WorldCom Hits VSNL

Updated: Jun 30 2002, 05:30am hrs
VSNL, the national long distance carrier, ever since it entered the fold of Tatas, has been buffeted by bad times. First it was the aggressive strategy of its rivals such as Bharati, Data Access etc that added to competitive heat. Lower tariff rates and cheaper internet access pressurised it further. Then followed the much controversial "asset stripping" charge against it because, the new management Tatas decided to invest in the group company Tata Teleservices at much higher prices. The latest one to cap it all is the WorldCom debacle.

VSNL is expected to take a huge hit, according to analysts, to the extent of Rs four billion plus.

This is because of its tie-up with the MCI that caters for international telephony services in America.

MCI, is the operating subsidiary of WorldCom and is a key client for VSNL. WorldCom, its parent would be revisiting its annual statements and is feared to file for Chapter 11 or bankruptcy.

However, thanks to a change in settlement procedures in the international telephony segment done currently on a monthly basis, as against quarterly in the past, outstanding dues from MCI may come down by Rs 1.5-1.6 billion.

International Telephony Scenario

The entire analysis is based on various facts, such as the international traffic handled between both the companies, the call duration, tariff charges etc.

Ever since the reduction in national/international long distance (ILD) tariffs, the business volume has grown considerably.

For the FY2002 the incoming ILD traffic stood at more than 2,500 ml/min. This is expected to rise further to 2700 ml/min in FY2003.

With the rising volumes and new tariff rates determined by Trai, the incoming settlement charges are expected to be in the range of Rs 7.8-Rs 8.5 per minute.

VSNLs Excessive Exposure To MCI

During FY2001, MCIs contribution to VSNLs topline was at Rs 10.9 billion. That is about 15 per cent of total revenue and about 16.8 per cent of its International Telephony Revenues.

In which case, the company is expected to receive about Rs four billion from MCI.

This means that the companys outstanding in percentage terms works out to 31.5 per cent of total amount receivable from clients in the international telephony segment.

Maintaining the same percentage ratio for FY2002 would mean the topline contribution of Rs 9.8 billion and average debtor days at 90 (till March 31, 2002).

This is based on the assumption of international settlements being done on a quarterly basis.

Thus assuming that one-quarter payment would stand as receivables it would imply receivable of around Rs 2.4 billion, (implying Rs nine per share of VSNL).

In the last quarter, VSNL had provided for bad debts to the extent of Rs 900 million. Of this, though, full amount may not be attributable to MCI.

Increasing Debt Provisioning

If the last year figure of Rs four billion and assumed amount of Rs 2.4 billion for this year were to remain as receivables from MCI, the debt per VSNL share will work out to Rs 23.

Yet, actual provisions may differ depending on when and whether WorldCom files for Chapter 11 and the quantum of amount that would be recoverable from MCI.

Earlier Worries

Already, VSNL has been witnessing pressure due to increasing threats for its ILD status from new operators.

In order to remain the preferred carrier of MTNL and BSNL, it had no option but to match the highly competitive interconnect terms offered by private operators like Bharati, Data Access etc.

Bhartis interconnect agreement with MTNL (weighted average net retention of Rs 3.7/ min) leaves VSNL no option but to match these rates, if it is to route calls for MTNL and BSNL for the next two years.

Data Accesss interconnect terms with MTNL and BSNL are reported to be even more aggressive, factoring in a net retention of Rs 2.4-4.4/min for incoming calls, depending on the distance of the domestic leg. This will inevitably hit VSNLs net retention per minute.

Direct connectivity to access providers in gateway locations will save it the money as, it currently has to pay BSNL. But that may not be enough to mitigate the impact of the fall in revenues from interconnect agreements.

So The Bottomline Is

After witnessing growing competition from the new entrants and the recent WorldCom imbroglio, there seems to be very little choice for VSNL but to stick to its task. It will have to make higher provisioning in case receivables from WorldCom fail to flow in. the preferred customer status granted to it, the compensation for losing its monopoly two years earlier than scheduled, should, however, do it a world of good.

However, the default carrier system and competition from new operators (Bharti, Data Access and probably Reliance) will take away whatever little bargaining power VSNL has had.It will be at the mercy of MTNL and BSNL to retain its share in outgoing (and hence, incoming) calls.