Mahanagar Telephone Nigam Limited (MTNL)’s revenue remained stagnant for the third consecutive quarter, as basic telephony continued to face subscriber attrition and the mobile market share shrank marginally in the metros.
Furthermore, the Company booked a net loss of Rs744 million, excluding the Rs1.2 billion interest on the income tax refund.
Despite attractive broadband packages, the wireline subscriber attrition has not abated and remains high at ~4% for the last three quarters. To add to its misery, average revenue per user (ARPU) for wireline has maintained its declining trend.
Since we do not expect MTNL to gain market share in broadband, given its dismal service quality and stiff competition from private players, we believe that the wireline revenue will decline ~10% (ARPU and subscribers to fall ~6% and ~4%, respectively) for FY10.
MTNL’s launch of 3G services in Delhi, in our view, would not attract subscribers and would not lead to an improvement in the market share due to the company’s low ARPU subscriber base. The company has limited brand appeal in the high-income group, which is most likely to progress to 3G.
As MTNL is unable to rationalize its employees’ compensation and provision for doubtful debts is likely to remain high due to its poor subscriber quality in wireline, we expect the EBITDA margin to halve itself in the next 2-3 years.
Given the bleak growth prospects and the negative margins, we have reduced our target price to Rs50 and maintain our SELL rating on the stock.