Mahanagar Telephone Nigam Limited (MTNL) made a 'soft debut' in the US markets last month. But it has failed to attract much interest amongst investors. The reasons for this are multi-fold.
Lets consider its cellular foray. The company has managed to increase its all India market share in the cellular segment from 0.7% in August 2001 to 1.2% in October 2001 (0.5% in March 2001). MTNL has added more subscribers in Mumbai compared to its formidable competitors like Hutchison and BPL Mobile. As a result, its market share in the Mumbai circle has gone up to 4.9% in October 2001. The waiver of activation charges during the festive season seems to have resulted in a sharp rise in subscriber base in October 2001. Presently, the direct cost of adding a new subscriber (which primarily consists of commission expense) is substantially offset by the initial activation charges recovered from the customers. This also forms a substantial part of expenses from a subscriber's point of view. Though subscriber base has increased significantly, average revenue per subscriber (ARPU) is expected to fall in the current year. Churn rate, which denotes the ratio of additions and deletions in subscriber base, might also increase if the company fails to service the new customers.
MTNL's cellular performance…
% market share
% market share
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But the core business of the company i.e. basic telephony, is expected to suffer due to a variety of reasons. For one, the tariff rationalisation effected by the Telecom Regulatory Authority of India (TRAI) last year, both on the domestic as well as on the international long distance telephony front, is expected to result in a 1%-1.5% fall in ARPUs in the current financial year. Though paid-minute calls have increased after the tariff rationalisation, basic telephony revenues that contributed to 93% of MTNL's FY01 revenues would continue to be under pressure. Going forward, tariffs are only going to fall as telecom liberalisation gains pace and competitors expand services (India's DLD and ILD rates, by far, are amongst the highest). Though MTNL has taken aggressive stance on the ISP front, value-add services contribute to just 0.7% of revenues. Even if one were to assume a 100% growth in income from value-add services in the coming years, contribution to topline and profits is expected to be marginal.
The transition into a revenue sharing regime will further lower profit growth for the company. License fees, which stood at 6.2% of revenues in FY01 is expected to shoot up sharply in the current year. Since MTNL operates in Category 'A' circles, a 12% revenue share is applicable. Against the current license fee of Rs 900 per active subscriber, which MTNL pays to DoT, MTNL has to shell out 12% of gross telecom revenues from now. Assuming a 12% revenue share, license fee payable would increase by close to 87% in the current financial year.
The first half performance of the company vindicates our estimates. While revenues increased by 6.7% to Rs 31,164 m, margins fell by 100 basis points to 38.5% in 1HFY02. Higher depreciation and tax outflow resulted in a 12.5% fall in net profits to Rs 7,147 m in 1HFY02. While MTNL is expected to save costs on the employee front, higher advertisement and promotional expenses towards expanding its cellular subscriber base, to a certain extent, would offset this benefit.
We expect MTNL to report around 6% growth in telecom revenues and a 18%-20% fall in net profits for FY02. Operating margins are expected to fall from 37.7% in FY01 to 33.1% in FY02. MTNL is expected to spend Rs 8,000 m as capital expenditure towards upgrading its existing infrastructure and installing new cellular sites. Though MTNL has expressed its intent to enter the DLD segment, it is yet to announce any concrete plans on this front.
MTNL currently trades at Rs 143 on a P/E multiple of 7.1x expected FY02 earnings.
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