The Hindu Business Line : Mahanagar Telephone Nigam: Hold

INVESTORS may continue to hold on to their exposures in the Mahanagar Telephone Nigam (MTNL) stock. A reasonably steady fourth quarter performance, opportunities opening up in the broadband arena and improving growth prospects for MTNL's cellular operations in Mumbai and Delhi inspire confidence. In the near term, however, the stock may be plagued by price weakness as the possibility of a merger of MTNL with the corporatised Bharat Sanchar Nigam (BSNL) has started doing the rounds again.

The salient features of MTNL's performance for the fourth-quarter ended March 31were:

Revenues at Rs 1,492 crore was 10 per cent higher on a year-on-year basis, but 2 per cent lower on a sequential (quarter-on-quarter) basis. While the topline growth on a sequential basis has been weak, it has been stabilising at these levels. The performance of the basic services division, which contributes 96 per cent of total revenues, continued to remain indifferent. The basic services subscriber base in the latest quarter declined by 90,000 subscribers, but the pace of decline has been slower than in the past. The contribution of revenues from the cellular division at 4 per cent is quite modest, though it has added nearly 35,620 GSM subscribers on a sequential basis.

Operating profit at Rs 494 crore was up by nearly 32 per cent on a yearly basis while on a sequential basis, these profits fell by 8 per cent. If the operating profits are adjusted for non-recurring provision made in the latest quarter, it has registered a 20 per cent rise. Three factors are likely to dictate the earnings performance of MTNL and the stock price trends over the next few quarters:

Intense competition: MTNL is expected to face stiff competition on two fronts. In the basic services space, the competition is likely to increase from private basic service operators, particularly Reliance Infocomm.

The basic services, which are already struggling to arrest the migration of subscribers to cellular, may find this challenging. The future growth will rest entirely on attractive pricing for high-end subscribers and aggressive marketing to widen market penetration. Second, in the cellular space also, similar challenges beckon from private operators. But, in the cellular arena, if MTNL expands its network capacity in phases, it will be in a position to add to the subscriber base comfortably. This can become a good profit driver for the company, going forward.

Prune staff costs: The high staff costs have been MTNL's bugbear for quite some time. It has currently proposed a Voluntary Retirement Scheme (VRS), which aims to reduce the bloated staff strength. If staff costs, which account for 20-23 per cent of revenues in the last few quarters, remain constant, it will neutralise the reduction in revenue share (by nearly two percentage point coming into effect from April 2004) and lower administrative expense to a large extent.

BSNL-MTNL merger:. As BSNL is nearly seven times bigger than MTNL, the share swap ratio will dilute the equity of minority shareholders in MTNL to an extremely low percentage, following a merger.