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MTNL: Gathering moss

Jul 22, 2003

MTNL has not yet declared its 1QFY04 results. In the meanwhile let’s have a look at the trend of its 1st quarter results of the last 4 years. As seen in the table below, the sales (read revenues) in the last few years have been sluggish. This can be attributed to a variety of factors predominantly, its operating inefficiencies and strong competition from private operators both basic and cellular. Its operational inefficiencies can be measured with reference to its employees per line. It had employed 59 employees per line in FY99, which has increased to 78 employees per line in FY02, this despite the reduction in its employees in the said period. Also, there has been tremendous pressure on the bottomline due to reducing revenues. Expenditure is also on a rise (though slowly), putting further pressure on margins. Depreciation cost is high mainly due to capacity expansion for cellular and WLL connections. There has been a negative growth of 8% (CAGR) in the margins in the previous four quarters. For the current quarter (1QFY04), we do not foresee a very different picture from what is seen below.

(Rs m) 1QFY00 1QFY01 1QFY02 1QFY03
Sales 12,637 14,007 14,953 14,937
% Growth - 10.8% 6.8% -0.1%
Other Income 674 462 521 416
% Growth - -31.5% 12.9% -20.2%
Expenditure 6,704 8,320 9,201.4 9,561
% Increase / Decrease - 24.1% 10.6% 3.9%
Operating Profit (EBDIT) 5,933 5,687 5,752 5,375
% Growth - -4.1% 1.1% -6.5%
Operating Profit Margin (%) 46.9% 40.6% 38.5% 36.0%
Interest 11 24 18 9
Depreciation 1,646 1,952 1,861 2,179
Profit before Tax 4,950 4,172 4,393 3,604
% Growth - -15.7% 5.3% -18.0%
Extraordinary items - - - (1)
Tax 1,699 482 620 1,105
Profit after Tax/(Loss) 3,251 3,691 3,773 2,499
% Growth - 13.5% 2.2% -33.8%
Net profit margin (%) 25.7% 26.3% 25.2% 16.7%

MTNL has a few positives going for it. The company has seen its number of subscribers go up from 4.5 m in FY02 to 4.74 m in FY03 (source: MTNL website). Also, owing to the hike in tariffs, MTNL is set to realise more revenues per paid minute call from landline to cellular or WLL. Free calls have been halved and this too is likely to reflect positively on its performance.

Despite this, we anticipate that MTNL will see only a marginal rise in topline during the quarter. This is because MTNL is facing immense competition from the private players not only on the basic telephony front but also on the cellular and WLL segment. The basic private operators are eating into its share of not only corporate customers but also retail subscribers, slowly but steadily. Due to this, there has been a reduction in volumes leading to a decline in ARPUs. The decline in ARPUs is on an average 2.4% in the last seven years.

Besides, on the cellular front, though there has been an increase in its subscriber base (205,377 in 1QFY03 to 290,841 in 1QFY04), its market share in Delhi has reduced from 7.3% in the 1QFY03 to 5.3% in the 1QFY04 and its market share in Mumbai has reduced from 9.8% to 8.8% during the same period. This decline in market share can be attributed to its inability to increase capacity despite demand, a sign of incompetence. Despite the rise in cellular subscribers there has been a constant decline in its market share.

The cellular segment contributed to 2% of its revenues in 1QFY03 when the tariffs were higher. Even an increase in cellular subscribers may be unable to add to its revenues due to reduction in tariffs and free incoming calls. On the contrary, we foresee a reduction in cellular subscribers due to better services offered by other players.

On the WLL front, its brand ‘Garuda’ is unable to move neck to neck with the likes of Reliance and Tata and garner substantial market share. This further adds to its worries as these companies are giving it stiff competition. In addition, the reduction in ILD/NLD rates by the cellular operators will also affect its margins. There has been an average decline of 0.64% in profits over the last seven years. Moreover, with the introduction of interconnect user charge, the margins are going to suffer further as it will have to divert a certain part of its income to the carrier and terminator which was not the case earlier.

The company is currently trading at a price of Rs. 100 implying a P/E multiple of 7x FY03 earnings. As far as FY04 is concerned the revenues may show a marginal rise despite weakening fundamentals due to the reasons stated above. Apart from that there is not much in store for the investor in the near future!

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