MTNL: Merger and synergies

MTNL investors could gain from a merger with BSNL, but a lot depends on the structure adopted for it

Exactly two years ago, when the communications minister under the NDA government had proposed a merger between BSNL and MTNL, the MTNL stock had crashed 8 per cent.

Now, as the current government is weighing options for "synergising the strengths of BSNL and MTNL", the MTNL stock has risen over 7 per cent.

The difference is that two years ago MTNL was on the disinvestment list, and the merger proposal could derail its privatisation. The merger proposal was seen as a roadblock to the disinvestment, so the fall in price.

The current communications minister has already ruled out the privatisation of MTNL. Besides, BSNL now seems to be in better financial space.

It was earlier felt that the merger may dilute MTNL's financials, since MTNL operates in the country's top two circles, Mumbai and Delhi, BSNL is saddled with a host of poor circles and village telephony.

But with BSNL getting a handsome access deficit charge and with its wireless subscriber base growing at a rapid pace, it appears that BSNL may be in better shape now.

MTNL's mainstay wireline business (97 per cent of revenues) has been hit by competition, as private players have been targeting its high-end customers.

Line additions are also lower because of competition from wireless operators. Going by the 7 per cent rise in MTNL's share price on Thursday, the markets seem to think that a merger will be beneficial for MTNL. But a lot depends on the structure the government adopts for the "synergy".

Non-life insurance

Competitive pressures in the Indian non-life insurance industry have taken their toll on state insurance companies. In July 2004, private insurance players accounted for 62.6 per cent of the incremental business of Rs 155 crore.

While their share recorded a growth of Rs 97 crore over the preceding month, state insurance companies recorded incremental business of just Rs 58 crore, despite a market share of around 80 per cent.

The non-life insurance market is growing at 13 per cent per annum, in vast contrast to the 70-odd per cent growth experienced by the life segment.

With 13 players vying for the same pie, price under-cutting is rampant. The gainers have been the private sector players and the state-owned National Insurance Company.

United India has seen negative growth so far this fiscal. Industry leader New India Assurance Company is just about managing to maintain its lead with a market share of 22 per cent. National is the only state insurer to continue growing at 25 per cent plus, partly because New India has lost profitable accounts.

For instance, the company was forced to write the loss-making business of Reliance Infocomm, after it was turned down by New India. But this account has proved to be an albatross around National's neck. And this is not an isolated case.

A number of corporate entities have got a good bargain, thanks to the cut-throat competition in the industry. Will things change? Probably not till the industry is detariffed and each risk is priced on the basis of the risks involved. Corporates have been the main beneficiaries of the cross-subsidisation of good risks against bad portfolios.

Birla Corp has done well indeed

At the recently concluded AGM of Birla Corp, R S Lodha was at pains to point out that the company had done very well under his stewardship.

An analysis of the company's performance shows that, whatever be the merits of his inheriting the last Priyamvada Birla's assets, there's little doubt that Birla Corp has done very well indeed, a fact borne out by the scrip's 120 per cent appreciation over the last six months.

For FY04, the company recorded a 10.6 per cent increase in its net sales to Rs 1243.18 crore aided by better realisations in its cement division and improved export performance of its jute business. Operating profit grew 39.8 per cent, thanks to tight control on key costs like staff and power & fuel.

Meanwhile, the company's debt to equity ratio dropped to 0.25:1 in FY04 from 0.41:1 in the previous year. Also return on equity has improved to 16.86 per cent in FY 04 from 1.88 per cent in the previous year. Return on equity in FY03 was low due to strikes at the jute mills.

In the first quarter of FY05, operating profit grew 97 per cent to Rs 42.14 crore. The company's unit Birla Synthetics has been recently closed and it is looking at selling the plant and machinery.

However, no negative impact on the company's books is anticipated, point out analysts, as the realisable value of these assets is expected to be greater than the value in the books.

Going forward, to achieve Lodha's promise of high growth, the performance of the cement division will be critical, given the inherent problems in the jute business.

With contributions by Mobis Philipose, Freny Patel and Amriteshwar Mathur