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Merrill ups MTNL earnings estimates

Merrill Lynch has raised its current-year earnings estimate for Mahanagar Telephone Nigam Ltd, an Indian state-owned telecom giant, and reiterated its 'accumulate/long term buy' rating on its shares. Merrill, however, slightly lowered its forecast for MTNL's earnings for the following year, citing shrinking margins due to the imminent entry of competition in fixed-line services.

In a research report dated January 29, Merrill raised its earnings estimate for the current year to March by 33 per cent to Rs 15.95 billion, based on the company's better-than-expected third-quarter results and recent launch of mobile services.

But Merrill lowered its earnings estimate for the following year by 19.4 per cent to Rs 12.85 billion.

Merrill set a 12-month intermediate price objective of Rs 215 on MTNL, a rise of 9.36 per cent over Tuesday's close of Rs 196.60.

The firm said the target price reflected a 20 per cent discount to its sum-of-parts discounted cash flow value of Rs 269 a share, based on enterprise value of $2,942 million for the fixed-line business and $366 million for the mobile business.

"We believe MTNL can significantly leverage its ownership of the last mile access to over four million homes in the top two metros through a basket of value-added services," the report said.

"A net cash balance sheet provides for flexibility to expand the telecom footprint across India as well," the report added.

It cautioned that "operational encumbrances arising from government control need to be effectively and speedily addressed to realise the long-term growth potential."

The report forecast a four per cent compounded annual growth rate (CAGR) decline in earnings before interest taxes depreciation and amortization (EBITDA) for fiscal years 2001-03, largely due to pressure on fixed-line margins, which would drop by 110 basis points.

Merrill said MTNL's mobile business could break even over five years, and initial aggressive competition in the fixed-line business would stabilise. That could enable EBITDA to sustain a 9.2 per cent CAGR and earnings growth at a more sedate 5.1 per cent, the report said.

Merrill said it would review its forecast in March 2001 depending on market feedback to the mobile launch.

"There could be an upside to our forecasts depending upon superior volume elasticity, higher market share retained in fixed line business and garnered in the mobile market," the report said.

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