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MTNL: Where’s the nadir? - Views on News from Equitymaster
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MTNL: Where’s the nadir?
Dec 7, 2005

Performance Summary
PSU telecom service provider, MTNL, had recently announced results for the second quarter and first half ended September 2005. The company reported yet another quarter of dismal performance, with its revenues and profits taking a severe beating. Operating margins contracted significantly on the back of higher revenue sharing and administrative costs.

Financial performance: A snapshot
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Sales 13,931 12,690 -8.9% 27,858 25,294 -9.2%
Expenditure 10,626 10,258 -3.5% 20,624 20,660 0.2%
Operating profit (EBDITA) 3,305 2,432 -26.4% 7,235 4,635 -35.9%
Operating profit margin (%) 23.7% 19.2% 26.0% 18.3%
Other income 1,132 1,549 36.9% 1,841 2,898 57.4%
Interest 71 91 28.7% 179 173 -3.2%
Depreciation 1,453 1,579 8.7% 2,867 3,109 8.4%
Profit before tax 2,914 2,311 -20.7% 6,029 4,250 -29.5%
Tax 835 632 -24.3% 1,611 988 -38.7%
Profit after tax/(loss) 2,079 1,679 -19.2% 4,418 3,262 -26.2%
Net profit margin (%) 14.9% 13.2% 15.9% 12.9%
No. of shares 630.0 630.0   630.0 630.0  
Diluted earnings per share* (Rs) 13.2 10.7   14.0 10.4  
P/E ratio (x)         11.6  
(* annualised)          

What is the company’s business?
MTNL is the government owned (56% stake) basic telecom service provider in Mumbai and Delhi with a subscriber base of just over 5 m, including 4.1 m in the fixed line telephony segment and the remaining in the mobile segment. The company has a license to offer basic telephony services in both these metros up to the year 2013. MTNL accounts for 9% of all India fixed line subscriber base. During the period between FY00 and FY05, while MTNL's revenues have grown at a compound rate of 1.4%, its net profits have witnessed a near 3% per annum decline.

What has driven performance in 2QFY06?
Not getting the ‘basics’ right: The 14% YoY decline in MTNL’s basic services revenues during 2QFY06 has been the reason for the company’s poor performance in the quarter. Notably, this services segment forms around 90% of the company’s total revenues and has been a drag on performance in the past few years. Decline in revenues from the segment has mainly been perpetuated by factors like stiff competition from private sector players, an increased move towards cellular telephony and the denial of access deficit charge. But for the 97% YoY growth in cellular revenues, the decline in topline would have been greater. This strong growth in cellular revenues was made possible by a robust addition to the subscriber base.

Segment-wise details
  2QFY05 % of total 2QFY06 % of total Change
Basic services
Revenue (Rs m) 13,295 95.4% 11,436 90.1% -14.0%
PBIT (Rs m) 2,474 95.6% 1,341 77.2% -45.8%
PBIT margin 18.6%   11.7%    
Cellular
Revenue (Rs m) 636 4.6% 1,254 9.9% 97.1%
PBIT (Rs m) 114 4.4% 397 22.8% 247.9%
PBIT margin 17.9%   31.6%    

Higher revenue sharing costs dent margins: Apart from the decline witnessed in topline, higher staff cost, revenue sharing costs and administration ad operative costs have dented MTNL’s operating margins during 2QFY06. Based on segments, while PBIT margins of basic services has declined by 6.9% to 11.7%, those for the cellular business have expanded from 17.9% in 2QFY05 to 31.6% in 2QFY06. Also, cellular PBIT margins now constitute to around 23% of the consolidated PBIT margins of MTNL, up from 4% in 2QFY05.

It boils down to the bottomline: The abovementioned factors, i.e., drop in topline and contraction in margins has led to MTNL reporting 19% YoY and 26% decline in net profits during 2QFY06 and 1HFY06 respectively. If it weren’t for the higher other income component, the net profits would have dipped further.

What to expect?
At the current price of Rs 120, the stock is trading at a price to earnings multiple of 8.0 times our estimated FY08 EPS. While these valuations might look as a big discount to what other major players like Bharti and VSNL are commanding, considering the string of poor performance from MTNL over the past few 2-3 years, be believe that the stock is adequately valued. Despite strong growth in the cellular business, overall, MTNL is fast losing customers to its rivals and needs to get its act together and prevent the plunge in its basic subscriber base. However, taking into consideration competition from the private sector players like Bharti Tele and Reliance Infocomm, this looks increasingly difficult.

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