MTNL, the state owned basic service provider in Mumbai and Delhi, is set to announce its fourth quarter in the coming week. Despite concerns of falling long distance telephony rates and declining market share in both the circles, the company reported a healthy growth in profits for in the first nine months of the current year. The trend is expected to continue in the fourth quarter also.
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MTNL has recorded a 19% growth in sales to Rs 43,906 m in the first nine months of the current year. Analysing the growth in sales in each of the quarters reveals interesting facts. Though revenues grew by 11% in 1QFY01, the reduction in long distance rates during the second quarter helped the company in clocking higher growth in revenues in the second and third quarter. Revenues grew by 25% and 21% in 2QFY01 and 3QFY01 respectively. This is impressive given the fact that the company operates in circles, where teledensity is the highest in India (teledensity in Delhi and Mumbai is 7.6% and 9.3% respectively compared to a penetration level of 2.6% for the country). The growth in revenues is expected to remain robust in the fourth quarter also.
The decline in operating margins from 45% in 9mFY00 to 40% in 9mFY01 is understandable given the 40% reduction in domestic long distance telephony rates. Going forward, margins are expected to remain under pressure due to continuing decline in long distance rates. Also, MTNL has removed the registration charges required for basic telephone connection in the fourth quarter. Besides, average revenue per subscriber, despite the cut in long distance charges, is not expected to improve significantly, if not decline.
MTNL has also launched its cellular service in both the metropolitan cities in the fourth quarter, which is expected to be one of the primary drivers of growth for the company in coming years. The company has targeted 400,000 subscribers by FY04. However, it has lost its cost competitivess in terms of air time charges as its competitors have also slashed rates to retain the existing cellular users. Though the initial response is encouraging, it remains to be seen whether the company manages to retain the existing customers apart from luring new customers.
It has also applied for a license to provide national long distance services in four cities under Category 'A' and five cities under Category 'B' circle. However, the grant for the license has been delayed. NLD has huge growth potential which is apparent from the fact that the Telecom Regulatory Authority of India (TRAI) has estimated the market size to be around Rs 239 bn by FY05. Though competition is severe, MTNL has adequate technical expertise in this segment. Also, maximum marketshare of NLD is between the Mumbai - Delhi circles.
The scrip is trading at Rs 137, at a P/E multiple of 4.9x the annualised nine months earnings. On the annualised sales of Rs 58,541 m, market capitalisation to sales works out to 1.5 times (market capitalisation is Rs 86,310 m). Given the potential of its cellular venture combined with the possibility of Wireless in Local Loop service where the company has plans to enter into, the scrip could be in for a re-rating.
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