MTNL: Cross-connection

Competition and BSNL merger plan cast shadow on MTNL

Mahanagar Telephone Nigam Ltd (MTNL) announced audited results for the year ended March 2004 on Monday, which, as usual, were quite different from the unaudited results announced earlier in April.

Income from services in the audited version was 4.4 per cent higher than the unaudited one, while net profit was lower by 10 per cent or Rs 128 crore.

The fall in profit was almost entirely on account of higher staff costs in the audited accounts. Staff costs were Rs 174 crore higher in the audited version compared with the unaudited version, and this more than adequately explains the drop in the net profit figure.

Staff costs as on March 2004 stand at 25.4 per cent of sales and is one of the main concerns for the MTNL stock. The board had cleared a voluntary retirement scheme (VRS) last year, and some analysts had estimated that if the scheme was implemented successfully, staff strength would be reduced by around 18 per cent.

But the scheme hasn't seen the light of day yet, and going by the signals coming from the new government, there are fears now that the VRS may not happen for quite some time.

Meanwhile, the company has benefited from the new interconnect regime, which became effective in January 2004. Resultant savings in cost helped the company increase net profit 31 per cent on the back of a 10 per cent increase in sales.

Going forward, the wireless services business is expected to grow at a fast pace, with the company set to add 1.6 million lines in the wireless space this year.

But revenues from the cellular business accounts for just around 3 per cent of revenues, and it will be a while before it can drive overall performance.

The wireline services (97 per cent of revenues), on the other hand, is facing severe competition from private players who have targeted its high-end customers.

According to estimates, these high-end customers account for only around 12 per cent of lines, but almost 50 per cent of call revenues. Further, line additions have slowed down, because of competition from cellular operators.

The management has taken proactive steps to stem the decline in high-end subscribers, according to some analysts. Whether it is successful will be reflected in the results going forward.

As of now, at Rs 130 a share, the stock trades at just seven times trailing earnings. What's more, it has close to Rs 50 a share as cash. But concerns about competition and inaction on the staff issue has depressed sentiment for the stock, not to mention the revival of the government's plan to merge the company with BSNL.

Pressure on bank liquidity

The Reserve Bank of India (RBI) may yet have to formally raise interest rates, but bond yields have already shot up, and the 10-year government bond is at a yield-to-maturity (YTM) of 5.4 per cent.

Liquidity is still substantial, as seen from the outstandings in the repos, and dealers say the outlook on inflation rate, the expected rise in corporate investment and lower liquidity as a consequence of a tapering off of foreign investor inflows are all to blame.

RBI data confirms the slow but steady squeeze on bank liquidity. In May, for instance, while credit (food plus non-food) declined by Rs 375 crore (a decline in credit is normal for this time of the year), deposits with banks fell by Rs 2,005 crore.

Compare that to April, when credit went down by Rs 2,356 crore (between April 2 and April 30), while deposits increased by Rs 7630 crore. Obviously the banks' liquidity position was far more comfortable in April.

Compare the position last year to get an idea of how things have changed. In May 2003, bank credit went down by Rs 606 crore, while deposits went up by Rs 4,869 crore.

A month earlier, over the period April 4 to May 2, 2003, deposits rose by Rs 51 crore, but then the fall in credit was much steeper at Rs 18,619 crore. Putting it simply, the figures for bank deposits and advances illustrate the much tighter liquidity prevailing currently. The change in the financial markets is also apparent from the money supply figures-while M3 rose by 4.2 per cent last fiscal till May 28, the corresponding figure this fiscal is just 3.3 per cent.

One last point-the data for non-food credit show the extent of the industrial recovery currently underway. Non-food credit fell by Rs 890 crore in May 2004, compared with a fall of Rs 1731 crore in May last year. In April 2004, non-food credit declined by Rs 8,380 crore, in sharp contrast to a fall of Rs 23,950 crore in April last year.

With contributions from Mobis Philipose