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MTNL: Tumbling profitability

Oct 31, 2001

Mahanagar Telephone Nigam Limited (MTNL) has posted a 14.5% drop in net profits for the second quarter ended September 30, 2001. The transition into a 12% revenue sharing regime has had a significant impact on profitability of the company.

(Rs m)2QFY012QFY02Change1HFY011HFY02Change
Sales 15,212 16,211 6.6% 29,220 31,164 6.7%
Other Income 775 851 9.8% 1,237 1,372 11.0%
Expenditure 9,372 9,962 6.3% 17,692 19,163 8.3%
Operating Profit (EBDIT) 5,841 6,250 7.0% 11,528 12,001 4.1%
Operating Profit Margin (%)38.4%38.6%39.5%38.5%
Interest 17 2 -90.7% 41 20 -51.7%
Depreciation 1,933 2,060 6.6% 3,885 3,922 0.9%
Profit before Tax 4,665 5,039 8.0% 8,838 9,432 6.7%
Tax 191 1,215 536.7% 673 2,285 239.7%
Profit after Tax/(Loss) 4,474 3,824 -14.5% 8,165 7,147 -12.5%
Net profit margin (%)29.4%23.6%27.9%22.9%
No. of Shares (eoy) (m) 630.0 630.0 630.0 630.0
Diluted number of shares 630.0 630.0 630.0 630.0
Earnings per share (Rs)* 28.4 24.3 51.8 45.4

While income from basic telephony services grew by 6.6%, value growth in FY02 is expected to be on the negative territory in light of the tariff restructuring effected by the Telecom Regulatory Authority of India (TRAI) last year. Besides, growth in basic subscriber base is also expected to slow down, as the company operates in two cities viz. Mumbai and Delhi where tele-density is amongst the highest in India.

Since MTNL operates in Category 'A' telecom circles, the shift from fixed license fee of Rs 900 per active basic subscriber line to 12% revenue share has resulted in a 114% rise in license fees for 2QFY02. For FY01, license fee as a percentage of total revenue stood at 6.2% and a shift into a revenue share regime will double its license fee outgo in the current financial year. But a decline in network charges has prevented the operating margins from a sharp fall. However, MTNL has provided for national network charges on an adhoc basis in the current quarter pending final formulae to be arrived at with Bharat Sanchar Nigam Limited (BSNL).

Tax liability has increased sharply for the first half of the current year due to a higher provising for deferred taxation. This has also resulted in a 14.5% fall in net profit to Rs 3,824 m for 2QFY02.

The scrip is currently trading at Rs 129 on a P/E multiple of 2.8x the annualised 1HFY02 earnings. We had estimated a 2% fall in net profits for the current year based on a license fee of Rs 900 per active subscriber line. Now with MTNL moving into a revenue share agreement in the current year itself, we expect the company to report a 18.5% fall in profits for FY02.

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