Mumbai: When the Tata’s controlledVidesh Sanchar Nigam Ltd (VSNL) acquired Canadian Teleglobe International Holdings Ltd for $239 million in July 2005, many analysts questioned the wisdom of the deal.
Two years after it lost its monopoly on international calls out of India and saw revenue dip, VSNL is now hoping to improve its overall margins, thanks to Teleglobe.
“By acquiring Teleglobe, we have become the No. 1 provider globally of wholesale voice minutes,” says Srinivasa Addepalli, vice-president corporate strategy. “We expect to realize benefits of this acquisition in the current financial year by garnering a larger share of customers revenues and rationalizing costs by moving shared service centers from Canada to the US.”
VSNL, which was focused on carrying calls from overseas to India and vice versa, realized that it could enter the business of carrying global voice calls into other countries at low incremental costs leveraging the equipment it already had.
The Teleglobe buy gave it the customer relationships to build on the infrastructure the $130 million Tyco Global Network acquisition in November 2004 had brought.
“India accounts for just 4% of the international voice traffic. With Teleglobe, we had the potential to tap 100% of this opportunity. Since the time we acquired Teleglobe, we have managed to boost the business from handling 13 billion voice minutes of traffic annually to 20 billion now. At this combined scale, we now have the ability to get operating costs leverage,” says Srinivasa.
The company now hopes to increase its operating profit margin by 3%-5% in the next five years to take it to double digits from the industry average Ebitda (earnings before interest, taxes, depreciation and amortization) margin of 6%-7% of revenues.
“The international voice business contributes almost 60% of our $1.1-1.2 billion revenues,” says Addepalli.
This is significant in the context of the fall in voice tariffs that both fixed line operators such as Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) and cellular operators such as Bharti Airtel Ltd and Reliance Communications Ltd, have effected in recent months.
A fall in calling rates by the service providers is usually reflected in a fall in the retention rate paid to the infrastructure provider who carries the voice call from India to the overseas destination.
“Already, the likes of BSNL are able to use their ISD licence and their buying clout to get a cheap rate. They are effectively paying only for the utilization of cables,” says Priyanko Panja, an analyst with Edelweiss Securities Pvt. Ltd.
This means despite increase in call volumes, profits may actually fall due to the higher costs associated in servicing such a variable cost business.
A research report by international credit ratings agency Standard & Poor on Asia-Pacific telecom companies notes, “Incumbents have had their long-distance voice monopolies eroded by intense pricing competition...Profitability of the incumbent operators may come under pressure.”
Standard & Poor in its report says that operating margins are unlikely to ever return to previous highs so improving operating efficiency remains key to future margins.
The situation faced by VSNL in its home market is similar to what local telecom service providers face in other South East Asian countries. However, as India is an even more price-sensitive market, the situation, too, is correspondingly intense here. Panja says in the best case scenario, VSNL will be able to maintain its margins.
Against this backdrop, VSNL’s hopes to expand its operating margins stems from its acquisition that was made with the prior knowledge that the monopoly on international long distance wasn’t going to last.
“The international voice telephony carriage business requires high fixed upfront investment,” says Addepalli. “You also need relationships with partners in 200 countries and a minimum two megabits per second network capacity in each country. Besides, you need to put up equipment in each of these countries. You need to sign legal and commercial contracts with partners in each of these countries. So the barriers to entry in this business are quite high.”
VSNL is also trying to combine its sales team for the wholesale voice and data business with that of Teleglobe to have a 300-person-integrated sales organization.
In the shared services area too, the company is trying to realize synergy benefits and offshore support services to lower cost locations in India.
“We have set up global delivery centres for shared services like commercial, accounts and network management in Chennai and Pune where work will be offshored completely in phases during the course of this year,” says Addepalli.
By negotiating better terms with business partners, the combine expects to secure far higher volume discounts than the standalone firm would.
A report by Citigroup on VSNL notes: “We expect the Teleglobe and Tyco acquisitions will be EPS accretive and synergies with Tyco and VSNL can lead to significant cost savings for Teleglobe.”
VSNL has set itself an ambitious target of raising revenues by 15-20% this year. It will also negotiate with service providers to pass on a larger portion of their international voice traffic to it.
“Teleglobe has a better revenue planning engine which we are adopting. While VSNL changed its prices every month, Teleglobe’s systems had an automatic network that changes prices every day keeping in mind the potential to maximize revenues given available capacity,” saysAddepalli.
Addepalli is confident that VSNL can cut costs faster than the decline in its revenues. This is key to VSNL’s profitability as, even though international voice traffic volumes are rising by 10% per annum, revenues are stagnant due to declining prices.