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Value-added services is the focus area for this <i>navratana</i>... - Views on News from Equitymaster
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  • Dec 23, 1999

    Value-added services is the focus area for this navratana...

    The opening up of the domestic telephony services market has surely not dampened the spirits of this navaratna. It is the near monopoly telecom services provider in two major markets - Delhi and Bombay, which together account for a 28 per cent share of the domestic market. Also, it has been revolutionising the fledgling internet service provider (ISP) sector by offering services at rock bottom prices. Yes, it is the government controlled (!!) Mahanagar Telephone Nigam Limited (MTNL).

    MTNL is a sole provider of telecom fixed line services in Delhi, while it has Hughes Ispat as a competitor in the Bombay market. The company has a licence to offer telephony services in both these metros upto 2013. It has over 3.7 m access lines in service (CAGR of 11% between FY97 and FY99). In order to augment its services, the company has begun providing value added services like internet access, ISDN, voice mail, video conferencing and electronic mail. It has recently been granted permission (provisional licence) to enter the cellular business.

      FY97 FY98 FY99
    No. of employees 64,210.0 63,266.0 62,500.0
    Direct lines per employee 42.2 49.1 53.9
    Revenue per employee 599,894.7 698,468.2 766,191.7
    Profit per employee 145,273.3 178,631.5 210,768.0

    Although predominantly controlled by government personnel, MTNL has continued to invest in its infrastructure over the years. This has made a dramatic improvement in the service levels as compared to those provided by the Department of Telecom, the earlier operator in these circles. Its continued effort in improving the standards of service has resulted in the development of a telecom infrastructure, which is of high technical standards.

    MTNL draws its main competitive advantage from its existing subscriber base and infrastructure. This benefits the company in terms of lower per subscriber operating costs and still lower capital costs (it was setup in 1986). Together, these factors have created stiff entry barriers for the new telecom service providers. Moreover, the captive customer base and infrastructure provide the company with a launching pad when introducing new services like internet access.

    However, the company's stock price performance has been lagging the 30 share BSE-Sensex since August 1999. And not without reason.

    The main causes for concern are the bureaucratic nature of its operations, large employee base (62,500 at last count), lack of complete independence while deciding telecom tariffs and its fronting of Department of Telecommunications (DoT) in the debt market. The last of these needs to be looked into in a more in-depth manner. MTNL generates a large amount of free cash flows from operations, due to its low capital expenditure and burgeoning subscriber base. However, it still carries debt on its books! This is the result of its obligations to the DoT, under which it raises money from the markets to finance the former's expenditures. The money raised is then transferred to the DoT, and it reflects as Loans and Advances in MTNL's books of accounts. Although it may seem as only a book entry, problems could crop up if the cash starved DoT were to default on its debt obligations.

    The other concern is the threat of technological innovations, which could lead to redundancy of its existing network. This could wipe out a competitive advantage and make it vulnerable to competition. Also, with the recent tariff rationalisation plan announced by the Telecom Regulatory Authority of India, the company's near term revenue growth prospects seem to have been adversely affected.

    Although, the company has substantially improved the quality of its services, it still lags the new entrants in this regard. As a result, there is a possibility of a switch over of existing users.

    Currently, MTNL derives 90 per cent of its revenues from 11 per cent of its subscribers. Thus, even a small reduction in its bulk user base could lead to a substantial reduction in topline.

    All is not gloomy, though. The company's forceful thrust into the ISP sector can be expected to contribute in a bigger way, as the Indian market matures. Moreover, as the internet density and usage increase, the revenue per telephone line can be expected to grow over time. Also, the company is likely to get permission to widen the scope its operations to include the Madras circle. These developments will boost the topline growth of MTNL. A major factor affecting the future prospects of the company will be the dilution of the government's holding in MTNL (56.3 per cent currently) and the subsequent autonomy that will be granted to the management.



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