Why MTNL Cannot Be Turned Around  

Normally I don’t write on individual companies, so today’s column is a bit of an exception to that. Today I plan to discuss the annual results of the government owned Mahanagar Telephone Nigam Ltd.(MTNL), and why it cannot be turned around.

The cue for this column lies in the fact that for the period of January to March 2016, the company made a profit of Rs 174.58 crore. The results were declared on May 30, 2016. On the same day, the telecom minister, Ravi Shankar Prasad, told The Economic Times, that the telecom department is “also working on to improve state-run Mahanagar Telephone Nigam Ltd. (MTNL)“.

Does that mean MTNL can be turned around? The answer is no. There is a fundamental problem with the way the company is run, and I have my doubts on whether that can be corrected. But before we get into that, let me first try and explain how did the company end up with a profit of Rs 174.58 crore during the last three months of 2015-2016.

There were basically two entries that helped the company come up with a net profit. The other income for the period stood at Rs 580.60 crore. Other income essentially means the money that a company earns from activities other than the normal business operations.

The company earned Rs 458.04 crore from surrendering the spectrum it used for its CDMA operations, back to the government. The company discontinued its CDMA operations from March 1, 2016, onwards. Further, taxes of Rs 492.96 crore for an earlier period have been written back. These two items essentially helped the firm come up with a net profit of Rs 174.58 crore.

The annual loss of the firm for 2015-2016 stood at Rs 2,012.24 crore. This is lower than the losses of Rs 2,901.16 crore in 2014-2015. This has been achieved through the surrendering of the CDMA spectrum and a tax write back. If these two things hadn’t happened, the losses of the company in 2015-2016, would have been similar to the losses in 2014-2015.

Now let’s talk about the fundamental problem that the company faces and why the telecom minister Ravi Shanker Prasad, cannot turnaround the company, despite his best intentions. Allow me to explain.

For the year 2015-2016, the company’s income from operations (which does not include its other income) stood at Rs 3,197.40 crore. Of this, Rs 2,310.76 crore went towards employee benefits. A further, Rs 343.68 crore went towards employee benefits for retirement. Hence, of the Rs 3,197.40 crore operational income of the company, a total of Rs 2,654.44 crore went towards employee benefits.

This basically means that 83 per cent of the company’s income from operations went towards meeting employee cost. This is not an anomaly. In 2014-2015, employee cost formed around 78 per cent of the company’s income from operations. Hence, employee cost as a proportion of income from operations has gone up by a whopping 500 basis points during the course of just one financial year. One basis point is one hundredth of a percentage.

How does this compare with competition? Let’s look at the numbers of Bharti Airtel. In 2015-2016. The income from operations of the company stood at Rs 60,300.2 crore. This is close to 19 times the total income from operations of MTNL.

And how much money did the company spend on employee benefits? Rs 1,869.3 crore. This is nearly 30 per cent lower than the employee benefits expenses of MTNL. So what does this mean? It means that Airtel earned 19 times MTNL’s income from operations by spending 30 per cent lesser on its employees.

Further, Airtel’s employee cost in 2015-2016 was 3.1 per cent of its income from operations. MTNL’s was at 83 per cent. And how did things look for Bharati Airtel in 2014-2015? The employee benefit expenses of Airtel were at 3.05 per cent of its income from operations. For MTNL, the figure was 78 per cent. Hence, the employee benefit costs of Airtel went up by 5 basis points, during the course of one financial year, whereas that of MTNL went up by 500 basis points.

This is what MTNL is competing against. For it to be viable, the employee cost as a proportion of income from operations, will have to come down dramatically. That can only happen in two ways-salaries being slashed or employees being fired. The first option can be ruled out. The second option will have its own share of costs.

Actually, there is a third way as well i.e. if the company manages to increase its income from operations. But given the brand image that the company has among consumers that seems to be difficult. As they used to say in the good old days when MTNL was a monopoly, MTNL equals Mera Telephone Nahi Lagta. The company had a branding problem back then as well, but the consumer did not have choice. Now he does and he has executed it.

Also, MTNL operates in Delhi and Mumbai, the two biggest and the two toughest telephone markets in the country. While it goes about restructuring (assuming that it does), the other companies won’t be sitting idle doing nothing. While excuses can still be made for keeping Bharat Sanchar Nigam Ltd(BSNL) going, there is none to keep MTNL running.

It’s time the government shut down the company and started monetising its assets. MTNL has offices in premier areas of Mumbai and Delhi. In Mumbai, two offices in Prabhadevi (Central Mumbai) and Cumbala Hill (South Mumbai) can be sold at a very good price. The money thus earned could be spent towards improving the physical infrastructure of the country.

It’s time the country stopped subsidising the lives of a few thousand individuals that MTNL employs.

This article was originally published in Vivek Kaul’s Diary – a newsletter that cuts through the noise and presents actionable views on socio-economic developments in India and the world. He is the author of a trilogy on the history of money and the financial crisis. The series is titled Easy Money.