VSNL Has Huge Upside

I originally talked about Videsh Sanchar Nigam Limited (VSL - commentary - Cramer's Take) on these pages back in early 2003 around April when I was preparing to head out for the annual summer-in-India trip. The shares were trading around $3 a share, give or take a dime or two.

More recently, when I talked about the opportunity in Tata Communications (VSNL's new name going forward) in the middle of September, VSL was trading at $19 and change.

Four and a half months later, the shares are at over $37.

I liked VSNL a lot back in September given its sum-of-parts calculations. But what has driven the stock higher in the last six trading days by about 26%?

On Dec. 19, VSNL announced that it was building a new TGN Eurasia Cable System that will link Bombay directly to Paris, London and Madrid via Egypt.

The stock has gone from $29.87 at the closing trade on Dec. 18 to $37.60 at Thursday's close, up 26% in six trading days here; from Dec. 18 through Dec. 26, the stock moved from INR 606 to INR 749, or 23.6%, in India.

The system is being built along with Seacom and Telecom Egypt and will add 1.3 terabits of capacity along the route starting in 2009.

With this new TGN system in place, VSNL will be able to offer data and voice connectivity between India, North America, Western Europe, South Africa, the Middle East and Southeast Asia.

Well, that is all well and good.

The main thing the company did not address is the fact (confirmed by a friend of mine who is a confidant of the Tata family) that once completed, VSNL's expenses for data and voice transmission will decrease by almost 60%, with almost all of those savings flowing directly to the company's bottom line.

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At the time of publication, Somaney had no positions in the stocks mentioned, although positions may change at any time without notice.

Jay Somaney is a partner and fund manager with TSG Capital Partners, a hedge fund based in Plano, Texas, and founder of GlobalTechStocks.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Somaney appreciates your feedback; click here to send him an email.