Videsh Sanchar Nigam Ltd

Videsh Sanchar Nigam's (VSNL), continual monopoly over India's external telephony sector is reflected in its financial results for the year ended March 1997. Income from operations jumped 17.14 per cent to Rs 5194.4 crore due to a 20.43 per cent increase in transmitted traffic volumes from 1148 million paid minutes to 1382 million paid minutes. The incoming to outgoing call ratio has also marginally improved from 2.4 to 2.59. An increase in the total access lines i.e. telephone circuits operated by VSNL from 12,873 to 14,184 has further helped sustain the volume growth.

But according to the recent revenue sharing agreement with DoT, settlement payments to and revenue sharing with DoT has been the largest cost component for VSNL. The agreement resulted in falling settlement and collection rates, which VSNL had hoped to offset against increased billings of calls originating from India.

However this did not materialise, thus affecting the operative margins which dipped from 16.18 per cent to 16.06 per cent.

Net profit at Rs 503 crore, was up 23.04 per cent compared to Rs 408.8 crore last year. However lower interest charges of Rs 4 crore and a higher other income of Rs 68.3 crore (Rs 38.8 crore last year), have both cushioned the company's bottomline. Other income in fact has bloated a staggering 76.03 per cent, which could prossibly be due to the temporary parking of a part of the company's GDR proceeds.

For the future, analysts state that as the incoming to outgoing call ratio increases and the settlement rates fall, the proportion of gross revenues retained by VSNL will increase due to the new revenue sharing agreement. The low rates for international calls originating in India could also help VSNL cut down the trend on increasing call backs from India and thus maximise its billings.

Furthermore a five year tax holiday, concessions on equipment imports and enhanced ECB limits, should all benefit VSNL with the accordance of infrastructure status to telecom. The cuts in import duties on components to 20 per cent and on equipment to 30 per cent, could substantially curb project costs at VSNL. Also as the company's networks grow and penetration improves, VSNL is likely to be the sole beneficiary of increasing international call traffic.

At Rs 1250, the scrip in being traded at around 20 times its 1996-97 earnings, by no means is a high discounting considering the company's monopoly status.

RIL tax planning

Reliance's net profits for 1996-97 amounting to Rs 1322.70 crore include credit of Rs 942.19 crore, which is the amount written back from general reserves consequent to the change of depreciation to the written down value (wdv) method, in accordance with accounting standard 6. This credit has enabled the company to show a large profit inspite of such a high depreciation charge of Rs 1352.33 crore for the year.

This year, however, other factors remaining the same, the huge credit may not be available in the P&L account, and the high level of depreciation could be a drag on net profits. But this tendency will be offset by several factors. First, new capacities will increase profits.

Second, under the wdv method, depreciation declines with the passage of time. Third, the depreciation on wdv method has been calaculated only on assets put to use up to April 1,1995. Fourth, in 1996- 1997 itself, gross block has grown by 60 per cent, and RIL can keep calculating depreciation on these assets on the SLM method, which will mean lower depreciation. RIL will be able to juggle all these factors, so as to enable it to have an optimum mix of book profit, addition to reserves, dividends, and tax.

TNPLpAlthough net sales at Tamil Nadu Newsprint and Papers (TNPL) in the second half of 1996-97 was higher by 73 percent compared to the first half, operating profits were lower by 68 percent at Rs 54.6 crore. Reduced prices cannot be the reason for the decline in operating profit margins from 49 per cent in the first half to 20 per cent in the second half, because the last price reduction was in October 1996.

The simple reason is that TNPL, for the eighth year in succession, is a zero inventory company. As on September 30, 1996, however,40 percent of its production was lying as inventory.

The treatment of increase/decrease in inventory can be given either on the income side or on the expense side (by reducing from total expenditure). Thus, high inventory results in inflated margins. The low margins in the second half, therefore, are due to the zero inventory as at end-March.TNPL had stopped production of newsprint for three months during the second half of the year. This is in line with its practice of reducing newsprint production as a percentage of total production.

The first half of 1997-98 will be better than the second half of 1996-97. The reason is that the educational year begins in June and as a result the demand for printing and writing paper starts picking up from March onwards.The company has adopted the questionable practise of treating MAT outgo as an item of current assets.

This has helped company inflate its net profit by Rs 2.14 core.Even in 1995-96, the cash generated from operations at Rs 41.39 crore was lower by 40 percent compared to 1994-95. The collection period in 1995-96 itself was 72 days and this is likely to worsen in the current year. For investors, the message is clear— get out of this cyclical stock.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.