MTNL is a government owned telecom operator providing wire-line and wireless telephony services in Mumbai and Delhi, India’s financial and national capital cities respectively, which constitutes about 4% of India’s population.
The company has more than 60% of market share in wire-line telephony in Mumbai and Delhi circles. However, in wireless services, the competition is intense and it is fifth and sixth largest operator in terms of subscriber base in Mumbai and Delhi, respectively. It has recently got 3G spectrum and plans to launch 3G services in a few months.
Our proprietary cash analysis shows cash per share declining to Rs39 from Rs61 after paying for 3G spectrum and salary increments.
We are conservatively modeling 3G spectrum payments at 2x reserve price in two most sought after circles, salary arrears at 25% increment on 1 January 2007 salary base and an income tax refund of Rs 6 billion.
We believe MTNL faces significant revenue risk as its wire-line segment, which contributes 70% of its revenue, will continue to decline due to subscriber loss and reduction in tariffs.
The wire-line penetration in the two cities (Mumbai and Delhi) has reached a plateau and increasing competition is cannibalizing into MTNL’s market share.
MTNL is also losing market share in the Public Call Office (PCO) segment. The wireline tariffs are under constant pressure from the declining wireless tariffs.
Our channel checks reveal that there is a delay of up to six months to get MTNL broadband connection due to which it is unable to capitalize on the broadband opportunity.
MTNL’s areas of operation have the highest wireless penetration and are close to saturation.
We believe that MTNL will find it extremely difficult to protect its wireless market share in competition with more efficient private operators who are reducing tariffs leveraging scale economies, coupled with superior customer service.
We initiate coverage with a REDUCE rating and target price of Rs55 based on a cash per share of Rs39 and a core business valuation of Rs16 at 2.5x FY09 EBITDA.
Historically MTNL traded close to its book value but the valuation is now converging towards its cash per share as its ROE has declined to 3.3%, well below its cost of capital, and one-fourth of its book value is amount recoverable from Department of Telecom, which is unconfirmed and outstanding for several years.