Telecom: MTNL's Year Of Reckoning

Fine, MTNL's Narendra Sharma articulated his desire to make the company a great Telco. But can he overcome the regulatory, organisational, and competive issues involved.

MTNL's Narendra Sharma: Midwifing change

In his twelfth floor office in, arguably, the swankest high-rise in New Delhi's central business district, Connaught Place, Narendra Sharma, the Chairman and Managing Director of the predominantly government-owned Mahanagar Telephone Nigam Ltd. (MTNL) is rifling through a file of the day's news clippings. The new chairman (he's been in the corner room of MTNL for exactly 90 days now) is probably looking for a clue to the dismal run of the MTNL scrip on the Bombay Stock Exchange. He's also done the usual round of meetings with i-bankers and analysts. Now, Sharma is in the process of launching a broadside of initiatives that could change the way the monolith he runs is perceived. Only the man's style is definitely understated, not the rabble-rousing approach of his predecessor in the hot seat, S. Rajagopalan.

Thus, when MTNL finally formed the 100 per cent subsidiary it had been talking of for some time, Millennium Telecom, on November 22 this year, it did so quietly. In one way, MTNL's hand was forced by the Telecom Regulatory Authority of India (TRAI) which ruled in 1998 that the company would have to maintain separate accounts for its telecom businesses, and its value-added businesses like internet services, call centers, and the like, a ruling that effectively ruled out things like cross-subsidies and price-bundling. Still, Millennium Telecom, which will, apart from the value-added services mentioned in the previous sentence also dabble in broadband, data warehousing, and web-hosting, could well be the vehicle that midwifes the transformation of a monolith into a new economy butterfly.

That doesn't mean the TELCO will play second fiddle to its just-born subsidiary. As Sharma puts it: ''In the next 18 months, MTNL will become a full fledged telecom service provider in India and across the borders (Sic)''. Strand one of this ambitious statement is the company's cellular service that will finally be launched by the end of January, 2001. The business, which will be treated as a division and be headed by a chief general manager, will start its life with the dubious distinction of being, perhaps, the only cellular telephony service in the world to be based on two technologies: Groupe System Mobile (GSM) and Code Division Multiple Access (CDMA). The GSM networks in the two cities where MTNL will offer its services, Delhi, and Mumbai are being built by ITI-Lucent, and will be able to accommodate 800,000 subscribers each in the next three years. The CDMA networks are being built by Motorola (Delhi), and Fujitsu (Mumbai). Each will be able to accommodate 25,000 cellular and 20,000 fixed-line connections in the first year. Money isn't really an issue for MTNL: according to its annual report for 1999-2000, its a zero debt company with a net worth of Rs 6,000 crore.

CDMA is a great basic-telephony technology. Says telecom consultant Mahesh Uppal: ''CDMA is based on wireless technology, is faster (lines don't have to be laid), and cheaper (optic fibre cable costs Rs 40,000 a km).'' MTNL's dual-tech cellular networks can't be explained that easily. One reason could be historical: in September 1999, soon after the Delhi High Court upheld MTNL's right to be the third cellular service provider in Delhi and Mumbai the company launched its cellular service, based on CDMA, in Delhi. Today, it has 5,000 subscribers in the city who will automatically move to the Motorola network when that becomes operational in January, 2001. Another reason could be economic: although CDMA doesn't have the versatility of GSM when it comes to value-added services like wireless access protocol, it will be far cheaper (MTNL proposes to continue its present pricing-model of charging nothing for incoming calls). ''CDMA will be for the poorer sections of society,'' says MTNL's CGM, Delhi, S.H. Khan, although it will take some doing to get the poor to take to mobile phones. However, the CDMA network may provide MTNL with an edge in moving towards the third-generation (3g) mobile telephony, which is based on this technology. Besides, CDMA, being more spectrum-efficient, will come in handy as the air waves get more congested.

Sharma is also eyeing the lucrative National Long Distance (NLD) telephony market. MTNL is creating a new division that will handle this business and is searching for a strategic ally in its run up to applying for a licence. Unlike some NLD players like Bharti Enterprises which plan to invest Rs 2,000 crore in building a NLD backbone MTNL proposes to invest between Rs 250-300 crore in leasing its infrastructure. ''Delhi and Mumbai have the maximum NLD users. And these are cities MTNL already has the most subscribers,'' says Prateek Aggarwal, a telecom analyst with SBI Capital. And, with evident global-intent, MTNL is stepping into Nepal to offer basic telephony services and is eyeing Bangladesh, and a few African countries as its next destination.

The World's Cheapest TELCO

MTNL is set to list on the New York Stock Exchange in January, 2001. But as CMD Narendra Sharma rings the bell on the due date to mark the start of trading, as is the tradition, he'll find it difficult to get his mind off the scenario back home, where MTNL is being widely talked of as the cheapest telecom stock in the world. At Rs 183 a share (BSE's closing price on December 11, 2000), it certainly is undervalued, given its strong financials and performance. In contrast, when US-based telecom conglomerate AT&T issued a tracking stock earlier this year-an IPO of 10 per cent equity in its wireless operation-it fetched $10 billion.

While no one is sure about the reason for the under valuation, theories abound. Sharma himself thinks it's because promises have not been kept within the expected time-frame. A Mumbai-based analyst says it's the company's inability to become pro-active. ''For instance, it has enough ISP subscribers in Delhi and Mumbai, but hasn't once talked of giving them DSL.'' According to telecom consultant Mahesh Uppal, there may be a perception that MTNL's markets are already saturated. This perception can however change if MTNL became aggressive in marketing, expanding the user base by pushing second or third phones and through innovative schemes for bulk users.

Besides, the advent of cellular in January next year can change things to a certain extent. Says Prateek Aggarwal of SBI Capital Markets: ''It is sitting on a gold mine of users and can provide cellular service at extremely low rates.''

At the moment, though, not many are buying.

Sharma's global ambitions may be easier to realise than his local ones. It's not as if Millennium Telecom, which has acquired a national ISP licence-MTNL merely had one to operate in Delhi and Mumbai-will run into any problems. But MTNL's desire to bid for the fourth cellular licences could. Cellular Operations of India secretary-general T.V. Ramachandran expresses near outrage at the idea: ''They can't go outside Mumbai and Delhi. Their terms of reference are only for these two cities. It's not a question of third or fourth. DoT and MTNL are treated as equivalent and have the third operator rights. They cannot bid again for the fourth.'' Ramachandran, actually, is merely articulating the very argument MTNL had presented to the Delhi High Court when the COAI had objected to it becoming the third cellular service provider in Delhi and Mumbai on the basis that it couldn't be equated with the dot. Opinion is divided on this. Atul Chopra, the CEO of boutique investment bank Asia Pacific Capital doesn't see a problem in MTNL bidding for fourth licences if it is seen as distinct from BSNL (an entity that owes its provenance to dot): ''We are the ones saying MTNL should be purely commercial. If it is a real enterprise like any telecom company, it should become competitive.''

There's definitely a court battle brewing there. And it's not the only battle which Sharma will have to fight. The most important of these, though, have to do with the company's track record in areas like marketing and services. Khan claims the company's efforts to upgrade its network, allow for electronic payments of bills, and train its steeped-in-babudom employees on the finer points of dealing with customers in a free market should see its service quality improving. And instead of trying to market its services itself, offers Aggarwal of SBI Caps, ''MTNL could outsource its marketing like some credit card companies do. Doing this will require no more than a go-ahead from the board.''

Ironically, neither Sharma, nor anyone in MTNL prefers to speak about the one thing that could help MTNL tackle all regulatory, competitive, and cultural issues: disinvestment. For instance, with the TRAI defining just a tariff-ceiling, MTNL could combat competition by slashing its rates. Its costs, given the economies of scale it enjoys, can allow it do so. But were the company to do this, says Uppal, ''the competition will go crying to the regulator that will wake up''. If MTNL were not a GoI company, it could slash rates with impunity, devise schemes to reward or punish its employees without worrying about GoI norms, and be answerable to no one but its shareholders. Can Sharma accomplish what Rajagopalan could not?