MTNL: Desperate to hang up on debt

It will be diificult to do that now due to the huge leverage and operating costs, significantly higher than revenues

Till FY10, Mahanagar Telephone Nigam (MTNL) was a debt-free company, besides having cash on books worth Rs 5,000 crore. Today, the cash balance has almost drained out to a mere Rs 110 crore and, worse, the company had accumulated borrowings of Rs 11,538 crore at the end of March.

The journey from cash-rich to debt-rich has been painful, for the company and its shareholders. While losses have been mounting, MTNL has lost both in terms of market capitalisation and market share. Its market capitalisation has fallen from almost Rs 5,000 crore at the start of 2010 to just Rs 920 crore now; the pain would be more if one compares the drop in market value since 2007, when it stood at about Rs 10,000 crore.

Once a cash cow, MTNL is struggling to retain its market share and bring down its high legacy cost. Sales turnover has halved in the past decade and the company has been losing business, both in the fixed line and wireless telecom space, to its private sector competitors.

MTNL’s wire-line subscriber base has remained more or less constant in the past three years at around 3.5 million, but its wireless subscriber base fell from 5.4 million in December 2010 to 4.51 million in June 2013. More important, due to cut-throat competition, its revenue per subscriber has come under pressure. For instance, according to the last available figures, in the wire-line business, the fixed rental income has shrunk from Rs 1,100 crore in FY08 to Rs 699 crore in FY11 and further to Rs 617 crore in FY13.

Call charges in this period have fallen from Rs 1,873 crore to Rs 1,135 crore and further to Rs 538 crore during this period. In wireless segment, too, average revenue per user (ARPU) for the prepaid customers have fallen from Rs 175 in FY08 to Rs 54 in the first quarter of FY12. For FY13, the wire-line (basic and other services) revenues stood at Rs 2,696 crore, while cellular revenues were at Rs 759 crore.

However, as the business shrunk, overall costs have only gone up, leading to huge losses at the operating and net level. For instance, in FY13, the company’s total income at Rs 3,714 crore was not even able to absorb the employee cost, which stood at Rs 4,901 crore.

To add fuel to the fire, this deficit (between operating income and expenses) as well as capex requirements was bridged through borrowings. As a result, interest costs have surged from a mere Rs 3 crore in FY09 to Rs 1,181 crore, leading to a net loss of Rs 5,300 crore in FY13.

Revival: An uphill task
Although too late, the government is now talking about yet another revival plan for the company. “We have chalked out our plan and expect to become profitable again by 2018.

Major issues are finance cost, pension and spectrum issues which is expected to be resolved soon,” MTNL’s chairman and managing director A K Garg told PTI recently.

 

However, any meaningful revival will not be easy. It will require a substantial cut in debt and employee costs, as well as concrete steps to ensure a rising trajectory in the subscriber base.

 

A group of ministers recently decided to refund Rs 5,700 crore to MTNL for surrendering the broadband wireless access spectrum.

If this money is used to repay debt, it would come down by half, leading to savings in interest of Rs 500-600 crore annually. However, the bigger worry stems from the employee costs. Bharti Airtel, which has a pan-India presence and operations in several African countries, has a workforce of 26,596.

This is far lower than MTNL’s, which operates in only two circles (Mumbai and Delhi) and has 40,000 employees. The government had earlier proposed to offer voluntary retirement scheme to its 20,000 employees.

The Street believes the implementation of these ambitious plans will be an uphill task and a long-drawn process.

More important, even if the company is able to cut employee cost and borrowings, the real question remains on the business front, in terms of growth and market share. “In line with our estimate, we need to invest around Rs 500 crore annually to maintain our market share,” Garg had told PTI.

If, despite all the proposed initiatives, the company is only talking about maintaining its market share, investors should be extremely cautious while betting on a turnround. MTNL also has significant real estate, which it could use to lower its debt. However, it will be time-intensive and will not help ease worries on the business front.