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Telecom: In search of growth - Views on News from Equitymaster
 
 
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  • Jan 9, 2002

    Telecom: In search of growth

    While the markets are positive of an improved performance for companies from sectors like software, cement and auto, the telecom majors are expected to report subdued growth in profits in the third quarter of the current fiscal. The reasons are multifold.

    For one, liberalisation and the consequent entry of private operators both in the basic as well as cellular telephony has resulted in intense price war between larger players. On the basic telephony front, players led by MTNL have aggressively reduced registration and initial deposits in an attempt to lure customers. Since India’s domestic as well as international long distance telephony rates are one of the highest in the world, the Telecom Regulatory Authority of India (TRAI) reduced tariffs by more than 50% last year. More recently, following a 60% reduction in DLD rates by Bharti, Bharat Sanchar Nigam Limited (BSNL) also reduced rates. Though players are optimistic of a sharp rise in paid-minute calls, which could offset the fall in tariffs, it might take some time to reflect in terms of revenue growth.

    Despite a 13% growth in telephone traffic for VSNL in 2QFY02, revenues fell by 4.5% due to a 20% fall in accounting rates. This is expected to continue in the second half as well. Given this backdrop, revenue growth of both VSNL and MTNL to remain subdued in 3QFY02.

    In an effort to diversify its revenue stream, MTNL entered into the cellular segment. Competitive airtime charges coupled with aggressive marketing has benefited the public sector major and is vindicated by the sharp rise in subscriber base. MTNL’s cellular subscriber base has reportedly touched 75,000 as against the original estimate of around 50,000. The company added 25,000 new subscribers in December 2001 alone.

    But on the cellular front, presently, the direct cost of adding a new subscriber, which primarily consists of commission expense, is substantially offset by the initial activation charges recovered from the customers. However BPL Mobile waived off activation charges in the festive season to increase subscriber base. MTNL followed suit and also waived off activation charges. So, this along with falling airtime charges would lower the average revenue per subscriber in the current fiscal.

    As far as margins are concerned, MTNL’s margins are expected to fall significantly in 3QFY02. One of the key reasons is a shift towards the revenue sharing regime, wherein MTNL is subjected to pay 12% of its gross revenues as license fee as against Rs 900 per subscriber, which hitherto it was paying (6.8% of basic telephony service in FY01). MTNL’s operating margins in the first half of the current fiscal fell by 100 basis points to 38.5%. The company reported a 12.5% drop in net profit for 1HFY02.

    But on the other hand, VSNL’s margins would be in line with previous years levels. Margins in 1HFY02 for the company increased by 240 basis points primarily on account of withdrawal of excess provision towards staff costs last year. Effectively, we expect VSNL’s margins to increase by 200 basis points for FY02. Overall, there is not much cheer about from telecom companies in 3QFY02.

    Comparative valuations...
    Category MTNL VSNL
    CMP (Rs) 128 217
    EPS (FY02E) (Rs) 20.3 51.7
    P/E (x) 6.3 4.2
    Price to book value (x) 1.0 0.9
    Market Cap (Rs m) 80,640 61,845
    Market Cap/sales (x) 1.3 0.8

     

     

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