Shares of Mahanagar Telephone Nigam Ltd (MTNL)have fallen by more than 8% to Rs60 since it announced results for the year ended March 2010. The company reported a record loss of Rs2,515 crore in fiscal 2010, on revenue of Rs3,770 crore. Of course, the results include extraordinary items and one–time costs, and the company has reported a marginal profit after adjusting for those. MTNL took a huge hit on account of changes in retirement benefits, and also made a provision for 3G spectrum.
While the company has already been allotted 3G spectrum, it has to pay the government spectrum fee based on the winning bid for the Mumbai and Delhi circles, where the company operates. Based on bids for these two circles as of 17 May, MTNL would have to shell out Rs6,215 crore as 3G spectrum fee. That would wipe out its entire cash balance. According to a recent report by Citigroup Research, the company’s cash and cash equivalents are estimated at Rs6,345 crore at the end of FY10.
Graphic: Naveen Saini/Mint
It’s important to note here that MTNL’s operations have been running losses for the past two years and the only reason it has been able to report a net profit (adjusted for exceptional items) is that it earns a large interest income on its cash balance. In 2009-10, the company had a loss of Rs823 crore before accounting for taxes, the one-time provision for 3G spectrum fee and retirement benefits. But it earned Rs1,135 crore as other income, which more than offset the large loss from operations.
The company’s cash balance will soon be depleted and as a result, interest income will fall sharply. This, in turn, will result in large losses in the next few years. According to the Citigroup report, “(MTNL’s) core business continues to face pressure with fixed-line losses and traffic migration to increasingly cheaper wireless service. Besides, cost pressure, especially on the employee cost front, are likely to continue despite natural attrition as a result of ongoing wage negotiation and pension payouts. All these issues, in our opinion, make it difficult to come out of the vicious cycle.”
If the telecom regulator’s recent recommendations such as the one-time fee for 2G spectrum are implemented, things could get worse for the company. While it has been evident for some time now that MTNL has been struggling, its share price has had a floor because of the large cash balance (amounting to around Rs100 per share) on the company’s books. A large part of the cash is about to get exhausted thanks to the 3G spectrum fee payment, which is extremely bad news for MTNL’s investors. Citi has cut its target price from Rs68 earlier to Rs40 owing to the depletion in cash and the regulatory uncertainty.
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