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MTNL: No respite in sight

Jul 31, 2002

Mahanagar Telephone Nigam Limited (MTNL), the public sector basic and cellular service provider, has posted a lacklustre performance for the first quarter ended June 2002. While revenues have slipped marginally, operating margins have declined sharply on account of its venture into the cellular segment. But the company is yet to adjust for new revenue share regulation, pending agreement with Bharat Sanchar Nigam Limited (BSNL). This has not been accounted for in 1QFY03 performance.

(Rs m) 1QFY02 1QFY03 Change
Net sales 14,953 14,937 -0.1%
Other Income 521 416 -20.2%
Expenditure 9,201 9,561 3.9%
Operating Profit (EBDIT) 5,752 5,375 -6.5%
Operating Profit Margin (%) 38.5% 36.0%  
Interest 18 9 -53.5%
Depreciation 1,861 2,179 17.0%
Profit before Tax 4,393 3,604 -18.0%
Extraordinary items - (1)  
Tax 620 1,105 78.1%
Profit after Tax/(Loss) 3,773 2,499 -33.8%
Net profit margin (%) 25.2% 16.7%  
No. of Shares (m) 630.0 630.0  
Diluted Earnings per share* 24.0 15.9  
P/E Ratio (x)   8.1  
(* annualised)      

One of the key reasons for this lacklustre performance is the drastic fall witnessed in domestic and international long distance telephony tariffs over the last two years, post telecom liberalisation. Lower tariffs means lower revenues for every call made and lower revenue share from other operators. This combined with slower basic subscriber growth in Mumbai and Delhi, which has high penetration levels, has affected growth prospects of the company. But it has to mentioned that the fall in revenues in 1QFY03 is below expectations considering the level of tariff reduction.

Moving away from basic, the company has made marked progress on the cellular and Wireless in Local Loop (WiLL) front. The estimated cellular subscriber base of MTNL as of March 2002 was 195,000, signifying an all India market share of 3%. MTNL has a 10% market share in the Delhi cellular area followed by a 9% share in Mumbai circle. It aggressive foray into WiLL also seems to have yielded positive results. Reportedly, its subscriber base is closer to 27,000 and growing at a faster clip. The reduction in monthly charges and a competitive airtime rates are a big positive for WiLL. Another notable initiative undertaken by MTNL is free internet usage for its basic subscribers in 1QFY03. While internet usage is free, the users are charged for the telephone paid-minute calls. This is a innovative strategy and could have aided in increasing overall calls for the company.

Both the fall in revenues and operating margins are below expectations. With the transition from fixed license fee to a revenue share based regime, the company is liable to pay 15% of gross telephone revenues as license fee to the regulator. However, the company is yet to conclude its negotiation with BSNL for the same period. Just to put things in perspective, license fee as a percentage of revenue stood at 11% in 1QFY03. Assuming 15% of telecom revenues in 1QFY03 (as a indicative measure), license fee increases by 41% to Rs 2,240 m as against the actual figure of Rs 1,588 m in the same period. Consequently, operating margins stands reduced to 32% as against 36% reported in 1QFY03. This translate into a 51% fall in net profits. The company, in its press release, has said that revenue share has been calculated on a provisional basis and are therefore subject to change in the coming quarters.

Net profits are lower by 34% in 1QFY03 also due to a sharp spurt in tax provisions. Overall, it has been a lacklustre performance by the company and one can expect similar results in the coming quarters as well. The core business faces pressure from further fall in ILD/DLD tariffs in the future and growth is also limited in the domestic market due to its PSU status. New ventures like cellular and WiLL still contribute to a smaller portion of total revenues (cellular contributed to 2% of revenues in 1QFY03). Besides, once the company adjusts for new revenue share, profitability would go for a toss.

The stock currently trades Rs 128 implying a P/E multiple of 8.1x 1QFY03 annualised earnings. The only factor that has aided the stock price recently is divestment. Even disinvestment has gone into some rough weather off late, with the government yet to declare a timetable for divesting its stake in companies like MTNL.

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