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MTNL: Twilight zone

Oct 25, 2002

Mahanagar Telephone Nigam Limited (MTNL) has posted yet another dismal performance for the second quarter ended September 2002. While revenues have declined sharply, lower operating margins has had significant impact on profitability as well.

(Rs m)2QFY022QFY03Change1HFY021HFY03Change
Sales 16,211 14,704 -9.3% 31,164 29,641 -4.9%
Other Income 851 575 -32.4% 1,372 991 -27.8%
Expenditure 9,962 9,623 -3.4% 19,163 19,184 0.1%
Operating Profit (EBDIT) 6,250 5,081 -18.7% 12,001 10,457 -12.9%
Operating Profit Margin (%)38.6%34.6% 38.5%35.3% 
Interest 2 74 - 20 83 312.3%
Depreciation 2,060 1,915 -7.1% 3,922 4,093 4.4%
Profit before Tax 5,039 3,668 -27.2% 9,432 7,272 -22.9%
Extraordinary items - - - - (1) -
Tax 1,215 1,199 -1.4% 2,285 2,303 0.8%
Profit after Tax/(Loss) 3,824 2,469 -35.4% 7,147 4,968 -30.5%
Net profit margin (%)23.6%16.8% 22.9%16.8% 
No. of Shares (m) 630.0 630.0   630.0 630.0  
Earnings per share (Rs)* 24.3 15.7   45.4 31.5  
P/E (x)     2.9  
(*annualised)      

The company is one of the key players in the basic and cellular telephony segment. While its basic subscriber base stood at 4.5 m in FY02, in the cellular segment, subscribers stood at 216,652 in September 2002. Since the company operates in two of the most high tele-density cities in the country, growth in basic subscriber base is hard to come by. With the entry of private sector players in the last two years, it is an uphill task for MTNL. The fall in revenues has also to be viewed in the context of a sharp decline in domestic and long distance tariffs in 1QFY03. With tariffs falling, the share of MTNL for a one minute call is also on the decline and the trend continued in 2QFY03. This has heigthened challenges for MTNL.

On the cellular telephony side, after the initial spurt in subscriber base in light of competitive air time charges, it seems that MTNL is not able to scale up its presence from the current levels. While the all India cellular subscriber base has increased at a stellar rate of 27% in the first half of the current fiscal year, MTNL has managed to increase its base only by 11% in the same period. In one were to go even further, total number of cellular subscribers in Delhi and Mumbai in 1HFY03 has gone up by 32% and 39% respectively on account of increased competition after the entry of the fourth operator. MTNL, on the other hand, has grown its base only by 16% and 7% in the Delhi and Mumbai circle respectively. Subscriber base has actually declined in Mumbai since April 2002, albeit marginally resulting in a loss in market share. As we have maintained earlier, MTNL does not have the ability to scale up its presence in the cellular segment due to inferior networks and poor customer service.

Cellular–Underperformer...
(% growth)* Sector MTNL MTNL/Sector
Delhi31.5%16.1%51.1%
Mumbai38.5%7.0%18.2%
All India27.1%11.4%42.1%
*Since March 2002

Operating margins, like in 2QFY03, have been under pressure. Due to migration to a revenue sharing regime, the company is now liable to pay more on a paid-minute call as compared with FY02. This, we believe, will continue to have a negative impact at the operating level in the future as well. Also, the cellular division is still not profitable due to a steep fall in tariffs and costs involved in marketing and promotional activities. This will also keep margins in check in the foreseeable future.

Even though the company is cash rich, the rise in interest costs is a surprise and could be to meet working capital requirements. Net profit in 2QFY03 and 1HFY03 has fallen by 35% and 31% respectively. The stock currently trades at Rs 91 implying a P/E multiple of 2.9x annualised 1HFY03 earnings. Though the stock might look attractive on a peer value comparison basis, the risk associated with the same is significantly higher. As we mentioned above, MTNL will face margin squeeze in the future and revenue growth prospects are not promising either.

With fundamentals weakening at a faster clip, hopes of disinvestment was the only factor that was holding stock price when it was trading at Rs 120-Rs 140 levels. With the government 'postponing' the same, there is not much positive left. Meanwhile, the Communication Ministry is contemplating a merger with Bharat Sanchar Nigam Limited (BSNL), the country's dominant basic telephony service provider with a market share of almost 92% in order to consolidate both the PSUs' foothold in the sector. There were media reports suggesting MTNL's delisting from the bourses, in which case BSNL has to make an open offer. This could be the only saving grace for investors. But given the inconsistency in the ruling government's policies, caution is the watch word. As a result, MTNL's risk profile vaults significantly.

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