? For 98 percent of VSNL’s turnover comes from providing gateways for long distance conversations. It used to be India’s largest Internet service provider till recently, but has now been overtaken by private sector Satyam Infoway.
Analysts are of the opinion that for VSNL to keep making money, it has to make money in the voice business. The trouble is, VSNL has no retail customers as it forward calls originating from the networks of BSNL and MTNL to overseas carriers like Sprint and MCI, and does the reverse for incoming calls. Also what one has to bear in mind is that currently voice is not allowed to be transferred over the Internet but this ban is to be lifted, starting from April 1.
What happens to VSNL’s margins then? It will have no choice but to drastically bring down the currently exorbitant long distance tariffs. But then this might induce a jump in volumes — the world over, telecom traffic has been found to be price sensitive. Price cuts could actually boost revenues for VSNL.
Well, this marriage between Tata’s and VSNL is new and there are bound to be troubles. Yet, this is looks to be a perfect match and will in all likelihood prove to be a combination which spells success.
