MTNL is a high-risk investment

While effective utilisation of assets and cost reduction will help improve its performance, monetisation of land bank will unlock value. However, lack of clear timeline for implementing these proposals is a major overhang on the stock

The MTNL stock was up seven per cent on Friday on news related to closing down of the government-led telecom company’s CDMA operations (which the management later denied), pruning of workforce, sharing of resources with other players and LIC’s plan to sell stake in the company. These have provided a ray of hope to investors, given the stock has been a weak performer over the last two years due to its lacklustre operational performance. Compared a net profit of Rs 211 crore in FY09, the company is estimated to make losses of Rs 2,000 crore in FY12. The poor performance is despite the first-mover advantage, operating in two prime circles and a cash pile of Rs 5,000 crore in FY09.

While the proposed measures will help improve operational performance and bring in efficiencies, analysts say the only way investors will benefit is if the company is sold to a private player. Says Ambareesh Baliga, chief operating officer of brokerage Way2Wealth, “Unless the company goes for a complete overhaul it is not going to come back on track. Complete sell out to a private player and a model similar to the one adopted during the VSNL sale (where the land bank was kept out of the sale) is the only way out.”

While the MTNL management did not respond to Business Standard's queries on asset utilisation, staff reduction and falling subscriber additions, most analysts say a piecemeal approach to MTNL's problems won’t help. Sooner than later, the government will have to monetise the assets to make good the continuing losses, they feel. In this backdrop, they believe, only investors with an appetite for risk and patience may consider the stock.

Positive triggers
While the government has not indicated any timeline for the merger of MTNL and BSNL, the MTNL management is looking at operational synergies between the two. A merger will help the company achieve scale and thereby save on costs especially for equipment orders. While analysts agree the merger is operationally sound, lack of customer focus, coupled with frequent changes at the leadership level, are among issues that need to be addressed.

Another trigger for the stock, given the impending New Telecom Policy, is the pooling and sharing of spectrum that should benefit MTNL. If MTNL were to rent out spare spectrum capacity as well as appoint franchisees for Broadband Wireless Access (BWA) services and split revenues it could generate about Rs 500 crore revenues per year.

MTNL’s plans to cut its workforce by a third from the current 44,000 could be a major boost and will help bring down its staff cost, which is now almost equal to its sales. If the proposed reduction of employees, by about 15,000, comes about, the company could make money at the operating level (it made an operating loss of Rs 335 crore in the December quarter).

Finally, if MTNL were to monetise its large land bank in New Delhi and Mumbai, it could fetch a sizeable amount. Currently, the company is leasing out office premises at prime locations across Delhi and Mumbai. Analysts conservatively estimate the land bank could fetch upwards of Rs 5,000 crore, translating to about Rs 79 per share. However, decisions on the proposals for development or sale of the land bank have been hanging fire for the last four years. Says Deven Choksey, managing director, K R Choksey, “The proposals have always been there, the issue is of implementation. Thus, while the intent is right, there is no execution.” Analysts point out the case of VSNL. While the company was sold to the Tatas 10 years ago, the sale of land is yet to be completed.

HIGH EMPLOYEE COSTS
In Rs crore	FY11	9M' FY12	FY12E	FY13E
Sales	3,797	2,613	3,709	3,790
% change y-o-y	2.3	-12.5	-2.3	2.2
Staff costs	3,257	2,470	-	-
Staff costs as a % of sales	85.8	94.5	-	-
Operating profit	-1,107	-951	-1,475	-1,441
Net profit	-2,801	-2,644	-2,015	-1,691
E: Estimates                                                              Source: Company,  Bloomberg

Operational performance
While revenues of most players have surged over the last few years, MTNL’s revenues have fallen about 25 per cent since FY2007. However, unlike its other competitors, the company competes only in Mumbai and Delhi where the market is saturated with penetration levels exceeding 100 per cent. The subscriber market share of the company in Mumbai and Delhi too, has been coming down. It is not just CDMA business that the company is struggling with, even in the GSM-based wireless service it has not made much inroads. It has added barely a hundred thousand subscribers over the last year. Despite the headstart, the company has, for example, managed subscribers to the tune of six million - half of Bharti Airtel’s subscribers in these two circles. So, while the company had to fork out Rs 11,000 crore in licence fee for offering 3G and BWA services in these two circles, it has not been able to improve its subscriber base, average revenues per user (ARPU) as well as revenues per minute (RPM). Lower revenues, higher interest and staff costs led to mounting losses.

Outlook
While there are many triggers for the company and its stock is quoting much below book value, MTNL has to improve its operational performance for the Street to take notice. While reduction of its workforce, monetisation of land and resource sharing are likely to be given a thumbs up, better operational performance, especially improvement in subscriber base as well revenue parameters (ARPU and RPM), are key to the long-term health of the scrip. Until there are clear signs of these happening, the stock may continue to underperform the markets.