Why employees are biggest threat to MTNL's profitability

Guess what's the biggest drag on MTNL's profitability? Its employees.

The state-run telecom operator has 43,311 employees, and its employee costs have been consistently equivalent to more than 90 percent of sales. Even in the quarter ending September, employee costs stood at Rs 801 crore, while sales totalled Rs 860 crore (see chart below). With those kind of expenses, is it any wonder that it posted losses of Rs 864 crore for those three months.

The pattern has been the same for the past two financial years. In fact, for the 12 months ending March 2010, employee costs stood at Rs 4,967 crore - equivalent to a whopping 134 percent of the company's net sales of Rs 3,710 crore. In the year ending March 2011, that proportion came slightly down but was still high at Rs 3,260 crore compared with revenues of Rs 3,745 crore.

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The company acknowledges the burden of employee costs in its 2011 annual report as it says these costs are "a major risk which the company faces, as it has little flexibility in the matter and may have to continue to carry the cost."

No surprise then that investors are disillusioned. MTNL's market capitalisation has lost 90 percent over the past five years to touch Rs 1,732 crore now; in the past one year alone, the stock has fallen by almost 48 percent. The stock is currently trading around Rs 27.

Its current market capitalisation is only slightly higher than its losses for the six months ending September (Rs 17,14 crore).

Worse, its net worth (equity+surplus) has also eroded by 40 percent to Rs 6,646 crore at the end of March 2011 compared with Rs 11,122.5 crore in 2006.

Losing monopoly behind MTNL's plight

It's a sorry tale of a company that just a few years ago, was practically debt-free and making huge profits.

Primarily, that has a lot to do with the changes to the telecom sector. MTNL used to be a monopoly player in the Delhi and Mumbai telecom markets. But after the entry of private-sector players in the telecom sector, the company lost market share rapidly (being confined only to two cities), even as another government telecom operator, BSNL, was permitted to operate pan-India.

That led to increased pressure on margins as tariffs reduced.

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The company's debt has also soared to Rs 7,459 crore for the year ended March 2011 from just Rs 8.5 crore the previous year. The sharp increase in debt occurred primarily because of its borrowings to pay for spectrum for third-generation (3G) and broadband wireless access (BWA) services.

Making matters worse, MTNL has become a free meal ticket for our MPs, who owe the company Rs 9 crore for extra calls made, according to a recent article in The Economic Times.

The one silver lining

Still, don't dismiss MTNL entirely. The big plus for the company is its real estate: it has almost 574 telephone exchanges at various locations in Mumbai and Delhi.

For now though, its employees will continue to take a big bite of its revenues.