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MTNL - Will it remain 'Maha'

Sep 15, 2000

Telecom sector reforms are on a roll with the government announcing several policy changes. In all the excitement, the stocks of incumbent operators have taken a beating on the bourses. Mahanagar Telephone Nigam Ltd (MTNL), the basic telephony service provider in Bombay and Delhi, has reached its 52-week nadir of Rs 137. Despite its PSU overhang, the company has several pluses. It is operating in the two top circles of the country. It has a well-established infrastructure in place and has been in the business of telecom services for the past 14 years. Therefore, the company knows its markets and has suitable business processes in place. Further, the company has a strong brand identity and is backed by reasonable management.

Does it mean that the markets have grossly misjudged this stock? There are issues that need to be ironed out. Being a PSU the company has weak brand values. The company is overstaffed and has to follow Government protocol for all decision-making, slowing down its reaction time. The Bombay and Delhi circles are the most developed and consequently growth has flattened. Further, it has to resolve the issue of the legacy infrastructure.

The stock has been hammered on the threat of competition from the private sector, primarily Hughes Tele, in basic telephony. Increased competition will cause a drop in operating profits. Another serious concern is the technology change. The new entrants in the field are starting with a clean slate and can set up state of the art infrastructure. However, such privileges are not available to MTNL.

Despite these drawbacks the company has reported a strong first quarter. Its turnover and bottomline has grown by 10% and 13% respectively. Currently, the stock trades at a multiple of 5.8x on 1Q-annualized earnings. Kickers for the stock could be rightsizing the workforce and the divestment by the Government in favour of the private sector. The reforms have opened up several new frontiers in the sector such as domestic long distance (DLD). The company is well positioned to capitalize on these opportunities, as it can leverage on its existing skill sets. MTNL will be entering the cellular space with GSM technology and already is a category B internet service provider with over 20,000 subscribers. The market is keenly eyeing how well the company executes these projects and whether it brings in the results.

A positive signal on either of the above-mentioned factors could facilitate a re-rating of the stock. But will the signal come?

Subscribers MTNL HIL*
Mumbai 2,012,410 27,000
Delhi 1,641,503  
Total Subscribers 3,653,913 27,000
Employees 62,000 500
Employees/1000 subscribers 16.97 18.52
Revenue (m) 50,325 638
Market Price 138 12
No. of shares (m) 630 1,553
Market Cap 86,940 18,636
Revenue/Subscriber (p.a.) 13,776 23,635
Market Cap/Subscriber 23,800 690,222
*Hughes Tele


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