When the Tatas acquired Videsh Sanchar Nigam Limited (VSNL) in 2002, many in the industry felt they had put their money on a losing proposition. That perception has since changed.The acquisition of Teleglobe International Holding in 2006 and of Tyco Global Networks (TGN) in 2005 has helped the $27 billion Tata group company effect a turnaround. Over the last two years, VSNL has not only become the world’s largest owner of bandwidth with over 200,000 route km, it has also strategically positioned itself to become a global provider of international wholesale voice service on the lines of AT&T and Verizon. Recently it also joined the select $2 billion club by clocking Rs 88.57 billion in consolidated revenues for the financial year ended 2007.
Taking a look at the company’s growth trajectory, VSNL’s vice-president corporate strategy, Srinivasa Addepalli says: “It is the acquisitions that have helped us create a strong platform to become a global carrier.We were able to transform our business model from an India-centric, single-business company to a global communications solutions company.”
Defining strategies
VSNL currently is structured along three business units: global voice business, global enterprise and data business and retail.All along, its largest revenue segment has been traditional wholesale voice, comprising international long distance (ILD) and national long distance (NLD) voice services, with ILD voice services being its core business.
In early 2002, when VSNL still had a monopoly of the ILD segment, analysts quipped that it was like an octroi post ?? once the levy was abolished and free movement allowed, it would have little value. That is exactly what happened when the government deregulated the sector two years ahead of time and shortly after the Tatas acquired it in 2002.Without the monopoly rentals coming in from the 4 billion minutes of calls that either came into or left Indian shores, VSNL’s revenues plummeted by half. Its margins were further squeezed by the collapse of long distance tariffs following the deregulation of the sector.
By 2003, the company had touched an all-time low. Growth pushed red while running costs remained high. A series of unfavourable regulations (which gave Bharat Sanchar Nigam Limited and private operators the licence to offer long distance services); the burgeoning grey market in international calls along with the company’s own structural defects left it limping for another year and a half.
This was a lesson for the Tatas. To make the VSNL venture pay off, they needed to reduce its dependence on the ultra-price-sensitive voice traffic. Though it continued to be the carrier for most of the operators, VSNL was fast losing its most-preferred-carrier status to new rivals like Bharti, Reliance Communications and BSNL. It was clearly time to put its house in order and devise new revenue streams in order to survive.
VSNL soon saw an opportunity to pick up international telecom companies going cheap. With the global long distance telephony industry reeling under excess capacity, businesses were either selling out or competing through frequent tariff cuts till they became unviable. These companies were on sale for as little as 10 per cent of the original cost of setting them up.
Tyco was thus bought at a bargain $130 million to add 60,000 km of international cable capacity and Teleglobe for $240 million. “It was the timing and the price that made the acquisitions a winner,” observes telecom analyst Mahesh Uppal.
For VSNL, the advantages that these acquisitions brought to the table were many. The Teleglobe acquisition, for instance, straightaway added $1 billion to VSNL’s annual revenue after the integration, while TGN brought with it the world’s largest submarine cable network.VSNL also inherited a clutch of holding companies and subsidiaries across the world, giving it a global presence in countries like the US, Canada, the UK, South Africa, Singapore and Sri Lanka. Today, with its international operations hub in Singapore, it has about 50 subsidiaries dotting the globe, which the company hopes to prune to 30 over the next year to cut costs.
Through these acquisitions VSNL also earned a capable R&D team, which helped it to upgrade its technologies in line with its global peers. Fortunately for VSNL, shortly after the buyouts, the margins in the overall long distance segment began improving as excess capacities dried up with an increase in voice traffic and no corresponding increase in capacities.Therefore, despite the reduced margins, wholesale voice revenues grew by 15.25 per cent, from Rs 18.77 billion to Rs 21.63 billion. It gave the company some elbow room to plan for the future and start thinking big.
As part of a repositioning strategy, VSNL developed a comprehensive basket of products, which today includes wholesale voice, private leased circuits, IP MPLS VPN, internet access, hosting, mobile signalling and other IP-based services.
Targeting the lucrative enterprise segment, VSNL, through its enterprise business division, TATA Indicom Enterprise Business Unit (TIEBU), developed a customised suite of products such as managed network services, managed IT infrastructure services and managed application services to cater to the segment. Over the last one year, it has also strengthened its managed data service offerings and end-toend telecom solutions for carriers and enterprises globally.
With VSNL’s dependence on voice traffic declining from 85 per cent in 2002 to 65 per cent today, the expectation is that by the end of the decade it will fall to 40 per cent. Meanwhile, the enterprise business is expected to grow to a similar size and broadband will make up the rest.
For VSNL, increasing broadband penetration is a natural progression. It continues to be a leading internet service provider, though it has been outpaced by BSNL and MTNL in the last two years.”Broadband is the next wave of growth for VSNL, though we will also look at acquisitions in the area of enterprise data and voice business,” says Addepalli.
The company is taking the cable route to push its broadband services to retail users and is in the process of tying up with cable operators across the country to reach the end-user. It has already partnered 2,000 cable service providers to provide the last mile link, which is still a constraint, for its broadband services. The company is also betting big on the retail business. It offers a range of retail products in India such as high speed broadband, dial-up internet, net telephony and calling cards under the Tata Indicom brand name.
As part of its consolidation drive, VSNL has shifted its Teleglobe traffic to TGN, resulting in substantial cost savings and freeing up capacity for data and IP traffic on the Teleglobe network. TGN and Teleglobe are expected to contribute an estimated $2 billion to VSNL’s revenues and this figure can only increase in the future, say company officials. Besides this, the company also won the second national operator licence for South Africa in December 2005 and launched commercial operations under the brand name Neotel.
The outside view
With 17 per cent market share in a 200 billion minute voice market that is growing at an impressive 8 per cent a year, the major worry for VSNL would be to sustain that growth in future.
Analysts share this concern because, despite the company’s progress in many areas, some issues still need to be resolved on an immediate basis. Says Uppal: “The company is not as comfortably placed as it used to be. It is facing tremendous pressure from competition and technological changes. The state of the industry is also making its business very difficult.Though it has an incumbent advantage as it has been one of the forerunners in the industry and enjoys strong relations with carriers and operators worldwide, its weakness is that it may not be able to stand its ground in the face of fierce competition in the data market. In addition, the company enjoyed partnerships with international carriers such as AT&T, BT, and Cable & Wireless, but the entry of these companies into the country spells bad news as they will function in adversarial roles.”
With as many as 20 operators, both domestic and international, lining up for ILD/NLD licences following the reduction in licence fees, VSNL’s revenues from long distance services are likely to get impacted in the long run. “Already, companies like BSNL are able to use their ISD licence and buying clout to get a cheap rate. They are effectively paying only for the utilisation of cables,” notes a senior analyst with Edelweiss Securities.
Undoubtedly, there is going to be stiff competition in the long distance sector.Players like AT&T which had earlier used VSNL for carrying traffic no longer need to piggyback on VSNL’s contacts.Similarly, British Telecom is likely to launch its services within the next six weeks and will target enterprises.Domestic players with a strong local presence like Bharti and Reliance too have leveraged their long distance licences and stolen a march over VSNL, which lost time in entering the NLD segment.
The other important concern for the company is the lack of direct access to endcustomers in its voice business. VSNL is dependent on other service providers to route the NLD and ILD calls of their customers. Some of these operators are also VSNL’s competitors in the long distance and other markets.
However, VSNL does not see its revenues from domestic and international voice traffic being impacted with more players entering the fray. “A licence gives them one part of the business, but they still need infrastructure. Either they invest in infrastructure or they use ours. We have robust infrastructure across the country and overseas, and make this available to operators who wish to optimise their cost,” says Addepalli. “We make it cheaper for them to use our infrastructure rather than their own.” In other words, as more operators get NLD/ILD licences, for VSNL, the source of revenue will shift from providing services to providing infrastructure.
VSNL is also taking measures to protect its turf. In 2006, it spent Rs 8.5 billion to roll out fibre as well as get a long lease from Bharti to set up an all-India NLD backbone of over 40,000 km.For VSNL, the bigger concern is the growing grey market for ILD calls.According to various market estimates, the grey market for ILD services accounts for as much as 30-40 per cent of the incoming ILD traffic, taking away a substantial chunk of the business of licensed providers like VSNL.
Also, one of the key challenges faced by the company is to manage costs and assets better, and meet the customer’s quality expectations in the face of reduced tariffs and very low margins in the voice segment. “Moreover, as we grow through multiple acquisitions, consolidating and integrating our business is a challenge. We have managed very well till now and hope to keep pace in the future as well,” says Addepalli.
The company’s inefficient PSU inheritance could be a stumbling block. It has a huge workforce which is used to the old ways of running its business when VSNL was a monopoly. Notes Romal Shetty, director, telecom risk advisory services, KPMG: “The transition from VSNL to Tata Teleservices is taking time. VSNL must look at how best to leverage on its sister concerns. If the company has enjoyed monopoly status for a considerable period, it tends to become complacent. Competition is fast heating up and VSNL needs to quicken its pace and not stay with the monopoly tag on it. One area in which the company can concentrate on is data services, which will prove to be a key growth area.”
Nevertheless, the company is convalescing back to health. In the quarter ended March 2007, it registered a total income of Rs 11.72 billion, its best over the preceding 12 quarters. Net profits also reported a 17.72 per cent growth from Rs 1,115 million in 2006 to Rs 1,312.6 million in the quarter ended March 2007.
For fiscal year 2006-07 however, VSNL’s net profits took a downslide, registering a 2.3 per cent decline at Rs 4,796 million for the year ended March 2007 compared to Rs 4,685.6 million for the year ended March 2006. For the same period though, its total income increased by 6.09 per cent to Rs 42,540.1 million from Rs 40,098 million in the previous year.
Future outlook
With Asian bandwidth demand forecasted to grow at an average of 27 per cent CAGR, VSNL is very optimistic about grabbing a big chunk of the sector. It is building two new submarine cable systems ?? one between India and Europe and the other intra-Asia ?? in partnership with carriers in the respective regions.The overall build cost of these two cable systems is expected to be in the region of $600 million.
For the upcoming $350 million IndiaEurope undersea link, VSNL has invited Bharti Airtel to be one of its partners. The other partners for this project are UAebased Etisalat, Saudi Telecom, Telecom Egypt and Telecom Italia. The 10,000 km long India-Europe submarine cable will provide connectivity to the Gulf region and the African continent, in addition to supplementing its existing bandwidth capacity in several consortium cables in the region.
Further, it intends to focus strongly on its international business, which accounts for more than 50 per cent of its revenues.The company recently applied for and won ILD and ISP licences in Sri Lanka.VSNL is optimistic about expanding its existing inbound carrier business through acquisitions to become a full-service telecom provider on the island.
Broadband will be the company’s other thrust area in the coming year. It has begun Wi-Max operations in Bangalore and plans to roll out its services in five cities by the end of 2007. Initially, Wi-Max will be offered to enterprise customers and later to individuals. The company has started offering Wi-Max solutions to its enterprise users in Bangalore and is planning to roll out its network to 120 cities in the current financial year.
VSNL is also working on offering new services like network management along with setting up of internal links. Though the company’s focus is currently on large enterprises and MNCs in the international market, it is looking to initially offer services to tier II telecom companies and ISPs in those countries. Having established its presence in those countries through these small operators, it will then approach MNCs.
Overall, the company’s positive steps in the last few years are paying off. It has managed to recover its position and has drawn up ambitious plans for the future.Whether it is able to transform these from the drawing board into reality, only time will tell
