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A complete service provider on the anvil… - Views on News from Equitymaster
 
 
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  • May 26, 2001

    A complete service provider on the anvil…

    From a pure basic telephony service provider in Mumbai and Delhi, Mahanagar Telephone Nigam Limited (MTNL) is gradually focusing on increasing its presence across a wider spectrum of telecom services. This includes cellular telephony, Internet services and limited mobility. But will the company be able to shred its public sector image and emerge as a competent telecom service provider?

    MTNL has a basic telephony subscriber base of around 4.3 million as of March 31, 2001 in two of the most lucrative telecom circles in India. The company reported a 52 percent rise in net profits to Rs 16,535 million (US$ 352 million) for the fiscal year 2001. The net income from services has gone up by 11 percent to Rs 57,320 million (US$ 1,219 million). The reason for the higher sales growth is primarily on account of the reduction in domestic long distance telephony rates, which has increased the paid call minutes.

    Increasing margins…
    (% of sales) FY00 FY01
    Staff cost 21.0% 19.2%
    Administrative costs 14.9% 14.2%
    License fee 6.3% 6.3%
    National network charge 20.3% 19.6%
    Operating margins 37.5% 40.7%

    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 the coming years. Already MTNL has an aggregate 25,000 customers in the two cities and has targeted 400,000 subscribers by FY04. Apart from leveraging its Sanchar Haats (the distribution point for basic services) in Delhi, MTNL has plans to set up call-centers in both the cities to tap new customers and service the existing customer base. Though the initial response is encouraging, it remains to be seen whether the company manages to increase market share given the competitive environment. It has lost its cost competitiveness in terms of airtime and rental charges, as its competitors like BPL, Hutchison Max and Bharti have also slashed rates.

    Another recent development, which is expected to be one of the key revenue drivers, is Wireless in Local Loop with limited mobility services (WiLL). The Telecom Regulatory Authority of India (TRAI) has fixed the floor on monthly rentals as Rs 450 (US$ 10) and a ceiling of Rs 550 (US$ 11) for WiLL. MTNL already provides WiLL services in Delhi and has around 10,000 subscribers. Due to infrastructure constraints, the company was not able to increase the subscriber base. But MTNL has plans to add capacity to service 50,000 subscribers by May 2001 and increase it further to 150,000 subscribers by the year-end. The company also has plans to launch similar services in Mumbai with an installed capacity of 150,000 subscribers. Since WiLL is an effective substitute to cellular telephony, particularly in the metros, MTNL has a clear upper hand.

    The sales mix: Increasing value add
    (% of sales) FY98 FY99 FY00 FY01E
    Basic telephony 94.9% 94.5% 94.7% 94.0%
    Telex 0.6% 0.4% 0.3% 0.2%
    Circuits 1.8% 1.7% 0.8% 0.7%
    Interconnection 0.0% 3.2% 3.8% 3.8%
    Other services 2.7% 0.1% 0.4% 0.4%
    Cellular - - - 0.9%
    Total 100.0% 100.0% 100.0% 100.0%

    It has also applied for a license to provide basic telephony service in four cities under Category 'A' and five cities under Category 'B' circle. The market size of basic is expected to be around Rs 239 billion (US$ 5 billion) as estimated by TRAI. However, the grant of the license has been delayed. Though competition is severe, MTNL has adequate technical expertise in this segment. Also, Mumbai and Delhi accounts for almost 35 percent of the NLD traffic. As a result, MTNL has a competitive advantage as it already has its basic service in place in both the cities.

    Under the proposed tariff rationalisation plans, TRAI is expected to reduce the NLD tariffs in the coming year also. This could dent sales growth and margins of the company in 2002. The company has also failed to capitalise on the Internet services front. The company has just 30,000 subscribers as against 0.6 million customers of VSNL. Though it has taken a number of steps to boost growth, the company lacks aggressiveness.

    Meanwhile, the government has plans to privatise MTNL before FY02. Given the Balco disinvestment saga and the bloated workforce of MTNL (61,104 as on March 31, 2001), privatisation seems to be a distant dream. Already, the seven employee unions have raised objection against MTNL’s disinvestment. They also threatened to go on an indefinite strike demanding a higher pension scheme.

    Meanwhile, the company has entered into a joint venture with WorldTel to provide basic telephony services in Dhaka, Bangladesh. The project envisages installing 300,000 telephone lines in Bangladesh. While MTNL would be responsible for installation, maintaining and operating the network, WorldTel would bring the necessary investments and management expertise. But future growth potential lies in timely execution of projects, which though, is lacking in this public sector telecom behemoth.

     

     

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