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MTNL - Reinventing itself

February 15, 2007

For Delhi and Mumbai, telephony for ong was synonymous with Mahanagar Telephone Nigam Limited (MTNL). Long queues for a fixed line connection in the two metros, even as late as the mid-1990s, remain vivid memories.

The state-run company was set up in 1986 primarily to upgrade the quality of telecom services, expand the network, introduce new services and raise telecom revenues from India's two main metros, Delhi and Mumbai. It was from its inception an incumbent, enjoying considerable advantages and no competition to speak of.

Liberalisation and the advent of mobile telephony changed all that. It not only altered the country's telecom landscape but also upset MTNL's applecart. By the late 1990s, the monopoly was facing stiff competition from the new private entrants.

Aggressive and more nimble-footed players like Bharti, Hutchison, Tata and Reliance were making rapid inroads into its turf. Even state-run Bharat Sanchar Nigam Limited (BSNL), operational in all the circles except Delhi and Mumbai, was getting more aggressive. They were snapping up subscribers, eating into MTNL's market share, and competing on tariffs and innovative services. By early 2000, MTNL was truly on shaky ground, its market share, bottomline and confidence badly bruised. During the period 2001 to 2006, MTNL's revenues and net profits declined at a compounded rate of 2 per cent and 18 per cent respectively.

In combat mode

It was time to make strategic changes.MTNL had an edge in many areas, and decided to make the most of it. "It was in the telecom space much before anyone else came there. It had built up a substantial subscriber base and a reputation as a value-for-money service provider, especially in basic telephony," notes telecom analyst Mahesh Uppal.

"Being an incumbent also gave MTNL years of experience, an extensive network infrastructure and sound technical personnel," says Rajesh Chharia, president, Internet Service Providers Association of India (ISPAI).

MTNL decided to build on its strengths. It started by sprucing up its operations and adding new revenue streams such as internet and later broadband, improving service quality, introducing more value-added services at competitive rates, and pushing up its mobile services.

The measures showed some results.Says R.S.P. Sinha, CMD, MTNL: "Though a late entrant in the mobile segment, we now have more than 2.4 million customers (as of December 2006) in Delhi and Mumbai, which is the most saturated and matured market for GSM services. This would roughly translate into 16-17 per cent market share."

But in the overall mobile segment, MTNL is still a small player compared to other GSM players. In terms of subscriber base, it follows Hutchison Essar, which had 4.53 million subscribers as of December 2006 (2.15 million in Delhi and 2.38 million in Mumbai) and Bharti Airtel, which had 4.52 million subscribers (2.7 million in Delhi and 1.74 million in Mumbai).

Nevertheless, points out Rajat Sharma, programme manager with Frost & Sullivan: "Since MTNL's focus has primarily been on the corporate segment, revenue-wise, the company fared well with approximately 60-70 per cent of its revenues coming from business customers."

In the fixed line segment, where MTNL accounts for around 9 per cent of the all-India subscriber base, the business has not been growing that well. Though still the market leader in the two metros, MTNL saw subscribers surrendering their connections. MTNL was the only service provider to clock a negative growth rate during 2005-06. Its fixed line subscriber base declined from 4.06 million to 3.87 million during this period.

To stem the subscriber slide and make the segment more attractive, MTNL decided to bundle fixed line services with internet and broadband services. That initiative has paid off, according to Sinha."Whatever we lost on account of fixed line churn, we have recovered from our wireless and broadband business."

MTNL, which launched broadband services in January 2005, has 152,000 subscribers in Delhi and 183,000 in Mumbai.Broadband is its current thrust area. Tariffs have been kept deliberately low, which has helped to pull in new subscribers.

In the last two years, the company has also taken several initiatives to improve its market performance. It has been investing heavily in infrastructure and network enhancement. The upgradation of its CDMA and GSM networks in Mumbai is expected to be completed shortly. This will enable it to offer an additional 150,000 GSM and 250,000 CDMA lines in the metros. The upgradation of its CDMA-based mobile and fixed wireless services, offered under the Garuda brand name, to 1X standards has also been undertaken.

MTNL has soft-launched upgraded CDMA-based mobile services in both the prepaid and post-paid segments. It is also improving its value-added services (VAS) portfolio and aims to double its revenue from these services to 15 per cent of total revenue in 2006-07.

Currently, MTNL provides VAS options such as SMS, interactive voice response system, general packet radio services (GPRS) and caller ringback tones.The PSU has also recently launched "Maps and Directions", claimed to be the first map-based location service on its GPRS network.

The company's latest offering is internet protocol TV (IPTV) services in the two metros, which, according to Sinha, "will pick up in a big way in times to come".

All this has put MTNL on steadier ground financially. The company has reported a twofold increase in net profit to Rs 2.24 billion for the quarter ended December 31, 2006 from Rs 1.17 billion in the same quarter of the previous year.

"The increase in traffic between Delhi and Mumbai due to the reduction in STD rates; the reduction in churn among fixed line subscribers; huge addition in mobile subscriber base; and decrease in salary outgo have contributed to the company's performance. Whatever steps we have taken over the past two years are now bearing results," notes Sinha. Over 5,000 employees have taken voluntary retirement, which has reduced expenses for the company.

The outside view

While these are good tidings for the company, the big question is, can MTNL compete effectively in one of the world's fastest growing telecom markets?

No doubt, MTNL is a strong company and has many advantages. "As a first mover in this space, it has been able to put up a robust backhaul of copper network in the two circles," says Sharma. "Therefore, from a fixed line perspective, MTNL has excellent coverage in both copper and fibre optic. This allows the company to expand into a lot of SMEs, SoHos and large enterprises. Its cellular service is reasonable enough and it has quite a number of customers. Its strength, therefore, lies in the fact that it is a long-standing player; the brand recall is thus extremely high."

Being a sister concern of BSNL also helps. "It is able to leverage BSNL's network strength and offer some excellent incentives to customers, riding on the strong relationship with BSNL," says Sharma. "Also, having an initial bit of money, it has been able to offer a good pricing strategy to its clients."

In other words, MTNL has its own niche and now, having expanded its product portfolio with offerings like IPTV and wireless broadband (Wi-Fi, Wi-Max) in certain pockets of Delhi and Mumbai, the company can count on a steady revenue stream.

MTNL, however, needs to increase its focus on GSM. "This is one area where MTNL can be left behind," cautions Sharma. "No one really buys Garuda. MTNL can be left behind in the race, though I don't see that happening soon. It can always join hands with BSNL and pass on the benefit to customers. At the moment, MTNL's customer base is small, but there will always be a customer category that is attracted to MTNL's type of service."

The biggest stumbling block for the company is that its operations are limited to only two circles. Even though these two markets account for 15.96 per cent of the country's total mobile subscriber base and the average revenue per user in Delhi (Rs 499) and Mumbai (Rs 428) is higher than the national average of Rs 370, MTNL can at best be a strong regional player while its rivals achieve a nationwide presence.

"The earnings prospect and profit outlook of the company will be a concern, primarily because the teledensity in the existing circles is high, resulting in a very low subscriber growth rate. With frequent tariff cuts and low subscriber growth rate, the earnings prospect of MTNL does not present a favourable picture," observes Romal Shetty, director, Telecom Risk Advisory Services, KPMG, India.

Currently, the company is operating at a net profit margin of 9 per cent with a return on capital of about 5 per cent. This makes it imperative for the company to increase its subscriber base and improve operating efficiency.

The company is currently in a unique operating environment where it has a huge infrastructure presence but stagnating growth and returns. In 2005, MTNL did seek to increase its presence to other circles but was refused by the Department of Telecommunications.

Global opportunities could be an option. "MTNL ought to explore overseas opportunities and new avenues for providing services," observes Shetty. "It will need to identify more foreign markets for investment of funds for the purpose of enhancing its earning prospects and becoming a global player."

The company can also look at partnering with other operators both in India and globally for providing better solutions to customers and increasing market presence.

The other hurdle that MTNL faces is its "sarkari" image and the perception that it is not changing fast enough compared to its rivals. It carries tremendous PSU baggage, such as high manpower and a complacent attitude. "It is still controlled by the government, and the staff is not open to compromise or suggestions," comments Chharia.

Uppal agrees: "MTNL's weak point is the perception of the quality of its customer care. It is riddled with bureaucratic processes. And it is still prone to political pressures because of its proximity to the government. It needs assistance from the government to become more autonomous and its management needs to be allowed to get on with its job."

As such, analysts agree that the top management of the company is extremely competent and qualified, but it is the general attitude that holds it back. For instance, as Chharia says: "Even sharing of idle infrastructure with other service providers is not acceptable on the ground that the company may have use for it in the future. What it does not realise is that in the future, this infrastructure may not yield the desired benefits as technology changes or it may become unusable or offer very low profitability."

Sinha disagrees completely. "It is unfair to expect state-run telecom companies to allow private operators to use their network connections. We have built the infrastructure, so why should anyone else use it? Will they pay the salaries of our employees?" he retorts.

The huge task force is certainly a roadblock. Unlike in the case of private players, this holds back the company from responding to market forces quickly.Shetty's suggestion is that "the government could divest its stake, giving more autonomy to the company and thereby allowing more dynamic management".

There are others who subscribe to this line of thinking. For instance, economist Omkar Goswami observed at a CII meet: "While the government is struggling to achieve its disinvestment target, it can raise a whopping Rs 350 billion if it sells off MTNL." The company is hugely undervalued, despite the current rally in its shares, and has generally underperformed the Sensex in spite of the fact that its financial performance is better than that of most top private sector companies." The main reason for this, he believes, is the government's holding over 56 per cent in the company.

Meanwhile, the proposed merger of BSNL and MTNL is still hanging fire. "It is for the owners to decide and as you know, the Government of India is the owner of MTNL and BSNL. So, as a part of the management, we don't have any opinion or say in this," says Sinha.

Future prospects

Despite the pitfalls, there is no denying that the company is battling hard to preserve its status and market share. It has initiated steps that will stand it in good stead in the future.

"MTNL's biggest asset is its subscriber base, which can be effectively used as a platform to launch other services and thereby contribute to a faster growth rate," states Uppal.

Recently, while rivals were still contemplating the commercial launch of IPTV services, MTNL went ahead and offered the service in the two metros. It has tied up with Aksh Optic Fibre for this.MTNL subscribers will thus have access to interactive, high quality digital TV that can be time-shifted.

"We are just waiting for critical mass to be achieved. Once this is established, I know that we will be sweeping the market through word of mouth like we did in broadband," claims an optimistic Sinha.

MTNL, in all likelihood, will also be the first player to offer 3G mobile services.It has already placed an order with Motorola for supplying the necessary equipment and is set to begin commercial services within a month of receiving spectrum allocation.

Though it is yet to offer national long distance (NLD) services (it continues to use VSNL's long distance network), it has an NLD licence and is looking at getting more aggressive in this segment. Recently, it started a price war by slashing calling rates between Delhi and Mumbai to Rs 1.20 for three minutes, or local call charges.

The company has also undertaken an estimated Rs 12 billion project to provide international bandwidth. In conjunction with BSNL, Millennium Telecom (a subsidiary of MTNL) will build a submarine cable system from India to Singapore and Malaysia and another to West Asia, which can be extended to the US and Europe.

In 2006, MTNL started exploring opportunities to launch operations overseas. It bid for licences to start telephony services in Bhutan and Kenya but failed to clinch these. Meanwhile, the first phase of services to be offered by a joint venture between MTNL and Nepal has become operational. In Mauritius, where the company has been awarded a licence for fixed, GSM and international long distance services, a quick rollout is being planned.

All in all, the company is exploring every opportunity to reinvent itself.Through latest technologies (broadband and IPTV services), competitive tariffs, harnessing new talent, and introducing innovative value-added services. Private sector competition notwithstanding, MTNL certainly is not a write-off.
Shampa Bahadur


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