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Morgan Stanley re-rates MTNL as outperformer

NetScribes/Rajiv Banerjee & Sunil Joshi

International research firm Morgan Stanley Dean Witter has revised its 'neutral' rating on public sector telecom major Mahanagar Telephone Nigam Ltd to 'outperformer', setting a 12-month price target of Rs 167 on the scrip.

MSDW's optimism on the scrip is based on MTNL's positive cash flow, last-mile connectivity and low valuations.

On the Bombay Stock Exchange, the scrip was trading at Rs 146.75 on Monday afternoon, up 4.85 per cent from its previous close. A total of 500,000 shares were traded at the counter.

The MSDW report says that MTNL had underperformed the market by 37 per cent in the past year. "Delays in its cellular launch and two tariff cuts of 16 per cent each in the past 18 months and the opening up of basic services were the reasons for the stock's weakness. However, we believe the negative news has been factored into the price and the stock has been oversold," it says.

The negatives factored in, the current valuation makes the scrip an attractive buy, says the report. At its current market price, the stock is trading at an estimated EPS of Rs 23.01 and a PE multiple of 6.1.

A strong Q4 performance and modest success in the cellular business are seen as short-term triggers for the MTNL stock.

"Investors didn't expect MTNL to succeed in the cellular market. Therefore, if it were to achieve even a modest success in this market, it would boost sentiment towards the stock," says Sanjeev Kapoor, an analyst at First Global.

With the government allowing basic service operators to offer WLL with limited mobility in the local call area, the attractiveness of the basic services licences has increased considerably, says the MSDW report.

Analysts also point out that there has been no significant impact on MTNL's revenues despite intense competition in Bombay from Hughes Tele.com, which is focusing on the lucrative corporate sector and has an average revenue per user almost three times that of MTNL. Most subscribers still maintain their earlier MTNL lines as a back-up even as they go in for new telephone connections from Hughes.

MTNL's biggest advantage is the last-mile access it enjoys in Mumbai and Delhi. The company has about 2.4 million connections in Bombay and 2 million in Delhi. The two cities boast of the highest fixed-line and cellular penetration levels in the country. These metros also have the highest Internet connectivity in the country.

Analysts say that MTNL's monopoly in these cities implies high revenue generation from cellular and Internet interconnectivity.

However, they warn, a slew of players lining up to provide basic services in Delhi and Bombay could cost MTNL a part of its market share.

The positive, they add, is that the loss is still a year away, until when MTNL will continue to benefit.

The Morgan report sees MTNL's free cash flow as a major driver for the stock. It estimates that MTNL's free cash flow will grow more than 22 per cent a year for the next three years. MTNL's Rs 18 billion cash in hand for FY2000 is expected to touch Rs 25 billion in FY2001.

"The historical correlation between free cash flow and stock price performance indicates those companies that can demonstrate their ability to boost cash flow will outperform," the report says.

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