Wednesday, April 21, 2010

MTNL - Value Trap?

A typical value investing principle states that any company, whose market cap is less than its cash on books, is a buy. (It should be preferably debt free.)

Now lets look at MTNL in this light.
CMP Rs.74/-
Market cap Rs.4600 crores
The company is debt-free.
Cash on books as per March 09 balance sheet Rs.4803 crores
Investments on books as per March 09 balance sheet Rs.465 crores.

Even if one does not consider the investments, the cash on books alone is more than market cap. Sounds yummy? Well then how bout this BSE announcement on 22nd March 2010:

Mahanagar Telephone Nigam Ltd. has informed the Exchange that 'In the matter of deduction under section 80IA of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has allowed to MTNL a further proportionate relief for the Assessment Years 1998-99, 1999-2000, 2001-02, 2002-03 and 2005-06. As a result of this order, MTNL would be entitled to an estimated amount of Rs.1380 crores which would include an Interest amount of Rs.624 crore approximately'.

If we add this to the March 09 cash on books, MTNL would be having cash of Rs.6183 crores. Against a market cap of Rs.4600 crores! It doesnt get better than this huh? Blind buy? Sitter? Well not quite.. Lets see some reasons why...

  • Lets look at the quarterly results broadly. The company has been making losses at the PAT level. But if we add back depreciation, the company is making cash profits. Thats good right? Welllll...if we look into it more, 'other income' is a major chunk, which is essentially the income earned on its huge cash reserves. If we reduce other income from the results, it is evident that the core business of the company is burning cash.
  • As a business, MTNL's performance has been really poor, to say the least. During the era when other telecom companies grew by leaps and bounds, MTNL has barely managed to grow. Also, there are issues like a large employee base, inefficiency, limited growth opportunities, etc.
  • The upcoming 3G auctions will take huge chunk out of MTNL's cash reserves. MTNL operates in prime circles, where the bidding for 3G can prove to be expensive. (i have no expertise in this, but estimates suggest that it could take more than Rs.1500 crores out of MTNL's cash reserves.)
So, all in all, there is high probability that MTNL's shareholders will never get any of the cash on books (through dividend or buyback) and in-fact the cash will eventually erode..

MTNL seems to be more of a value-trap, rather than a value-buy..

8 comments:

AMIT said...

MTNL has been the most value destroyer stock ever, even worst than Hyderabad and Ahmedabad based delisted companies....

Neeraj Marathe said...

Agreed Amit..
and its cleverly disguised itself as a value-investing proposition!
:-)

ramki830 said...

Hi Neeraj,

Perfectly agreeing with your assesment on Mental (uh MTNL)... But I would add add this:

MTNL's Main Business (Landline) will face a gradual decline (though wired broadband could sort of be a buffer).

MTNL's biggest curse, huge workforce will be less of a problem in future- since a lot of the workforce is quite aged and they will start slowly retiring in next decade.

Given this, MTNL's current valuation more or less factors its deficiencies IMHO (maybe you can give bit downside for 3G). The one and only wildcard in MTNL is its real estate holdings - I have no much idea, but it is not insignificant and some day, value unlocking should be done by Govt of India that looks for easy ways to fund its treasury.

But that time is still far away, so this counter can be ignored for now...

Neeraj Marathe said...

Hi Ramki,
Always good to hear from you..
Your thoughts on MTNL are extremely valid. There are three 'stories' floating around turn-by-turn ;-)
1) Merger with BSNL..maybe that will make things worse!
2) The unlocking of its significant real estate holdings.
3) VRS to excess staff and streamlining the organisation..

Someday maybe something good will happen..someday! :-)

Cheers!
Neeraj

ZeeNut said...

Excellent article.

Neeraj Marathe said...

Thnx Bosco..
Cheers!
Neeraj

Janak Naik said...

Good analysis & nice way of presenting...

Thanks,
Janak

Neeraj Marathe said...

Thnx Janak..
cheers!
Neeraj