BSNL-MTNL: Greater than sum of parts

The BSNL-MTNL merger will spawn a behemoth

The BSNL-MTNL merger will result in a strong player that will have the last mile advantage across the country and effectively control 91 per cent of the fixed line market.

In almost every country, whether Britain, France or Germany, the incumbent government player has managed to retain a big share even after private sector players enter the fray. The story should be no different in India.

The rationale for the merger is compelling. With a nationwide footprint, the new firm will be in a position to offer a full range of services across the country.

Without Mumbai and Delhi, BSNL which controls 18 per cent of the wireless market, cannot offer enterprises or mobile users a credible package, especially roaming services, which is a serious drawback.

Moreover, BSNL is still expanding in the mobile space and can use the cash on MTNL's books, which was Rs 2,550 crore or Rs 41 per share as of March 2004. Also, the stronger balance sheet will allow room for greater leveraging, important for a business that needs constant capex.

From a shareholder's perspective, a reverse merger (BSNL merged into MTNL) where MTNL makes a part-share, part cash offer for BSNL would be ideal, ensuring that the dilution of minority shareholders is not lower than the threshold for delisting. Another option is for BSNL to acquire the government's stake in MTNL, so that minority shareholders are not affected.

With a combined market cap in the region of $12 billion and a growing business, the stock will be hard to ignore. MTNL currently trades at 9 times estimated FY05 earnings.

However, a merger alone will not result in a modern telco. It will merely plug the gaps in the network and should catalyse technology upgrades and marketing strategies.

Gold

The current bull run in gold has seen gold futures on the Comex division of the New York Mercantile Exchange closing at a 16 year high on Friday. If the current trends continue, gold is expected to touch the $450 mark in the near future.

Investors have turned to gold recently as a safeguard, given concerns over global terrorism, rising oil prices and a burgeoning US trade deficit, apart from low interest rates prevailing in the international money market.

Gold prices are up 40 percent from its low last year at $320 and about 70 percent over the last three years. Analysts are expecting the dollar to weaken further in the short-term, thereby strengthening gold prices.

Gold futures on the Multi Commodity Exchange of India (MCX) continued to rise as market players betted on prices moving up higher with the US dollar remaining under pressure.

The most active December contract closed at Rs 6500 per 10 grams last week. A rebound in crude oil prices has also spurred gold buying on the back of concerns about the effect of high oil prices on global growth rates.

The growth in open interest and volume levels on the MCX on the back of higher prices have also seen a lot of speculative interest in the yellow metal, thus adding further momentum to the price run.

However, recent trends suggest that physical buying of the metal is on the wane in the post festival season. Keeping in mind the high prices, investors have also been liquidating their physical holdings with a profit motive.

Besides, jewellers are said to be holding high levels of carry-over stocks as soaring prices had hit sales. While bullion analysts maintain $450 as the price target for gold over the medium term, they have cautioned that it could correct lower toward $430 - $425 levels. They also point out that a spate of profit taking and long liquidation in the metal are inevitable, sooner than later.

The deceleration in exports

Export growth slowed to 9.5 per cent in October, a sharp drop from the 17.4 per cent rise in the previous month. Is the slowdown the beginning of a trend or a mere blip? The year-on-year figures of percentage growth can be misleading""much depends on the base effect.

In October, however, exports actually fell to $5.9 billion from the previous month's $6.2 billion. A look at the chart shows that exports in October are not much higher than the figure notched up as early as May.

Exports have been moving up or down every month and showing impressive year-on-year growth percentages, but not much movement from that May figure, with the only appreciable rise occurring in September.

We're still comfortably above the August number, and y-o-y export growth in August was a very high 28 per cent. The October export figure is therefore very much in line with past performance, and with exports already crossing $ 40 billion, we shouldn't have a problem reaching the $75 billion target set for the year.

The chart also shows that despite a slowdown from September, October's non-oil import growth is still pretty high compared to July and August, and shows continued buoyancy in the economy.

And so far as the trade deficit is concerned, while it's true that it has increased sharply on account of higher oil prices, the recent appreciation of the rupee should allay apprehensions on that score.

With contributions by Shobhana Subramanian and Sunil Nayanar