Leading financial analysts, J M Morgan Stanley has downgraded public sector Mahanagar Telephone Nigam Ltd (MTNL) from an ‘overweight’ to ‘equal-weight’ following Communications Minister Pramod Mahajan announcement that MTNL would merge with Bharat Sanchar Nigam Ltd (BSNL). The downgrade, according to the latest report by the company issued on September 2, is a result of perceptions that a proposed merger with BSNL would mean that prospects for disinvestment of the company would take a severe beating. Currently the government holds a 56 per cent stake in the company which provides basic phone services in Delhi and Mumbai and has also launched cellphone services in the two cities since February 2001 and has around one lakh customers in each of the two cities. MTNL also gas 50,000 subscribers in the two cities using its limited mobility wireless in local loop phone (WiLL) — Garuda. Morgan Stanley’s decision to downgrade comes despite a 3 per cent positive trend in MTNL stocks since March 2001, in a market where the Sensex has crashed 14.6 per cent during the same period. MTNL was among the few wireline phone companies in Asia ‘to have given positive absolute returns to its shareholders,’ the report has stated. The report points out that the negatives for the proposed merger include ‘operational issues such as ovestaffing in BSNL’ and its compulsions of operating ‘in non-lucrative areas and having to fulfil social obligations like rural density targets which may not be profitable.’ The reports also states that the proposed merger would also mean no strategic divestment of MTNL, ‘which in our view was a potential upside trigger for stock and would have attracted a handful of serious bidders.’The report also states that the merger could delay gains from the interconnect arrangements with private operators directly without going through BSNL. For example, MTNL had to pay out 55 per cent of its international long distance (ILD) revenue to private sector ILD operators and BSNL not receiving any termination revenue for such calls,’ the report has stated.The only positive for the company if it merges with BSNL would be that it would ‘merge with a giant — the incumbent BSNL which has a network of over 34 million fixed lines, a nation-wide long distance network and a 250,373 route-km-long fibre optic network.What is also in the company’s favour as of now is that ‘MTNL has a strong balance sheet with around 42 per cent of its market capitalisation as cash-in-hand.’
