MTE: India's Telecom Dinosaur (MTE)

Jun.19.06 | About: Mahanagar Telephone (MTE)

India's state-owned telecom giant, Mahanagar Telephone Nigam Limited or 'MTNL' (NYSE:MTE) mainly operates in the country's commercial and political capitals of Bombay and Delhi, respectively. Owned and operated by the government, it suffers from many of the issues that plague state-run corporations in India, such as ministerial intervention and government diktats to management.

The associated minister for the sector oftentimes acts like a quasi-CEO. PSUs (public sector units) are never nearly as well-managed as their private sector competitors. MTNL held a monopoly over telephone services in the "mahanagars" or metropolises of Bombay and Delhi until the sector was opened up to private participation in the mid-1990s. Since the wireless telecom boom in India took off in the late 1990s, its wired fixed-line basic services have taken a huge hit.

MTNL started wireless telecom operations under the Dolphin (post-paid) and Trump (pre-paid) brands in 2001. As of today, it has about 1 million subscribers, a far cry from the 16 million+ subscriber base of Airtel, Reliance and BSNL, the top three operators and less than 2% of the market share. However, these services were unable to compete with private providers such as Bharti Enterprises, operating the Airtel brand, and Hutchison Essar, a joint-venture between Hong Kong's Hutchison Whampoa and Essar Group, an Indian diversified conglomerate with primary interests in steel.

MTE is an also-ran in India's red-hot telecom market, and survives because of its government backing. It doesnt offer the peerless network of its bigger cousin, Bharat Sanchar Nigam Limited [BSNL], or the customer service offered by the private operators. It lacks brands, scale, service and nearly everything else that is important for a top-notch telecom company.

Its revenue is being steadily eroded, thanks to its high dependence on fixed wired-line services. Earnings growth went nowhere in a period which has been unprecedented for Indian telecom companies in particular, and the Indian economy in general. Despite flat revenues and meandering profits, the stock nearly doubled from October 2005 - a classic case of a rising tide lifting all boats - until the recent crash, which has brought it back to those levels. With an ordinary management team and no competitive advantage to speak of, MTE still looks very richly valued, having a P/E ratio of nearly 28.

In an industry that is in consolidation mode, MTNL would make for a good takeover target for the more successful telecoms. Recently, Rajeev Chandrasekhar sold his stake in BPL, a major wireless telecom operator, to Hutch-Essar, and the Hinduja group and Analjit Singh of the Max group, also minority stakeholders in Hutch-Essar, have all cashed in their holdings. The Tata group has sold out to the AV Birla group, their JV partner for the group's GSM telecoms venture Idea Cellular and the fourth largest operator in the country by subscriber base.

Having said that, MTNL's divestment would be possible only if the UPA government at the center can convince its (indispensable) Communist allies. The comrades have fretted enough about the allowance of FDI (foreign direct investment) in retail, and the recent rise in petrol and diesel prices by the central government, and its unlikely they will entertain any such proposal. The government has spoken of merging MTNL with BSNL, but the government being the government, it seems unclear when or whether this will ever take place. Despite India's telecom minister, Dayanidhi Maran, being among the more intelligible and respectable central government ministers, the comrades are ever ready to spring upon the centre about anything that smacks of being bourgeois.

Keeping these conditions in mind, with the recent crash in Indian markets, MTE might offer longer-term value only if it gets acquired by a private operator, like the value being unlocked in VSNL after it was divested to the redoubtable Tata group, or if it is at least merged with BSNL. It is imperative for the company's competitiveness that it enter the fold of a larger parent, or it will lose relevance in the ever-growing market.

Simply put, MTE is too small and niche to be of any significance by itself. Its future is dictated by politics rather than economics. Also, the risk-reward ratio seems unfavourable, and for the time being, it is best to avoid MTE, while there are alternatives to park your money in for the longer-term.