Following a period of slow growth in operating income (OI) since FY2000, VSNLs OI has declined significantly since FY2002, due to steep price declines since May 1999, declines in settlement rates and decline in traffic. While incoming paid minutes of traffic carried by VSNL declined during FY2004, outgoing paid minutes increased. However, total paid minutes carried by VSNL declined during FY2003 and FY2004. While VSNLs net profits declined 51.6% during FY2004, net margins declined from 17.2% during FY2003 to 11.9% during FY2004.
VSNLs call volumes and revenues have also been adversely affected by the international telephony services offered by illegal operators as they bypass interconnect or access deficit charge (ADC). According to various market estimates, these operators take control of about 30-40% of the incoming ILD traffic into India. The recent reduction in ADC charges on ILD calls is estimated to reduce the price advantage of illegal operators.
VSNLs revenues from ILD services are expected to decline significantly due to competition and tariff drops. VSNL has introduced value-added services and is investing significant amounts to upgrade its infrastructure to support the bandwidth for such services. These measures have had an impact and despite declining telephone services revenues, VSNLs revenues increased 1% (yoy) during 9MFY2005. While net profits increased 21% (yoy) during 9MFY2005, net margins improved from 12.4% during 9MFY2004 to 14.9% during 9MFY2005. VSNLs margins could be adversely impacted because of the planned capital expenditures. Over the medium term, VSNLs revenue and profitability growth is likely to depend on the outcome of its diversification into NLD and other value-added services. VSNL has also initiated cost cutting measures as part of a broader profit enhancement program to improve debt recovery and timely collections.