By Santosh Menon

NEW DELHI, Feb 2 (Reuters) -The Indian government decision to sell a big chunk of its holding in telecoms blue-chip Videsh Sanchar Nigam Ltd (VSNL) sent the firm's shares soaring 16 percent, the daily limit, on Friday.

Will the stock continue to soar Monday when trading resumes?

Maybe, due to sheer momentum driven by speculative buying. But not because of the company's earnings fundamentals, analysts warn.VSNL's main business of international voice traffic faced threats from falling international tariffs and impending competition, while future growth avenues were unclear, he said.Revenue from international voice traffic accounts for over 90 percent of VSNL's income. Other revenue comes from its leased lines and fledgling Internet access businesses.

Recently the research firm Cazenove & Co recommended a reduce rating in the stock, citing pressures on VSNL's revenue from the impending loss of its monopoly status.

The New York Stock Exchange-listed VSNL (NYSE:VSL) is due to lose its monopoly over international voice traffic in April 2002 when the Indian government opens the market to private and foreign players.

Its future revenues are also threatened by falling international accounting rates and an impending entry of the much-cheaper voice over Internet.

RUSHING TO BUY

Still, that didn't stop investors from rushing to buy VSNL's shares on Friday, following news that the government will reduce its holding to 26 percent from 52.97 percent, by selling a 25 percent stake to a strategic partner.

VSNL shares surged 16 percent, the daily limit, to 382.15 rupees before trading in the issue was suspended for the remainder of the day.

The government's decision surprised the market, which expected a phased sale of about seven percent in the open market, a small portion to employees and the rest to a strategic partner.

VSNL is also India's first and largest Internet service provider with over 557,000 subscribers and provides the gateway to most private Internet access providers.

SPECULATIVE RALLY

VSNL Chairman and Managing Director S.K. Gupta said the rally was justified and added his firm's shares were still undervalued.

The company is one of India's most cash rich firms with over 60 billion rupees ($1.3 billion) in reserves and no debt.

At around 3,000, VSNL also has many fewer employees than other state-run companies. By contrast, state-owned telecom's firm Bharat Sanchar Nigam Ltd has nearly 400,000 employees.

And on price-earnings multiples, VSNL's valuation is far below some of its international peers. Even after Friday's leap, its shares are trading at just 7.2 times projected earnings for the year, compared to 27.26 for AT&T (NYSE:T) Singapore Telecommunication's 22.66 and Sprint Corp's (NYSE:FON) 17.1.

FUTURE FORAYS

VSNL's Gupta said the company was eyeing new businesses to broaden future revenue streams. Its considering entering the recently liberalised domestic long-distance telephone business and direct-to- home broadcasting.

He said the company was also reviewing earlier plans to enter the cellular business after the government's decision to allow fixed-line firms to offer limited mobility to customers.VSNL has been promised a free licence to enter the domestic long-distance (DLD) telephone service market in exchange for ending its monopoly over international voice traffic two years ahead of schedule.

Yet analysts said doubts remain about management's ability to seize business opportunities.