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MTNL: Growth under threat

Sep 6, 2001

Mahanagar Telephone Nigam Limited (MTNL), the state owned basic service provider in Mumbai and Delhi, is witnessing considerable activity on the bourses and for reasons not for its liking. The scrip has fallen by almost 44% in the last eight months after having touched Rs 212 (the 52-week high). What is the reason for this volatility? One of the key reasons, Public Sector Undertakings (PSUs), like MTNL gained sharply at the beginning of the year was the talks of disinvestment. Another reason was the proposed launch of its cellular service in Delhi and Mumbai. The company did launch its cellular services in Delhi and Mumbai in February and March 2001 respectively. The Finance Minister also did set a disinvestment target of Rs 120 bn for the current financial year and included MTNL is the disinvestment list. But unclear policy framework has hindered the disinvestment process. Despite concerns of competition from private players (in both the basic and the cellular segments) and its legacy infrastructure, markets felt that MTNL would make significant inroads into the private players market share on account of its cost advantage.

Worrying financials...
(Rs m) 1QFY01 1QFY02 Change
Sales 14,007 14,953 6.8%
Operating Profit (EBDIT) 5,687 5,752 1.1%
Operating Profit Margin (%) 40.6% 38.5%  
Profit after Tax/(Loss) 3,691 3,773 2.2%
Net profit margin (%) 26.3% 25.2%  
Market cap/Sales 1.3 1.3  
Market cap/subscriber 20,825 17,435  
Revenue/subscriber 3,891 3,477  

Where customer satisfaction is involved, costs i.e. tariffs need not be the key unique selling proposition. Though MTNL has managed to increase its cellular subscriber base from 18,243 in March 2001 to 18,460 in June 2001, private players have managed to increase base at a faster rate than MTNL. In fact, its subscriber base in Delhi has been gradually declining (9,593 in June 2001 as compared with 10,211 in March 2001). On the basic service front, the average revenue per subscriber (ARPU), as of FY01 stood at around Rs 12,400 levels as compared to the ARPU of Rs 25,000 for Hughes The ARPU is expected to come down with the reduction in domestic long distance telephony and international long distance telephony rates.

Though Mumbai and Delhi are high revenue generating circles, as a percentage of all India revenues, the scenario is changing. The combined revenues of Mumbai and Delhi as a percentage of all India revenues stood at 28.3% in FY97 and is 26.1% in FY01. The Department of Telecommunication Services (DTS), expects this to go down to 24.9% by FY05. Although this is a significant portion will MTNL be able to tap it aggressively remains to be seen.

Projected revenues (Rental + call charges)
(Rs bn) FY97 FY98 FY00 FY05 FY07 FY10 CAGR**
MTNL (Mumbai) 21.6 24.0 30.0 44.1 49.8 58.3 10.0%
MTNL (Delhi) 15.7 17.6 21.8 32.1 36.2 42.3 9.9%
All India 132.0 156.7 198.1 306.2 349.5 414.3 11.7%
MTNL* 28.3% 26.5% 26.1% 24.9% 24.6% 24.3%  
Source: DTS
*Combined revenue of Mumbai and Delhi as a % of All India revenue
**CAGR from FY94

On the other hand, disinvestment has always been a non-starter. Given the company's bloated workforce combined with almost six labour unions, not many will be interested. On the competition front, the proposed entry of the third operator will further subdue revenue growth for MTNL in coming years.

The scrip is currently trading at Rs 118 at a P/E multiple of 4.9x the annualised 1QFY02 earnings.

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