Mahanagar Tel Nigam Ltd (NYSE:MTE)

Industry

The telecom industry is one of the fastest growing industries in India. India has nearly 200 million telephone lines making it the third largest network in the world after China and USA. With a growth rate of 45%, Indian telecom industry has the highest growth rate in the world. History of Indian Telecommunications started in 1851 when the first operational land lines were laid by the government near Calcutta (seat of British power). Telephone services were introduced in India in 1881. In 1883 telephone services were merged with the postal system. Indian Radio Telegraph Company (IRT) was formed in 1923. After independence in 1947, all the foreign telecommunication companies were nationalized to form the Posts, Telephone and Telegraph (PTT), a monopoly run by the government's Ministry of Communications. Telecom sector was considered as a strategic service and the government considered it best to bring under state's control. The first wind of reforms in telecommunications sector began to flow in 1980s when the private sector was allowed in telecommunications equipment manufacturing. In 1985, Department of Telecommunications (DOT) was established. It was an exclusive provider of domestic and long-distance service that would be its own regulator (separate from the postal system). In 1986, two wholly government-owned companies were created: the Videsh Sanchar Nigam Limited (VSNL) for international telecommunications and Mahanagar Telephone Nigam Limited (MTNL) for service in metropolitan areas.In 1990s, telecommunications sector benefited from the general opening up of the economy. Also, examples of telecom revolution in many other countries, which resulted in better quality of service and lower tariffs, led Indian policy makers to initiate a change process finally resulting in opening up of telecom services sector for the private sector. National Telecom Policy (NTP) 1994 was the first attempt to give a comprehensive roadmap for the Indian telecommunications sector. In 1997, Telecom Regulatory Authority of India (TRAI) was created. TRAI was formed to act as a regulator to facilitate the growth of the telecom sector. New National Telecom Policy was adopted in 1999 and cellular services were also launched in the same year. Telecommunication sector in India can be divided into two segments: Fixed Service Provider (FSPs), and Cellular Services. Fixed line services consist of basic services, national or domestic long distance and international long distance services. The state operators (BSNL and MTNL), account for almost 90 per cent of revenues from basic services. Private sector services are presently available in selective urban areas, and collectively account for less than 5 per cent of subscriptions. However, private services focus on the business/corporate sector, and offer reliable, high- end services, such as leased lines, ISDN, closed user group and videoconferencing. Cellular services can be further divided into two categories: Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA). The GSM sector is dominated by Airtel, Vodfone-Hutch, and Idea Cellular, while the CDMA sector is dominated by Reliance and Tata Indicom. Opening up of international and domestic long distance telephony services are the major growth drivers for cellular industry. Cellular operators get substantial revenue from these services, and compensate them for reduction in tariffs on airtime, which along with rental was the main source of revenue. The reduction in tariffs for airtime, national long distance, international long distance, and handset prices has driven demand.The telecom sector is also afflicted by a number of restraints. These include: Sluggish pace of reform process, Lack of infrastructure in semi-rural and rural areas, which makes it difficult to make inroads into this market segment as service providers have to incur a huge initial fixed cost, Limited spectrum availability. But notwithstanding these constraints, telecom sector has undergone a revolution in the past decade and has played a major part in bridging the rural-urban divide.

Company Background

Mahanagar Telephone Nigam Limited (MTNL) provides fixed-line and other basic telecommunications services in Delhi and Mumbai, India. It offers basic fixed-line access; public call offices; global system for mobile communications (GSM) cellular service. The company was founded in 1986 and is based in New Delhi, India.

Financials

MTNL Q2 net dipped 14% at Rs 94.78 crore. The company could post a net profit of Rs 94.78 crore for the quarter ended September 30, 2007 as compared to Rs 109.92 crore for the quarter ended September 30, 2006. Total Income has decreased from Rs 1365.24 crore for the quarter ended September 30, 2006 to Rs 1345.3 crore for the quarter ended September 30, 2007.  

Valuation

GSM subscriber base was up 5.4%. Subscriber net additions continued strongly even as the company’s market share (in Mumbai and NCR circles) jumped from around 6.4% to 14%. Broadband operations continued to gather pace and helped arrest the decline in revenues arising out of fixed line subscriber attrition. CDMA subscribers have been consistently declining over the last few months from 0.19 million to 0.15 million. Total subscribers increased from 12.7 million to 13.3 million. Increase in GSM, drop in wire line and delay in CDMA capacity expansion leading to subs loss summarize the scenario. Revenues and bottom line remain stagnant. MTNL trades at 0.9x EV/sales and 3.8x EV/EBITDA on FY07E numbers and 0.7x EV/Sales and 2.8x EV/ EBITDA on FY09E numbers. Given that outlook the downside to currently attractive valuation is limited.Recent initiatives will enable MTNL to handle competitive pressures and retain and improve its market share. At current valuations, MTNL trades at a PE of 7.8x FY07E EPS and 6.6x FY08E EPS.

Outlook

GSM subscriber addition compensates for delay in re-commissioning of CDMA capex. Along with broadband subscriber base starting to assume size, wire line revenues are stabilizing despite visible erosion in wireline subscriber base. Broadband subscriber base starts assuming size. Current broadband, DSL subscriber base is around 100,000 and monthly addition/conversion are nearing 15,000 subscribers. The subscriber accretion momentum is expected to continue.MTNL is underway to commission additional 800,000 lines of GSM subscriber capacity by the end of Q3FY06. It is expected that GSM subscriber addition will maintain the robust trend as seen in the past 3 quarters.