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MTNL: Going nowhere? - Views on News from Equitymaster
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  • Aug 13, 2004

    MTNL: Going nowhere?

    Introduction to results
    MTNL, the public sector telecom behemoth, had recently announced disappointing financial performance for the June quarter. While at the first look the 12% growth in bottomline seems encouraging, if one were to discount the rise in other income, the growth would have been marginal. The topline too has disappointed, registering a 3% YoY fall in the June quarter. MTNL has witnessed a sharp fall in its operating margins further indicating the weakness of its financial performance.

    Rs m 1QFY04 1QFY05 Change
    Sales 14,975 14,572 -2.7%
    Other income 404 658 62.7%
    Expenditure 9,406 9,971 6.0%
    Operating profit (EBDIT) 5,569 4,601 -17.4%
    Operating profit margin (%) 37.2% 31.6%  
    Interest 73 110 50.8%
    Depreciation 2,200 1,418 -35.5%
    Profit before tax 3,700 3,731 0.8%
    Tax 1,194 929 -22.2%
    Profit after tax/(Loss) 2,506 2,802 11.8%
    Net profit margin (%) 16.7% 19.2%  
    No. of Shares 630.0 630.0  
    Diluted Earnings per share* (Rs) 15.9 17.8  
    P/E Ratio (x)   7.2  
    (* annualised)      

    Metro telecom major
    MTNL is the government owned basic telecom service provider in Mumbai and Delhi with a subscriber base of 4.3 m in FY04. The company has a license to offer telephony services in both these metros upto the year 2013. MTNL also provides cellular services in both the circles and had nealry 3,00,000 subscribers as of March 2004. In an effort to combat competition from private cellular operators, it has joined hands with Bharat Sanchar Nigam Limited (BSNL) and reduced tariffs. However, lack of capacity has resulted in the company unable to scale up its subscriber base off late.

    What has driven the performance in 1QFY05?
    Sales:MTNL is facing stiff competiton in its two markets, Delhi and Mumbai, from private sector players like Tata Teleservices and Reliance Infocomm. This has led to an erosion of over 1,00,000 subscribers (fixed line segment) in the June quarter alone. This trend is consistent to that seen in FY04 as the company lost nealy 2,50,000 subscribers compared to FY03. Apart from falling subscriber base, falling realisations in both the local as well as long distance service offerings have led to the erosion in the company's topline. The company is consistently losing market share to private sector players. We do not have information on the company's mobile services subscriber base, but the growth in the revenues of this division indicates that this segment may have seen a rise in subscriber base. Apart from better service, private sector players are offering CDMA technology for their fixed line operations, which is perceived to be far more convenient to use. That apart, consumers are increasingly leaning towards mobile services and this has hit the demand for fixed line phones.

    Segment-wise performance
    (Rs m) 1QFY04 1QFY05 Change
    Basic services      
    Revenues 14,569 14,047 -3.6%
    EBIT 21.1% 24.7%  
    Cellular services      
    Revenues 406 525 29.3%
    EBIT 46.5% 34.4%  
    Revenues 14,975 14,572 -2.7%
    EBIT 25.2% 26.4%  

    Operating margins: On the operational front, the company has reported sharp rise in employee cost and this has overshadowed the fall in revenue sharing as well as license fee costs. The table below indicated the extent to which higher employee cost have had an adverse impact on the operating efficiency of the company.

    Expenses (Rs m) 1QFY04 1QFY05
    Staff Cost 3,364 4,575
    % of sales 22.5% 31.4%
    Admn./Operative Expenditure 2,147 2,448
    % of sales 14.3% 16.8%
    Licence Fee 1,915 1,350
    % of sales 12.8% 9.3%
    Revenue Sharing 1,980 1,598
    % of sales 13.2% 11.0%

    Net Profits:
    Despite the fall in operating margins, MTNL has been able to post a healthy rise in bottomline mainly due to a significant fall in its depreciation expenses and a rise in other income. The fall in depreciation is mainly due to a change in accounting policy regarding the useful life of the assets the company. If it were not for the fall in depreciation, bottomline may have actually fallen in 1QFY05 compared to 1QFY04.

    What to expect?
    The stock currently trades at Rs 145, implying a P/E multiple of 7.2x its annualised 1QFY05 earnings. MTNL is fast losing customers to its rivals and the company needs to get its act together and prevent the deluge in its subscriber base. However looking at competition this looks increasingly difficult. The company will have to shed its PSU mindset in order to take on competition, which is easier said than done. Investors need to be cautious at this stage and a proposal for merger with its larger sibling BSNL needs to be carefully scrutinised in order to ascertain long-term benefits.



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