Investors with a penchant for high risk can consider taking fresh exposure in the Videsh Sanchar Nigam (VSNL) stock with a one-year perspective. At the current market price, the stock trades at a price-earnings multiple of 24 times its likely 2006-07 earnings. While the valuation is not cheap and the fundamentals yet to stabilise fully, there are two near-term potential triggers for the stock.
Impact of listing
One, the proposed listing of Flag Telecom, Reliance Communications subsidiary, at the London Stock Exchange, is likely to have a positive impact on the valuation of Tyco Global Network, the undersea cable network acquired by VSNL. These assets were acquired by VSNL by $130 million in 2005 and its undersea cable capacities are similar to Flag Telecom at 65,000 km.
Going by the preliminary valuation estimates of $1.5-2 billion for Flag Telecom, if the listing happens at this value, it will have a positive effect on VSNL too. Even if we assign a value of 70-80 per cent to the assets of Flag, Tyco's value will work out to Rs 160-175 per share.
Two, according to recent news reports, VSNL has plans to de-merge the telecom business into a separate company. The existing company, which holds the prize-surplus real-estate assets of VSNL, will become the holding company.
This proposal is said to be under government scrutiny. While no confirmation is available, this reflects that the government is possibly moving closer to a decision on monetising the real-estate assets that will unlock handsome gains for shareholders of VSNL.
According to the original privatisation and shareholding agreement, 51 per cent shareholding in the real-estate company was to be held by the government and the rest with the shareholders.
On a per share basis, rough estimates place the real estate value at anywhere between Rs 200 and Rs 240.
Though no moves are afoot now, with the listing of Idea Cellular and Vodafone's acquisition of Hutch-Essar, the Tatas may consider restructuring the entire telecom holding within the group.
If the Tatas decide to consolidate all the assets under Tata Teleservices, the mobile arm of the group, VSNL, which holds an effective equity stake of 14.1 per cent (as of March 31, 2006) in the former will have an opportunity to monetise this equity holding.
The value of this equity stake will be about Rs 75 depending on the valuation placed for Tata Teleservices.
Based on the sum-of-the-parts valuation, elements such as real estate, Tyco and equity stake in Tata Teleservices offer a fair degree of valuation comfort in the stock.
The flip side
On the flip side, however, there are three variables that are a cause for concern. VSNL has recast its business into three broad segments — wholesale voice, carrier and enterprise/carrier data and broadband.
Of these three segments, it is likely to face intense competition in the wholesale voice, which includes the international/domestic long-distance voice operations as newer players enter the fray.
The segment margin on the wholesale voice business has been stable at 17.5 per cent in the first nine months of 2006-07 compared to the corresponding previous period.
Two, any slowdown in enterprise/carrier data is likely to hit them hard as the margins from this segment are spectacular.
Finally, Flag Telecom has approached the Arbitration Tribunal of the International Chamber of Commerce seeking monetary relief of $406 million from VSNL relating to construction and maintenance of Flag Europe-Asia cable system. As it is a legal dispute, its impact of financials is hard to evaluate at this point.