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MTNL: On the crossroads

May 22, 2002

The private sector telecom majors, post the opening up of the sector, are giving a tough time for the PSU incumbents. This is reflected in MTNL's (Mahanagar Telephone Nigam Limited) FY02 performance. The PSU major, which provides basic and cellular services in Mumbai and Delhi, reported a 12% fall in profits. We take a look at the performance of the company in FY02 and future growth prospects.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 change
Sales 13,414 13,805 2.9% 57,320 61,471 7.2%
Other Income 501 458 -8.6% 2,485 2,202 -11.4%
Expenditure 7,828 6,374 -18.6% 33,984 35,901 5.6%
Operating Profit (EBDIT) 5,586 7,432 33.0% 23,336 25,570 9.6%
Operating Profit Margin (%) 41.6% 53.8%   40.7% 41.6%  
Interest 3 10 250.5% 62 31 -49.7%
Depreciation 1,625 2,002 23.2% 7,184 7,882 9.7%
Profit before Tax 4,458 5,877 31.8% 18,574 19,858 6.9%
Extraordinary items (450) -   (450) -  
Tax 405 1,716 323.6% 1,589 5,270 231.6%
Profit after Tax/(Loss) 3,603 4,162 15.5% 16,535 14,588 -11.8%
Net profit margin (%) 26.9% 30.1%   28.8% 23.7%  
No. of Shares (m) 630.0 630.0   630.0 630.0  
Diluted earnings per share (Rs)         23.2  
P/E (x)         5.6  

While revenue growth at 7% was higher than expected, it seems to have been led by its venture into the cellular segment last year and higher growth in paid-minute calls. The company's cellular subscriber base for FY02 stood at 194,547 as compared to around 19,000 last year. While the overall market share in Delhi and Mumbai stood at 10%, MTNL has a 9% share of the Mumbai cellular subscriber base. Aggressive marketing efforts and competitive air time charges have done wonders for the PSU telecom major.

On the basic telephony front, MTNL's subscriber base stood at 4.3 m in FY01 with average revenue per subscriber at around Rs 12,000 levels. The growth in subscriber base is likely to have been on the lower side in FY02 despite reduction in minimum deposit charges. With the entry of Hughes Tele in Mumbai and Bharti in Delhi, incremental basic subscribers are hard to come by. Moreover, both the private sector entrants are focusing on higher-end customers where MTNL is believed to be deriving a key portion of basic telephony revenues. Not only has competition increased, but there is a sea change in regulatory environment as well that has a bearing on MTNL. With tariffs for both domestic and international long distance telephony witnessing a sharp fall in the last one and half years, the company's revenue share also has come down. But the same time, with a strong 4.3 m basic connections, paid-minute calls are expected to increase notably in the coming years. This, to a certain extent, could compensate for the fall in tariffs and revenue share. However, the net impact on MTNL's revenue growth is not favorable.

After plummeting for three consecutive quarters due to migration to a revenue sharing regime (i.e. 12% instead of Rs 900 per active basic subscriber before), operating margins witnessed a sharp rise in fourth quarter. MTNL had announced that with interconnection agreement between BSNL and MTNL still pending, the revenue sharing has been worked out on provisional basis. Since its agreement with VSNL was also pending, the revenue accrued to MTNL on account of termination of ILD calls on MTNLs network aggregating Rs 3,096 m was not provided. But after adjusting for dues payable to VSNL, the net impact is positive on MTNL (Rs 1,096 m). But due to sharp spurt in tax provisioning on account of deferred taxation, the company's net profits were dragged down by 12%.

After having acquired a sizable pie of the market, the key lies in retaining customers through various value-add services. Already, both in Mumbai and Delhi, private cellular majors are not only offering value-add services, airtime charges for roaming facility are also on the attractive side. For instance, Bharti in Delhi has entered into an understanding with a number of private cellular operators in the country wherein they have opted for lower revenue share. Consequently, these operators have passed on the benefit to the cellular subscriber thus bringing down airtimes charges for DLD calls. MTNL is at the disadvantage on this front.

The stock currently trades at Rs 129 implying a P/E multiple of 5.6x FY02 earnings. Though valuations at the current juncture seem to be on the lower side, keeping the competitive environment and limited growth prospects of the company in mind, it remains to be seen how MTNL copes up. After rising sharply on the back of divestment expectations, it has been languishing at the current levels for some time. Given its huge workforce and worsening financials, disinvestment of MTNL is an uphill task for the government.

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