News reports speculate that the telecom commission is exploring the possibility of merging VSNL with DoT. DoT is slated to be corporatised early next year. The following points pertaining to VSNL and DoT need to be mulled over. First, currently any policy and management decision by VSNL requires the approval of DoT or the telecom commission under the ministry of communications. This simply means the government, acting through DoT, continues to control the company and has the powers to elect its directors.

Second, VSNL is slated to retain its monopoly over international long- distance telecom traffic till 2004, while DoT's monopoly over domestic long- distance services would end in 1999. It garners around 60 per cent of its revenues from this area and would be logically averse to major international private players eating into its cash cow. Moreover, only till the next round of bidding for basic services successfully comes through, DoT would continue to still remain a monopolybasic-service provider for a major part of the country.

Third, long-distance telephony has been VSNL's cash cow, with it contributing 94.7 per cent to the traffic revenues of Rs 6,074.98 crore. Also, VSNL Seamless Services Private Ltd was incorporated on March 31, 1998, intended to market VSNL's value-added services like the Internet, e-mail, electronic data interchange and video conferencing. In the future, these services are expected to contribute substantially to the VSNL turnover, though currently they contribute only around 5 per cent. Fourth, VSNL gets reimunerated at the rate of Rs 45.98 per minute by DoT for calls going out.

Whereas, for calls coming into the country, the company reimburses DoT at the rate of Rs 21.34. The revenue-sharing arrangement is intended to result in average earnings profit per call minute of Rs 10 for VSNL. The moot point is nowhere in the world, a behemoth as large as the proposed entity provides the entire gamut of telephony services. The general idea of the nationaltelecom policy is to end monopolies and segregate the various areas in telecom. Also, DoT is already struggling to administer its huge work force, and handling additional burden would be a problem. VSNL, owing to its GDR issue in 1997, has a substantial international holding and the interests of these shareholders could be jeopardised. Moreover, the government has proposed to disinvest around 5 per cent of VSNL's equity capital in the GDR market. DoT, being a government department, arriving at a reasonable swap ratio compensating VSNL's shareholders would be a problem. So the government should only stick to exploring the possibility of corporatising DoT.

Fact

News reports indicate that Fertilisers & Chemicals Travancore (FACT) has decided to implement a restructuring package which includes a reduction in manpower, ban on recruitment and a possible wage freeze. The prospect of a Rs 85-crore loss on a Rs 500 crore turnover has been cited as the motivation behind the decision. As the problems of thecompany hinge mainly on factors external to it, downsizing may be of little help. Consider the following: while the company's income for the year 1997-98 was Rs 1,244 crore; the expenditure on salaries, wages and bonus was Rs 90.30 crore. Contribution to the providend fund accounted for Rs 6.64 crore staff welfare expenses contributed another Rs 13.39 crore. FACT's manpower expenses constituted 8.84 per cent of its total income down from 9.68 per cent in 1996-97. Manpower expenses as a percentage of total expenses stood at 9.28 per cent in 1997-98 and at 10.37 per cent in 1996-97.

Even a drastic cut in employee costs is unlikely to translate into a significant addition to the company's bottomline as these constitute less than 10 per cent of its total costs. Also, despite the fact that manpower expenditure as a percentage of both total income and total expenditure was lower in 1997-98, the gross-margin fell from 8.5 per cent to 7.79 per cent. This shows that reducing manpower expenses alone may not lead tohigher profitability.The firm must come out with effective solutions to its frequent power problems which lead to a less than optimal capacity utilisation. A higher capacity utilisation will result in lower per unit cost of production translating into higher margins. But a cost-effective substitute to power from the Kerala State Electricity Board is difficult to come by. Further, the company's interest costs are on the higher side. These have resulted mainly from the recent commissioning of the 900-tonnes-per day ammonia project. FACT can do little about these expenses, likely to continue as a drag on its bottomline.

Tisco

With steel prices remaining depressed, higher volume sales by Tisco in the first half is unlikely to cheer the shareholder. The company increased its sales of saleable steel, welded tubes and bearings by 5.7 percent, 13 percent and 22 percent respectively compared to the corresponding period in 1997-98. The firm plans to get out of the cement and bearing business and is slatedto enhance the already strong cash flow of the company. Inventory levels for the period is 11 percent lower.

At present, the landed price of HRC is around $ 200 per tonne and Tiscos cost of production for saleable steel is approximately $ 285 per tonne. Even assuming a 100 percent output through continuous casting, the cost of production is unlikely to fall below $ 250 per tonne. Moreover, the demand for steel is not expected to rise above 23 million tonnes in the near future. Commensurately, Tisco's bottomline might not see any significant upsurge.

Emcee (With contributions from AG Krishnan, S Saraf and M Saxena)