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MTNL: Call dropped!

Feb 27, 2007

PSU telecom company, <>MTNL, had recently announced yet another quarter of lacklustre performance, as it reported 1% YoY decline in sales for 3QFY07. However, due to substantially higher other income and an extraordinary income, the net profits were up by 91% YoY during the quarter. For the nine month period, while the topline declined by 1% YoY, net profits were up 3% YoY.

Financial Snapshot
  3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Sales 12,669 12,603 -0.5% 38,041 37,517 -1.4%
Expenditure 10,373 10,295 -0.8% 31,299 30,606 -2.2%
Operating Profit (EBIDTA) 2,296 2,308 0.5% 6,743 6,912 2.5%
Operating Profit Margin 18.1% 18.3%   17.7% 18.4%  
Other Income 848 1,890 123.0% 3,869 4,141 7.0%
Interest 40 2 -95.9% 221 20 -91.1%
Depreciation 1,621 1,685 3.9% 4,722 5,056 7.1%
Profit Before Tax 1,483 2,511 69.3% 5,669 5,976 5.4%
Tax 307 850 176.5% 1,285 2,033 58.2%
Extraordinary income/(Expense) - 579   - 579  
Profit After Tax/(Loss) 1,176 2,240 90.5% 4,384 4,522 3.1%
Net Profit Margin (%) 9.3% 17.8%   11.5% 12.1%  
No. of Shares       630 630  
Diluted Earnings Per Share (Rs)         9.4  
P/E Ratio (x)*         15.1  
* On a trailing 12 months basis            

What is the Company's Business?
MTNL is the government-owned (56% stake) basic telecom service provider in Mumbai and Delhi, with a subscriber base of around 6.2 m, including 3.8 m in the fixed line telephony segment and the remaining 2.4 in the mobile segment. The company has a license to offer basic telephony services in both these metros up to the year 2013. MTNL accounts for around 9% of the all-India fixed line subscriber base.

What has driven performance in 3QFY07?
All due to mobile: Despite the 5% YoY decline in fixed line revenues, MTNL managed to keep its topline at almost the similar level as 3QFY07. This was mainly due to the strong 31% YoY growth in the company's mobile services business, which contributed to 16% of the company's total revenues in 3QFY07 (12% in 3QFY06). While it is heartening to know that the share of cellular services has gone up as a percentage of total revenues, one must also not forget that the company offers its services only in the metros of Delhi and Mumbai. What is worrying though is the fact that these markets have lesser potential for growth as compared to the other markets considering the already high levels of penetration (teledensity) in the former.

Segment wise performance
  3QFY06 3QFY07 Change
Basic Services      
Revenue 11,140 10,596 -4.9%
% of total revenues 87.9% 84.1%  
EBIT margin 3.9% 1.9% -2.0%
Cellular Services      
Revenue 1,529 2,006 31.2%
% of total revenues 12.1% 15.9%  
EBIT margin 4.1% 7.1% 3.1%

Lower staff costs, revenue share aid margins: Despite the pressure on MTNL's topline during 3QFY07, it still managed a 20 basis points improvement in operating margins. This was largely due to lower staff costs and revenue share (each as % of sales). As for segments, while EBIT margins of fixed line declined from 3.9% in 3QFY06 to 1.9% in 3QFY07, those for the cellular business expanded from 4.1% to 7.1%. These margins for the cellular business are, however, much lower that what the company's competitors like Bharti Airtel and Reliance Communications earn, and are indicative of the former's uncompetitiveness vis-ŕ-vis its peers.

Extraordinary impact on bottom line: MTNL's other income during 3QFY07 includes an amount of Rs 1,183 m on account of interest accrued on refund, excluding which, the other income declined by almost 17% YoY during 3QFY07. Also, if one were to exclude Rs 579 m of prior period adjustment amount on account of excess provision made earlier, the net profits have actually declined by 59% YoY during 3QFY07.

What to expect?
At the current price of Rs 142, the stock is trading at a price to earnings multiple of 15.1 times its trailing 12 months earnings. While these valuations appear cheap as compared to MTNL's peers like Bharti and Reliance Communications, these are clearly indicative of the company's standing in the industry. MTNL's performance has been in dire straits over the past so many quarters and we do not see and trigger for this performance to improve in the medium term. Agreed that the cellular market growth in the country will be beneficial for most players in the fray, investors need to clearly distinguish as to who will be the out-performer, and who will be an ‘also-ran'!

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