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MTNL: Wrong number!

Dec 11, 2003

In the rapidly growing Indian telecom market, there are a host of companies that are competing with each other to garner a larger share of the overall subscriber base. In this sphere, there is one company that has borne the brunt of opening up of this sector (due to increased competition) and has consistently lost market share in its business of both basic and cellular services. The company we are talking about is the state-owned MTNL. Let us take a look on its performance in the past and see where it is headed going forward. Despite the pressures that MTNL is facing at present, one of the great strengths of the company is the telecom infrastructure that it has in two of the most lucrative markets of Mumbai and Delhi, which account for an estimated 28% of basic subscriber base and 30% of domestic long distance telephone calls. As on 30th September 2003, the company had a fixed line subscriber base of 4.45 m. The company is the second largest player in the basic telephony segment after BSNL and its basic subscriber base accounts for around 11% of all India figure. The company also has the second largest (after BSNL) switching capacity (10% of total capacity) in the country. MTNL has also been credited with the introduction of both cellular as well as WLL services in the two metros recognizing the strong growth potential of the mobile telecommunications segment.

Despite these strengths, and initial successes in its foray in the cellular market, the company has faced tremendous pressure in growing its subscriber base. This is mainly due to lack of quality services as well as rapidly increasing competition in the mobile telephony segment. As a matter of fact, while the cellular industry grew at a rate of around 115% for the period between Sep'02-Sep'03, MTNL managed to grow only by about 41%, thus resulting in its market share erosion (from 2.6% in Sep'02 to 1.7% at present). Competition is also eating into MTNL's basic telephony segment where its market share has dropped from 11.4% in September 2002 to 10.7% at present. We expect these shares to decline further considering the company's inability to counter high levels of competition, both in the basic and cellular segments.

While the tele-density in Mumbai (18%) and Delhi (16%) is relatively higher than the national average (3.5%), there is still significant room to grow the subscriber base. However, the focus needs to be on the mobile telephony segment. This is because in the last few years the growth in mobile subscriber base has outstripped growth in the basic telephony segment. However, MTNL's track record does not inspire confidence in its ability to grow in line with the telecom market.

At the current price of Rs 121, the stock is trading at a P/E of 8x its annualized 1HFY04 earnings. Due to competition and an inherent uncompetitive nature, MTNL has been bearing the burden of reducing tariffs, thus falling average revenue per user (ARPU). Also, the company's bloated workforce (around 57,000 employees in the two metros) that cost the company around 25% of revenues in FY03 adds to this burden on its performance. While MTNL has initiated steps to reduce this workforce by initiating a VRS exercise, the benefits of the same may take a while before showing on the company's financial performance.

MTNL's stock has witnessed increased volatility in the recent past, very much in line with its peers in the telecom sector. With high levels of uncertainty on account of the regulatory process continuing, and pressure on MTNL's performance increasing, investors need to be cautious. Also, lack of clarity on the disinvestment of MTNL adds to the uncertainty regarding the company's future.


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