`Get Rs 35,000 cr from MTNL'

`Get Rs 35,000 cr from MTNL'
Sunil Jain

New Delhi, Feb 15: While the government is struggling with achieving its disinvestment target, CII economist Omkar Goswami argues that the government can raise a whopping Rs 35,000 crore if it sells off just the telecom giant MTNL. MTNL, Goswami argues, is vastly undervalued, despite the current rally in its shares, and has generally underperformed the sensex. This, despite the fact that MTNL's financial performance is better than that of most top private sector corporates. The reason for the poor share performance is due to the fact that the government controls MTNL once this goes, the share price will shoot up.

For the year ended March 1999, for instance, MTNL earned a gross margin of over 50 per cent of operating income and post tax profits which exceeded 25 per cent of operating income. It had a return on net worth of 22 per cent, and a return on capital employed of a whopping 24 per cent.

Goswami recommends that the government reduce its stake to just around 10 per cent, sell 26 per cent to astrategic buyer through a global bid, and sell the remaining 20 per cent through an ADR and to the Indian public. Once the government stake is reduced to below 25 per cent, MTNL's share price is expected to surge in line with its profitability, and the way that other top-notch telecom firms are valued globally. Goswami expects a price of around Rs 600 per share immediately on this announcement, and later in the ADR market, the price will be around $30.

Based on a price of $30, selling 26 per cent of MTNL's shares to a strategic investor, and another 10 per cent in the ADR market will fetch around Rs 29,500 crore. Another 10 per cent in the domestic market at a price of Rs 1,000 will fetch another Rs 6,500 crore or so.

According to Goswami, the argument that this will hurt customers is vastly exaggerated. For one, MTNL operates only in Mumbai and Delhi, then the fact that technology is changing so fast in telecom, is making its monopoly status quite shaky. More important, since telecom rates are fixed bythe regulator, there is no fear that the firm which buys MTNL will enjoy monopoly power.

The same argument can be extended to several other profitable PSUs, argues Goswami. Nalco, for instance, has gross margins of around 50 per cent of sales and has a return on capital employed of around 24 per cent. Again, disinvestment of NALCO would yield a huge sum, especially considering that the government owns 87 per cent of the PSU's equity. Moreover, as per the government's own definition, none of these PSUs fall in the `strategic' category. Essentially, since the government is committed to getting out of these PSUs, why not sell them when they're very profitable.