MTNL: Woes continue - Views on News from Equitymaster

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MTNL: Woes continue

May 2, 2003

Mahanagar Telephone Nigam Limited (MTNL), has posted a poor performance for the full year ended March 2003. While revenues from its core businesses i.e. basic and cellular services have declined, there has been a significant pressure on the operating margins as well. Net profit for FY03 is lower by 31%.

(Rs m)4QFY024QFY03ChangeFY02FY03change
Sales 13,805 13,565 -1.7% 61,437 57,837 -5.9%
Other Income 458 814 77.9% 2,483 2,380 -4.2%
Expenditure 6,374 9,816 54.0% 37,676 38,512 2.2%
Operating Profit (EBDIT) 7,432 3,749 -49.6% 23,761 19,325 -18.7%
Operating Profit Margin (%)53.8%27.6%38.7%33.4%
Interest 10 124 - 57 273 381.1%
Depreciation 2,002 2,463 23.1% 8,165 8,806 7.9%
Profit before Tax 5,877 1,976 -66.4% 18,023 12,626 -29.9%
Extraordinary items - - (79) -
Tax 1,716 140 -91.9% 4,938 3,651 -26.1%
Profit after Tax/(Loss) 4,162 1,836 -55.9% 13,007 8,975 -31.0%
Net profit margin (%)30.1%13.5%21.2%15.5%
No. of Shares (m) 630.0 630.0 630.0 630.0
Diluted earnings per share (Rs) 26.4 11.7 14.2
P/E (x) 6.5

The decline in revenues has not come as a surprise. To understand the reason for the same, let's take a brief look at the company's operations. MTNL is a basic and cellular service provider in Mumbai and Delhi (other services include internet and limited mobility). While basic services contribute to 90% of its topline, revenues from interconnection and cellular based services contributed to 7% and 1% respectively in FY02. Since MTNL operates in circles where basic penetration level are higher (14%), growth prospects are limited. Though it has made significant strides on the mobile telephony front, competition is stiff and contribution to total revenues is insignificant. Consequently it is not enough to arrest the decline in basic revenues.

Given this backdrop, combined with the significant fall in tariffs (be it, mobile, domestic or international long distance telephony), MTNL's performance in FY03 is hardly surprising. We expect the basic subscriber base to have grown marginally by 2% in FY03. On the cellular services front, MTNL subscriber base has touched 291,917 as of March 2003, a growth of 50%. However, the company has under-performed in both the Mumbai and Delhi circles during FY03 (as against the market growth of 71%, MTNL's growth of 50% is on the lower side). After tasting success in the initial phase of the launch on the back of a competitive tariff structure, the PSU major lost to private players. The entry of fourth operator in both the circles in the form of Idea Cellular in Delhi and Bharti in Mumbai and competition from Reliance on the limited front also added to the woes.

While subscriber growth has been on the lower side, MTNL is also facing pressure on the revenue sharing front. Given the steep fall in domestic and international long distance rates, MTNL's share of the same has also come down resulting in lower average revenue per user (ARPU). We expect ARPUs to be lower by 7% in FY03. The 6% fall in revenues has to be viewed in this context. Operating margins, due to a combination of all the aforesaid factors, have come under pressure. This is below our estimates. Though net profit is as per the results declared as lower by 31%, we expect further correction in the same, as MTNL has provided for revenue sharing on a pro-rata basis and is likely to restate its numbers.

The stock is currently trading at Rs 93 implying a P/E multiple of 6.5x FY03 earnings. As far as FY04 is concerned, the new tariff regime for basic operators i.e. halving of free calls from 60 to 30 in urban area, reduction in average local call duration and fall in subsidised calls will directly add to the profit of MTNL This has been one of the reasons why the stock has held up in the recent past despite weakening fundamentals. Beyond this, there is no respite in sight for MTNL in the near term.

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