MTNL: How did it lose its way?

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  • Mr Market
  • 15-Oct-2014

MTNL has earned a unique distinction recently by making it to the unenviable list of top 10 loss making Public Sector Units (PSU) released by Department of Public Enterprises. MTNL, a provider of Fixed Telephone services (local/ STD/ ISDN calls, IPTV, Broadband), Mobile Services & other services like VOIP, internet and miscellaneous services in Mumbai & Delhi, has been bleeding the exchequer since FY10. Let's delve deeper into the reasons for its downfall.


MTNL - Declining sales, accelerating losses


Rs. Crore FY09 FY10 FY11 FY12 FY13 FY14
Total Revenue 5,250 5,058 3,992 3,624 3,714 3,787
Profit before Tax and exceptional items 264 (3,418) (2,775) (4,045) (5,302) (3,083)

1. Failure to ride on the telecom boom


The Government's New Telecom Policy (NTP) of 1999, entry of private players, availability of cheap handsets and demographic factors have fuelled the stupendous telecom growth in India. The private players like Bharti Airtel, Vodafone and Idea completely changed the competitive landscape in the sector; launch of new telephony services, brand-building efforts and better customer service led to a shift in consumer preferences. MTNL ceded its market share to private players - its market share in mobile telephony has reduced from 11% in FY09 to 5% in FY14. Over a period of time, private telecom companies have proved to be more nimble-footed than their PSU peers - the revenue growth rates in the below exhibit only underscore this fact.


Telecom Players: Operating Revenue Growth (YoY)


Source: Company filings


2. Overhang of red tape, bureaucracy and political interference


MTNL had functioned without a full-time Chairman for a protracted period of nearly 2 years - from Jan'10 to Dec'11. There have been several such delays in appointments of members of core management team. The interference of politicians and bureaucrats has caused delays in procurement of important equipments, untimely scrapping of tenders leading to unavailability of requisite infrastructure to keep pace with competition. In the last decade, there have been delays in procurement of line data network equipment, COMA equipment to name a few. Red tape, bureaucracy and political interference significantly slow down the decision making which in turn adversely affects the company's functioning.


3. Employees of MTNL - The White Elephants?


Like several other PSUs, MTNL is massively overstaffed - Bharti Airtel with a presence in over 20+ countries has ~25,000 employees as of FY14 while MTNL with a presence only in Mumbai and Delhi has ~36,523 employees as of FY14. The wide gap of 20x in the employee efficiency metric is startling - The average revenue per employee of MTNL as of FY14 is ~Rs. 10 lacs while the corresponding number for Bharti Airtel is ~Rs. 200 lacs.


Overstaffing - A drag on MTNL's profits


  FY10 FY11 FY12 FY13 FY14
No. of Employees 5,058 3,992 3,624 3,714 3,787
Employee cost as % of revenue 98% 81% 102% 132% 69%
Avg revenue per employee (Rs. Lacs) 11.3 9.2 8.7 9.5 10.4

Source: Company filings


Though MTNL has taken steps to trim its workforce from 62,000 in 1999 to 36,500 in 2014 by issuing VRS, the company still remains enormously overburdened with high employee costs. Employee and trade unions only compound the problem.


4. Poor branding and marketing


Marketing and branding are potent tools in highly competitive consumer businesses to create a strong brand recall and draw customers' attention. Innovation and creativity are the cornerstones of private players' marketing campaigns. The iconic "Zoozoo" campaigns of Vodafone and "An Idea can change your life" & "What an Idea Sirji" campaigns of Idea have helped in building their respective brand equity. Across traditional media and digital channels, MTNL has little visibility vis-vis the private telecom players like Airtel, Vodafone and Idea. At any given point of time, MTNL works with 4 advertising agencies and it calls for fresh bids every year leaving little room for the continuity of a coherent marketing strategy. Clearly, MTNL's branding is no match for the marketing blitz of private players.
 


Prospero Tree View


MTNL could look at leveraging its strengths in the broadband and fixed telephony network segments where it has a relatively stronger foothold. Also, MTNL is believed to have huge land banks and buildings in Mumbai & Delhi - monetizing these properties in some way could cushion the losses.


Several loss-making PSUs in Gujarat had turned profitable during Modi's tenure as Gujarat's Chief Minister. Now, with the emergence of a Modi led Govt. at the Centre, the hopes have been raised for the resurgence of PSUs. Also, the Govt. has announced plans to infuse ~Rs. 39,000 crores in both MTNL and BSNL to restore their financial health. Nevertheless, Prospero Tree advises investors to be cautious of investing in PSUs that are hamstrung by red tape, political interference, union problems, inability to innovate and keep pace with competition.


As it stands, it remains to be seen if MTNL can come out of the woods. Hope MTNL doesn't end up the HMT way.



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