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VSNL sore over UTI's criticism

The report, titled 'VSNL's position in a decontrolled environment', projects the Mahanagar Telephone Nigam Limited on a better footing.

T O D A Y

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It also says that competitors could shave off around 15 per cent of VSNL's market share within five years of their operations.

The UTI also downgraded the recommendation on VSNL's stock from 'buy' to 'hold' on a potential disappointment in earnings of the second half.

"There is no need to break the monopoly of VSNL over international telephony today. The so-called demand for opening up international telephony is a bogey set up by multinationals. This (the report) has done a lot of damage. Our market price has slumped by 15-20 per cent on the bourses and so the global depository receipt (GDR) price since the publication of the report. We spoke to GP Gupta, chairperson of the UTI, and strongly objected to remarks made in the report. They have agreed to retract some of the points made in the report," said a senior VSNL official.

UTI officials maintained that "We stand by our report on VSNL. They (the VSNL) did meet the chairman but there is not going to be any change in the report. In fact, we raised a certain query. They are, however, yet to reply."

The research was undertaken by the UTI Securities Exchange Limited, a wholly owned subsidiary of UTI.

The report states that the downgrading of the recommendation on VSNL's stock arise from three issues. The first is the potential disappointment in earnings in the second half. Second is the concern over the impact of competition when VSNL's core business is deregulated. And the third is uncertainty over the timing and scope of revisions to the revenue sharing agreement with the Department of Telecommunications.

VSNL's monopoly over international telephone services will be extended up to 2004 only. "Companies like AT&T and other mega-carrier are then likely to use competitive pricing and intensive marketing strategies to gain market share," the study states.

'The entry barriers for setting up international telephone operations are lower than those for local loops. We believe competition will hit VSNL harder than MTNL due to this factor,' the report claims.

The government has assured the World Trade Organisation of reviewing the possibility of opening international telephone services by 2004 for private sector participation.

"We believe competition will have a greater impact on VSNL than on MTNL as the investment required to match MTNL's network is considerably higher than for VSNL.

MTNL's depreciated gross fixed cost per line stood at Rs 22,400 as on March 31, 1997. On the other hand, VSNL's depreciated gross fixed asset cost per line stood at Rs 7,800 per line, assuming 10 per cent of the total lines in India have STD connections.

Entry barriers in to international telephony are, therefore, much lower and there is the prospect also of private operators rolling out services at a faster pace than for domestic services," states the report.

The UTI report has also preferred MTNL's asset quality to VSNL's in the light of future competition.

The potential threat for VSNL, according to the study, is the practice of 'international simple resale' which some countries now allow.

This permits carriers to lease or buy international transmission circuits in bulk, plug it into the public networks at each end and resell it at one call at a time.

ISR carriers can thus avoid settlement payments, giving them a big price advantage in terms of tariff reduction.

For example, Britain and the United State, both allow ISR, whereas India does not. So, if a caller wants to telephone Britain through VSNL, the call will travel the usual way.

However, a competitor (an ISR carrier) could send the call out of India over a private line to its own switch in America, provided it has one. The call would then be routed to Britain, circumventing the accounting rate system and significantly cutting prices once price setting is reasonably deregulated in India.

This will escalate VSNL's market share loss significantly.

Earlier:

• An interview with VSNL Chairman B K Syngal
• VSNL bans Web telephony. Then plans its own service
• VSNL may tie up with Inelsat for DTH service
• Dial M for Murder
• Names of new members on VSNL board recommended
• VSNL cuts accounting rates against US carriers
• More on Archives page

- Compiled from the Indian media

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