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MTNL vs Bharti Tele

Jul 29, 2003

MTNL is the largest player in basic telephony in Mumbai and Delhi whereas Bharti Televentures is the market leader in the cellular segment. Bharti operates in 15 circles of the total 22 circles. Though these companies are not strictly comparable as MTNL has a head start, but we are attempting to strike a comparison between the two as Bharti is fast moving up the ladder. The table below brings out the difference between the two companies. While MTNL’s net profit margin is on the decline, Bharti’s losses continue to reduce on the back of rising revenues. MTNL has not yet declared its 1QFY04 results but Bharti seems to be reversing its trend of losses and has posted a net profit in the quarter just gone by (read more). The gestation period for telecom companies is long and Bharti is showing positive signs by having posted profits in this quarter. We expect it to break even in the near future.

  MTNL Bharti Tele-ventures
(Rs m) FY02 FY03 Change FY02 FY03 Change
Sales 61,437 57,837 -5.9% 12,171 24,133 98.3%
Other Income 2,483 2,380 -4.2% 54 56 3.7%
Expenditure 37,676 38,512 2.2% 8,178 16,426 100.9%
Operating Profit (EBDIT) 23,761 19,325 -18.7% 3,993 7,707 93.0%
Operating Profit Margin (%) 38.7% 33.4% - 32.8% 31.9%
Interest 57 273 381.1% 906 2,821 211.4%
Depreciation 8,165 8,806 7.9% 2,172 4,438 104.3%
Amortisation - - - 1,086 1,910 75.9%
Profit before Tax 18,023 12,626 -29.9% (117) (1,406)
Extraordinary items (79) - (922) (378) -
Tax 4,938 3,651 -26.1% 177 (3) -
Profit after Tax/(Loss) 13,007 8,975 -31.0% (1,216) (1,781) -
Net profit margin (%) 21.2% 15.5% - -10.0% -7.4% -

In the last five years, MTNL has had an average growth (CAGR) in revenues of 4% in contrast to Bharti’s 80% growth in the corresponding period. This growth in Bharti’s revenues has been possible not only due to a rise in cellular usage but also due to its aggressive marketing and management strategies. On the subscriber front, MTNL’s total subscriber base in the last two years has risen by 6% (4.7 m in FY02 to 5 m in FY03), whereas the rise in Bharti’s total subscribers has been over 125% (1.5 m in FY02 to 3.4 m in FY03).

Basic telephony contributes almost 87% to MTNL’s revenues, whereas for Bharti, the fixed line segment contributes around 15%. MTNL is operating in the two largest metros of the country where the penetration levels are high compared to other parts of the country and the scope to increasing subscriber base is limited. Besides, it is facing strong competition from private players like Bharti who are making inroads and eating into its market share. A major problem with MTNL is the restriction on its operating areas. It cannot operate in other circles and therefore cannot easily compete with the likes of Bharti who operate in a range of areas where the potential is higher.

The cellular segment contributes a meagre 2% to MTNL’s total revenues and as far as Bharti is concerned, the cellular segment contributes almost 63% to its revenues. MTNL has increased its cellular subscribers by almost 50% in FY03 as compared to FY02. However, the growth pales in comparision to Bharti whose cellular subscriber base increased by 134% in the same period. Moreover, it has managed to improve its usage per minute, which has had a direct impact on its revenues. The cellular market has grown at an average rate of 93% in the last three years. We expect the trend to continue as the cellular tariffs are at their lowest. Bharti will consequently be a key beneficiary of this continuing trend.

The balance of MTNL’s and Bharti’s revenues is contributed by long distance telephony and others services. MTNL uses its long distance telephony to subsidise its local call costs. But the private players have reduced the long distance call costs and are giving MTNL a tough time. Besides, making long distance calls from mobile to mobile is cheaper than any other source. Let’s take the example of international calls: MTNL charges a hefty Rs 24 per minute (which it has refused to reduce) whereas Bharti charges Rs 16 per minute on regular days and Rs 10 per minute on weekends. In addition, for every 10 minutes of international calls, it is offering 2 minutes of free ISD talk time. This highlights the level of competition MTNL is facing from its peer Bharti as well as from other private players. Going forward, this may prove detrimental to MTNL’s growth, if it doesn’t move in line with the market.

In the last two quarters Bharti’s stock has gained almost 51% whereas MTNL has gained 14%. If Rs 100 were invested in each of the two stocks in the corresponding period in the previous year, then Bharti’s stock would now be worth Rs 150 whereas MTNL’s stock would equate to Rs 80, implying a loss for the investor. As of today Bharti scores over MTNL not only on the operational front but also as far stock appreciation is concerned.

Going forward, we still foresee MTNL losing out to private players in terms of aggressiveness and service standard perception. Though MTNL is a profitable company and other private players are still looking at breakeven, if the trend continues, private players are likely to take away a large chunk of the profitable growth in the telecom pie.

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