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MTNL: Margins plunge

Jan 31, 2002

Mahanagar Telephone Nigam Limited (MTNL), the state owned basic service provider in Mumbai and Delhi, has reported a sharp drop in profits for the third quarter ended December 31, 2001. Margins have fallen drastically in the current quarter.

(Rs m)3QFY013QFY02Change9mFY019mFY02Change
Net sales 14,687 16,501 12.4% 43,906 47,666 8.6%
Other Income 747 372 -50.2% 1,984 1,744 -12.1%
Expenditure 8,465 10,364 22.4% 26,157 29,528 12.9%
Operating Profit (EBDIT) 6,222 6,137 -1.4% 17,750 18,138 2.2%
Operating Profit Margin (%)42.4%37.2% 40.4%38.1% 
Interest 18 1 -94.2% 59 21 -64.6%
Depreciation 1,674 1,958 17.0% 5,559 5,880 5.8%
Profit before Tax 5,277 4,549 -13.8% 14,114 13,981 -0.9%
Tax 511 1,269 148.4% 1,184 3,554 200.3%
Profit after Tax/(Loss) 4,766 3,280 -31.2% 12,930 10,427 -19.4%
Net profit margin (%)32.4%19.9% 29.4%21.9% 
No. of Shares (m) 630.0 630.0   630.0 630.0  
Diluted Earnings per share* 30.3 20.8   27.4 22.1  
P/E Ratio (x)  5.5    5.2  

Revenues have increased 12% in 3QFY02 backed by higher growth in subscriber base for its recently launched cellular service in Mumbai and Delhi. Also, paid-minutes calls could have risen in light of a steep fall in domestic long distance telephony rates in the current fiscal. Other income in 3QFY02 is lower by 50%. For the first nine months of the current fiscal, revenue growth at 9% is in line with expectations.

But the spoiler for the third quarter performance is the steep fall in margins. The reasons for this are multi-fold. In line with the tariff rationalisation policy of the Telecom Regulatory Authority of India (TRAI), both the domestic and international long distance telephony rates have been on the free fall over the last year and a half. Given the fact that Mumbai and Delhi account for a key portion of domestic long distance calls, lower revenue share has resulted in lower margins. Besides, with the transition into a revenue sharing regime, MTNL is subjected to pay a 12% revenue share as against around 7% it was paying till now. Higher promotional expenses towards the launch of its cellular service (Dolphin) and CDMA based wireless service (Garuda) also could have exercised a downward pressure on margins.

Net profit for the first nine months has declined by 19%. Though interest expense has fallen notably, higher tax outgo towards deferred taxation has lowered net profits. MTNL is expected to report a 7% growth in revenues and a 18% fall in net profits for FY02. The stock currently trades at Rs 115 implying a P/E multiple of 5.2x annualised nine months earnings.

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