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Telecom PSUs: Profits under pressure

Oct 15, 2001

Telecom PSUs like Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL) have been the centre of activity in recent weeks. Here we take a brief look at the revenue mix of both the companies and their future prospects. The tariff restructuring effected by the Telecom Regulatory Authority of India (TRAI) last year on both the domestic and international telephony front has had adverse impact on profitability of both the companies. VSNL reported a 9.9% fall in telecom revenues and a 4.5% fall in net profits for 1QFY02.

Though MTNL reported a commendable rise in telecom revenues, operating margins witnessed a sharp slump in 1QFY02. The trend is expected to continue in the coming years also. TRAI is expected to amend the second round of tariff rebalancing in the current year to bring rates in line with international tariff structure. This will have a negative impact on margins and profits of both MTNL and VSNL. Though paid-minute calls is expected to increase, value growth would be modest.

Core revenues under pressure…
Company FY98 FY99 FY00 FY01
VSNL        
Avg Realisation (Rs/min) 34.0 32.1 27.9 24.1
growth (%) -4.2% -5.4% -13.1% -13.9%
MTNL        
ARPU (Rs) 12,971 13,015 12,169 12,339
growth (%) - 0.3% -6.5% 1.4%

Though both the telecom PSUs are focusing on value-add services to increase revenue and profitability, their contribution as a percentage of total revenues is still small. First of all, lets take a closer look at what both the PSUs offer in terms of value-add services. While VSNL provides services like telex, lease lines, Internet connectivity, satellite and uplinking services, MTNL just provides internet and lease line services. Apart from basic telephony, MTNL derives close to 6.6% of revenues from interconnectivity and circuit charges.

While VSNL has 630,970 internet subscribers, MTNL has around 50,000 subscribers. Though MTNL is better placed when it comes to offering ISP services given its last-mile connectivity advantage, the company lacks aggressiveness. On the other hand, VSNL has introduced new internet subscription packages and has also slashed charges to increase subscriber base (in FY01 subscriber base increased by 72%). It is also increasing its presence to 20 cities in the current financial year (9 in FY01). Other value-add services like satellite communication and channel uplinking services are expected to be one of the key drivers for the company in the coming years. So, when it comes to value-add services, VSNL is comparatively better placed than MTNL.

Value-add services: Long way to go…
(% of revenues) FY97 FY98 FY99 FY00 FY01
VSNL 5.3% 6.1% 8.5% 9.8% 11.2%
MTNL 4.4% 5.1% 5.5% 5.3% 7.5%

In FY02, we expect MTNL to report around 6%-8% growth in telecom revenues and a 5% fall in net profits to Rs 14,905 m. VSNL is expected to register a meager 2% rise in revenues and a 15%-17% fall in net profits for FY02. MTNL is trading at Rs 126 at a P/E multiple of 5.3x the annualised 1QFY02 earnings. VSNL is trading at Rs 222 at a P/E multiple of 4.3x the annualised 1QFY02 earnings.

Given the fact that MTNL has a bloated workforce of more than 60,000 employees (with atleast six trade unions), disinvestment is not going to be easy. On the other hand, one can expect positive news on VSNL's disinvestment in the current financial year.

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