A PLAY ON INDIAN TELECOMMUNICATIONS
marketwatch.com
Last Update: 12:01 AM ET Dec 4, 2006
Editor's note: Jay Somaney is a partner and fund manager with TSG Capital Partners, a hedge fund based in Plano, Texas. He is also editor of GlobalTechStocks.com, a financial Web site produced by traders and fund managers in the U.S. and India. Click here for more information.
PLANO, Texas (MarketWatch) -- Videsh Sanchar Nigam Limited is one of India's leading global communications service providers and offers another attractive play on the burgeoning growth in the region.
VSL offers carrier and enterprise solutions which include data, mobile, ethernet and voice. Through its various subsidiaries VSL owns one of the largest global networks (including mobile, data and voice) in the world.
The company's backbone capacity network that spans 206,356 kilometres of fiber-optic networks and undersea-cable, connecting 240 countries around the globe.
VSL is the largest carrier of wholesale voice bar none. It is the third largest global telecommunications network behind only MCI and AT&T
Yes, you heard that right.
VSL is part of the Tata Group, a $22 billion Indian conglomerate, with their hands in everything from the most basic of industries to the cutting edge of technologies. The Tata group has 93 different operating subsidiaries. Point being, deep pocketed parent company.
So why do I like VSL even here?
Great question.
I have owned VSL for almost 4 years now and it has been a big multi-bagger for me. I remember when I first started writing about it on the Net. The volume was barely a few hundred shares a day with a few thousand shares traded on a good day. It took me a month and half to accumulate a decent sized position back then. No one had even heard of the company then but I was buying it in India for my personal account so I started looking at it here for my LP's. And, now here we are.
Here is the main thesis: VSL is undervalued even now from a price-to-sales multiple or a growth rate to price multiple when you compare it to the likes of behemoths like Ma Bell et al. Most analyst estimates here are not accurate. And even fans of the company are all over the place in their analysis and even worse mostly bearish, in their assessment of VSL.
Furthermore, VSL owns massive land holdings in India which are now free to be unlocked creating additional but relatively unknown value (even to the sell-side) for shareholders.
Point being, even the sellsiders don't have a good handle on the story.
A couple of years ago or so, VSL pulled off one of the biggest corporate heists in history. They bought the Tyco deep-sea fiber optic network for pennies on the dollar because at the time there was such a huge glut of fiber capacity lying dark that TYCO was a distress seller.
Then they did the same thing with the Teleglobe network. Again a major distress sale.
Those two acquisitions are going to eventually make VSL a global name. It's not a question of "if" just a question of "when."
Indian management teams are famous for the UPOD (under-promise, over-deliver) style of operations and are also notoriously understated on their projections. Conservatisim is the key word in India, which to me, is very refreshing -- a walk softly, carry a big stick, sort of thing.
OK, so let's go through my valuations per ADR of its different operating units (Using IMHO extremely conservative valuations for each segment including the land holdings. Also important to note that two local shares equals one ADR to keep things pari pasu):
Core business conservatively valued at Indian Ruppes (INR) 475
VSL Investments in Tata Teleservices: INR 200
Tyco Global Network: INR 55
Teleglobe: INR 75
Land Holdings: Anywhere from INR 400 to INR 550
The above valuation does not even include the South African subsidiary because we do not have enough details yet.
That produces a total INR 1205-INR 1355
In terms of U.S. dollars using an exchange rate from late November of $1 = INR 44.57, my analysis yields a valuation of $27.04 to $30.41 a share.
Remember, these valuations I assigned do not include the South African venture and also does not include the valuation that Indian pure-play real estate companies are getting for their land holdings. Of course, VSL is not a real estate company but is one of India's premier telcos.
Is there a downside?
Sure, there is. There always is.
Here are a couple of "on the other hand" things to consider.
The company is seeing tremendous competition in its STD/ILD/Domestic business as companies across the globe realize the potential of the Indian market and rates for calls in India continue to get slashed lower due to competitive pressures.
Secondly, valuing land in India is extremely difficult at the moment. The valuations could be radically different upon realization.
But all said and done, I like the risk/reward at current levels.
Until the next time, good trading.
Editor's note: Somaney is long all stocks mentioned either here in the U.S. or in India |
