Mahanagar Telephone Nigam Ltd’s (MTNL) valuations are surprising, to say the least. In early April, before the 3G (third-generation spectrum) auction process began, the company had a market capitalization of Rs4,700 crore. Back then the company had a net cash position of Rs6,331 crore, according to Citigroup Research’s estimates. In effect, the markets’ view was that the core business had a negative value.
But things have worsened dramatically for the company after the auctions for 3G telecom services and broadband wireless access (BWA). It has had to shell out Rs6,564 crore for the 3G spectrum it was allotted in the Delhi and Mumbai circles and additional Rs4,534 crore for BWA spectrum for the two circles it has operations in. MTNL didn’t bid these large amounts for the spectrum—it just had to match the top bids made by private sector companies in the auction process.
Also See Discount Expectations (Graphic)
As a result, from a net cash position, the company has ended up with a net debt position of around Rs4,500 crore. This should have resulted in a sharp drop in MTNL’s share price. Instead, at its current share price of Rs64.85, the company has a market capitalization of Rs4,085 crore, or only around 13% lower than the levels in early April.
Around two weeks ago, soon after the BWA auction ended, its valuations had dropped to a low of Rs3,370 crore, around 28.5% lower than the early April levels. But since then MTNL’s valuations have risen sharply, on the expectation that the government would refund the firm at least part of the spectrum fee.
Whether the finance ministry will agree to this is anybody’s guess, but as far as the markets are concerned, the expectation seems to be that MTNL may be refunded a substantial portion of the fee. How else can one explain MTNL’s current market value? The company derived all of its value from the cash on its books, which has disappeared. Even in terms of the company’s earnings, other income contributed entirely to profit, offsetting the losses of the core business.
Some analysts have said MTNL may derive significant value from some of its real estate holdings, and this is the reason for the resilience in its shares. With valuations being propped up by such hopes, there’s ample room for disappointment.
Graphic by Naveen Kumar Saini/Mint
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