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MTNL: Wrong number, yet again! - Views on News from Equitymaster
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MTNL: Wrong number, yet again!
Aug 18, 2005

Performance Summary
PSU telecom service provider, MTNL, had recently announced results for the first quarter of FY06. The company reported yet another quarter of poor performance, with its revenues and profits taking a severe beating. What is more, operating margins contracted significantly on the back of higher revenue sharing and administrative costs.

Financial performance: A snapshot
(Rs m) 1QFY05 1QFY06 Change
Sales 13,927 12,641 -9.2%
Expenditure 9,998 10,277 2.8%
Operating profit (EBDITA) 3,929 2,364 -39.8%
Operating profit margin (%) 28.2% 18.7%  
Other income 709 1,395 96.8%
Interest 108 76 -30.3%
Depreciation 1,415 1,536 8.6%
Profit before tax 3,115 2,147 -31.1%
Extraordinary income/(expense) - -  
Tax 776 422 -45.6%
Profit after tax/(loss) 2,339 1,725 -26.3%
Net profit margin (%) 16.8% 13.6%  
No. of shares 630.0 630.0  
Diluted earnings per share* (Rs) 14.9 11.0  
P/E ratio (x)   11.9  
(* annualised)      

What is the company’s business?
MTNL is a government-owned basic telecom service provider in Mumbai and Delhi with a subscriber base of around 4.9 m. The company has a license to offer telephony services in both these metros up to the year 2013. MTNL also provides cellular services (8% of 1QFY06 sales) in both the circles and had nearly 0.9 m subscribers as at the end of the quarter.

What has driven performance in 1QFY06?
Basic services pressurize topline: The 9% YoY decline in MTNL’s revenues during 1QFY06 has mainly been a result of the pressure on the company’s basic telephony services, which form around 92% of the total revenues. Decline in revenues from the segment has mainly been perpetuated by factors like stiff competition from private sector players, an increased move towards cellular telephony and the denial of access deficit charge. But for the 100% YoY growth in cellular revenues, the decline in topline would have been greater. This strong growth in cellular revenues was made possible by a robust addition to the subscriber base. MTNL’s cellular subscriber base current stands at nearly 1.1 m, a growth of 170% YoY over the base at the end of 1QFY05.

Higher revenue sharing costs impair margins: Apart from the decline witnessed in topline, higher staff and revenue sharing costs have led to the large decline in margins for MTNL during 1QFY06.

Cost details
(Rs m) 1QFY05 % of sales 1QFY06 % of sales
Staff costs 4,759 34.2% 4,438 35.1%
Revenue sharing 1,532 11.0% 2,350 18.6%
License fee 1,291 9.3% 1,172 9.3%
Admin & operative costs 2,415 17.3% 2,317 18.3%

It boils down to the bottomline: The abovementioned factors, i.e., drop in topline and contraction in margins has led to MTNL reporting a 26% YoY decline in net profits during 1QFY06. If it weren’t for the higher other income component, the net profits would have dipped further.

What to expect?
At the current price of Rs 130, the stock is trading at a price to earnings multiple of 11.9 times its annualised 1QFY06 earnings. Despite strong growth in the cellular business, overall, MTNL is fast losing customers to its rivals and needs to get its act together and prevent the plunge in its basic subscriber base. However, taking into consideration competition from the private sector players like Bharti Tele and Reliance Infocomm, this looks increasingly difficult.

We shall soon update our research report on the company. Considering the continuation of poor performance, and that valuations already factor in the meager growth that we expect in the future, we will have to revise our numbers downwards.

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