Saturday, February 26, 2011

The bullish case for MTNL has carried an excellent series on the deterioration of BSNL(unapproved capex plans, litigious tenders, no VRS etc). But there is hardly any coverage about the impending demise of another erstwhile PSU gem-MTNL. Considering that external shareholders hold 25%(GOI 56%, LIC 18%), you would expect some good coverage on this stock. But there's hardly any analyst interest in the stock-when there is enough here to fill a Bollywood potboiler.

A bearish case can be built as follows:-
  1. Risk of losing major customers:- With 47% call units coming from 8% access lines, MTNL is  particularly vulnerable to losing market share if other operators aggressively target our largest subscribers. A similar defection is happening in the Mumbai Power sector between RPower and Tata Power. To its credit though, MTNL has identified high usage “commercially important persons” and is making all efforts to strengthen  relationship with these subscribers. But will this be too little too late?
  2. BSNL issue:- As MTNL mildly puts it(Page 8 of 20-F), We have significant amounts due from related parties and our inability to collect them or change the terms of our arrangements with our elated parties could adversely affect our revenues and profitability. As I blogged earlier, the dispute with BSNL exceeds its total Mcap. And this is only the surface
  3. Pension issue:- The DOT had agreed that pensionary benefits to the Government employees absorbed in MTNL and who have opted for either the Government Scheme of pension or for prorated pension scheme shall be paid by the Government. But this amount is simmering(and not accounted for)
  4. Weak controls(all pervasive):- Controls are weak in major areas like reconciliation of subscriber deposits, accounting for related party transactions and information technology controls.
The stock is beaten down to such low levels that a favourable resolution of any/all of the below issues can send the share price zooming for a while. The pension issue itself is worth Rs 1900 crores and can materially boost performance of the stock-irrespective of operational aspects. A careful tracking of the ligation progress could yield rich dividends

MTNL pending litigation Note 23 F-46 20F 2009-10 filed Oct-10 with SEC

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