Tariff cut eats into profits of public sector telecom companies

MTNL’s poor performance in the first and second quarters of the fiscal can be directly traced to reduced domestic long distance (DLD) tariffs. The Telecom Regulatory Authority of India reduced DLD charges by 45 per cent starting May this year. Leased line charges were also dropped by as much as 80 per cent.

With long distance charges constituting nearly80 per cent of MTNL’s total income, net profit in Q2 slipped to Rs 323 crore as compared to Rs 375 crore in the corresponding quarter of the previous fiscal – a drop of 13.8 per cent. Net sales were down from Rs 1323 crore to Rs 1220 crore.

In first quarter, however, it managed to post a 8.39 per cent increase in net profit because of a whopping 244.55 per cent rise in other income from Rs 67.36 crore from Rs 19.55 crore over the same period last year.

Disinvestment in MTNL has also put off in the GDR and domestic market because its scrip has dropped from a high of Rs 286 to Rs 175 over a 52-week period on the BSE. Following in MTNL’s footsteps, VSNL also posted lower profits for the first time recording a net of Rs 346.6 crore in second quarter as opposed to Rs 424.7 crore in the comparable quarter of the previous year. Income from operations was down to Rs 1663.2 crore from Rs 1681.2 crore the previous year.

However, it must be pointed out that it posted a higher income last fiscal chiefly becauseof other income was better at Rs 220.5 crore as compared to Rs 122.3 in second quarter this fiscal. VSNL was hit by a 10 per cent fall in accounting rate and revenue was down despite a 19.53 per cent growth in traffic. The scrip is currently at Rs 1686 as compared to the 52-week high of Rs 1842.

"Other income was the main reason why profits were down. It is too early to predict how the third quarter will be. If (ISD) rates come down, volumes should also go up. But when it will happen and what quantitative impact it will have, no one can say exactly," says S K Gupta, chairman and managing director of VSNL.

But clearly, lower net sales are a warning for VSNL that it cannot continue to depend on telephone revenues for boosting its performance. The scenario is not going to be much different in the third quarter unless value-added services (VAS) revenue shoots up significantly. As per the results for the quarter ended September 99, VAS revenue as a percentage of net telephone revenues were only 25.66 per cent.Although, this is better than the 24.89 per cent recorded in comparable quarter of 1998, VSNL needs to be much more aggressive especially in view of competition in the internet sector.

Currently the company enjoys dominant status with nearly 3 lakh internet subscribers but this might change as more private ISPs backed by the right mix of money and expertise enter the market. For instance, Satyam Infoway has already made inroads into a number of cities where VSNL is yet to establish a base.

In MTNL’s case, it is very likely that net sales will continue to show negative growth in the following two quarters of the fiscal. While chairman and managing director S Rajagopalan’s pro-active approach into new sectors has been appreciated, the results are yet to come in.

"Demand for leased lines have gone up significantly. We expect this to gradually become a dominant part of our revenues. Income from new services like internet, ISDN, pre-paid cards will also increase. Right now, they are still new and may notmake much of difference," says K J Chacko, general manager (marketing) at MTNL, Mumbai.

MTNL has also filed a petition in the Delhi High Court that it stands to lose Rs 20 crore if the calling party pays (CPP) regime is implemented. Under this all calls from fixed line telephones to cell phones will be charged a minimum of Rs 2.40 per minute. The case is coming up for hearing tomorrow. The public-sector undertaking has adopted the right approach by dropping internet charges which encourages higher internet usage and in turn contributes to telephone usage. It has also reduced deposit on new telephone connections for internet use.

Strangely, it not marketing it telephone service as aggressively. The only way it can augment its revenues in the near future is by marketing a second telephone connection to each household with an internet connection. It is uniquely positioned to do this because it is currently the only company which offers both telephone and internet services.