Never catch a falling knife, is one of the basic rules of investing. While it is difficult to take a trading call on a company, business calls are comparatively easier.
It is no secret that Mahanagar Telephone Nigam Ltd (MTNL), like Air India, was given a raw deal during the telecom boom. While anyone and everyone could bid for 2G licences across the country, MTNL was asked to restrict itself to Mumbai and Delhi. This was done because BSNL, another public sector company, was present in the other areas. As a result, while every private player benefited from the boom in the telecom sector, MTNL saw its customer base and profitability erode.
MTNL witnessed a drop in sales from Rs 5,500 crore in financial year 2006 to Rs 3,745 crore in 2011. During the same time, net profit of Rs 569.17 crore has now been converted into a Rs 2,796 crore loss.
The company is swimming in red ink.
While it was obvious that increased competition would affect MTNL, Life Insurance Corporation LIC), a key investor, did not seem to bother. During this period the insurance major increased its stake in the company from 11.95 percent in June 2006 to 18.81 percent currently. This was done at the cost of other mutual funds who all sold out recognising the deteriorating market conditions. LIC was left high and dry with its MTNL holding.
A Business Standard report says that the average cost of LIC's holdings in MTNL was Rs 92 per share, which it now wants to offload at the current price of Rs 30.35 per share, taking a loss of Rs 750 crore in the process.
There are reports that a merger with BSNL will revive the fortunes of the company. Though BSNL is not a listed entity, a merger will help both the companies as there are a lot of synergies and cost savings possible.
Further, MTNL has also gone on record saying that it would be now be developing its huge land banks and capitalising on its empty residential and commercial properties to shore up its profitability.
The newspaper report says that MTNL is rich in spectrum and operates in the two most lucrative markets in the country. It has 12.4 MHz of 2G spectrum, which none of the other private players have.
Given this scenario, does it make sense for LIC to quit after eroding two-thirds of its investments, or is it being asked to exit from the stock to accommodate some other players?
Updated Date: Dec 20, 2014 17:10:16 IST