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MTNL: The growth engine lacks power - Views on News from Equitymaster
 
 
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  • Feb 9, 2002

    MTNL: The growth engine lacks power

    MTNL is the country’s second largest basic telephony service provider (BSP). It provides basic telephony service in Mumbai and Delhi and its subscriber base as of March 2001 stood at 4.3 m, a market share of 14%. Since both these circles are two of the largest metros in the country, one being the financial capital (Mumbai) and other the political capital (Delhi), MTNL has been benefited from its monopoly position. However, the gradual entry of private sector players post liberalisation of the Indian telecom sector has threatened its dominancy.

    It is estimated that MTNL derives almost 60%-70% of its revenues from the business segment. Hughes Tele.com, which entered the BSP segment a year and a half ago, successfully managed to target the business class and has given a run for the money to the PSU (its subscriber base already has touched more than 125,000 subscribers). It has also been setting up broadband infrastructure, which it intends to bundle with its basic telephony service.

    Not only competition but also the regulatory environment has changed completely. As per the tariff rationalisation plan of the National Telecom Policy 1999 (NTP-99), the Telecom Regulatory Authority of India (TRAI) slashed tariffs for both domestic as well as international long distance telephony rates in mid-2001. Though this resulted in a sharp rise in paid-minute calls, average revenue per minute came under pressure.

    With DLD segment let open to private players, rates have declined even further in the current fiscal. Bharat Sanchar Nigam Limited (the re-christened DoT) recently slashed DLD tariffs by more than 60% in 3QFY02. The first nine months performance of MTNL mirrors the effect of tariff rebalancing. While sales grew by 9% to Rs 47,666 m for 9mFY02, operating margins fell by 20 basis points to 38% in 9mFY02. The fall in margins was acute in 3QFY02 (operating margins fell from 42% in 3QFY01 to 37% in 3QFY02). There were other reasons for the fall in operating margins as well. With the transition to a revenue share regime in FY02 from a fixed licensee era, MTNL is liable to pay 12% of its gross revenue as license fee. Hitherto, the company was paying Rs 900 per active subscriber, which works out to just 6.8% of basic telecom revenues in FY01. Besides, higher adspend towards the launch of its cellular service (Dolphin) and limited mobility service (Garuda) also could have exercised downward pressure on operating profits.

    (Rs m) 3QFY01 3QFY02 Change 9mFY01 9mFY02 Change
    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  

    To broaden the revenue stream, MTNL ventured into the ISP segment. Though subscriber base grew at a faster rate during the initial period of launch, the company lacked aggressiveness and as a result growth has been much lower compared with its peers. Though there were other factors like falling usage charges that affected growth, VSNL managed to increase its Internet subscriber base by more than 70% to 630,000 customers in FY01. It has to be mentioned that VSNL was also a PSU.

    MTNL’s biggest asset is its subscriber base and the company does not seem to realize this. As Mr. Prakash Bajpai, CEO of Hughes Tele puts it "Without last mile connectivity we are all dead…" Read interview. The company can effectively use this as a launching pad for bundling other services like Internet and leased line services, which could enable it to grow at a faster rate. Consider a simple case. MTNL could decide to offer a free Internet account to its existing basic subscribers as well new subscribers to grow topline at a faster clip. Though it might lose out on one front i.e. approximately Rs 700 for 100 hours, telephone usage could increase sharply. Effectively this means that the subscribers would have to shell out Rs 1.20 per 3 minutes of Internet usage (Rs 24 per hour). Assuming an average usage of 100 hours per year per subscriber and assuming only 25% of its existing subscribers have computers at their residence (for metros like Mumbai and Delhi where MTNL operates, this could be even higher), we are looking at revenues of Rs 2.5 m per annum or 4.5% of FY01 revenues (value add services contributed to just 1% of FY01 revenues). This will also act as an incentive for new subscribers to opt for MTNL’s basic service. Of course, there are other factors like infrastructure, faster connectivity and bandwidth.

    To further reduce its dependence on basic telephony, MTNL ventured into the cellular segment. And it has been a successful effort till now. Its subscriber base stood at 118,656 as of December 2001, a 2.2% market share. The company recently has managed to add more subscribers in Mumbai as compared to its competitors like Hutchison and BPL Mobile, it is on the slower side in the Delhi region. MTNL had an 8% market share in the Mumbai circle and a 5% market share in Delhi. By pricing its package competitively, the company has forced private players to reduce tariffs. While we expect the subscriber growth rate to remain robust, it remains to be seen whether the company would be able to offer value-add services like its peers, which is critical in the long run.

    Following TRAI permission for basic operators to provide limited mobility, MTNL launched its Wireless in Local Loop (WiLL) service branded ‘Garuda’ in December 2001. By pricing monthly rentals and deposits competitively, MTNL has increased the attractiveness of the service. While incoming calls are free of cost, outgoing calls are charged at the rate of Rs 1.20 per minute, which is also the ruling basic telephony charge. There are two options. One, on a security deposit of Rs 5,000, MTNL would provide the instrument and on the surrender of the instrument, the security deposit would be refunded. The other option is for the subscriber to buy the handset from the market with no security deposit. The handsets are already available in the market and one can expect rates to fall in the coming years. The monthly rental at Rs 450 is the same for both the options.

    But the key cause of concern is the earnings prospects. Since Mumbai and Delhi are cities with high tele-density, subscriber base growth is expected to be on the lower side. While tariff restructuring has increased paid-minute calls, it is not commensurate with the fall in tariffs. Also, in such a highly competitive environment, pricing is not a sustainable differentiating factor. As customers become more and more sophisticated, telecom majors will have to improve service levels and bundle value-adds.

    MTNL’s future prospects rely on its disinvestment. The new partner could bring in the technical expertise and show the way for the company. But even here, there is a difficulty. With more than 60,000 employees, which the management assumes as its biggest asset ("The human strength is the greatest strength for MTNL…" Read interview), one has to be cautious. To increase attractiveness, the government might decide to prune workforce to a manageable level before disinvestment. Given this backdrop, challenges are galore for this telecom behemoth.

     

     

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