Strong Outlook For Vsnl: Lehman
Reviewing the telecommunications sector in India, Lehman Brothers has forecast impressive growth for VSNL's traffic at slightly more than 20 per cent for the next five years. This growth is expected to come from the expansion of the domestic network, which will have a multiplier effect, and from lower rates in a price-elastic market.
With the Indian government awarding VSNL a monopoly on international telecommunications services up to 2004, and a 'gatekeeper' for the domestic sector, VSNL is likely to gain extensively from the opening up of the Indian economy.
With no commitment required from the company towards the basic network and as a net foreign exchange earner, VSNL is expected to gain in the face of a falling currency despite the likely fall in accounting rates." Strong unit growth and steady margins may lead to annual profit growth averaging 25 per cent for the next five years, Lehman adds.
According to the investment bank, privatisation of the basic service, which is expected in the next two years, along with a steady GDP growth will push up telephone penetration rates to 2 per 100 people in the next five years from 1.1 at present.
The growth of outgoing calls, in particular, will be triggered by the increase in domestic lines because of the expected privatisation and by the offering of discount rates at off-peak hours, creating more effective line utilisation.
The report further adds that VSNL will continue to be well placed in the future as additional expansion plans can be met by strong cash flows and borrowings. As per its estimates, VSNL's share is trading at a 16 per cent discount to its net asset value (NAV). While the stock remains thinly traded, the global investment bank says that the VSNL stock has been a strong performer at the markets, rising 33 per cent since January 1995 while the BSE Sensitive Index dropped 11 per cent.
Lehman Brothers expects VSNL to outperform the market and has set a 12-month stock price target of Rs 1,650 (offering an upside of 25 per cent from present levels).