MTNL's Last Breath?

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Good morning. In today's edition, we examine the failed revival attempts of MTNL and the resulting burden on taxpayers. We also delve into the growing secondhand fashion market in India, analyze whether Jubilant Foodworks' performance could turn around sluggish sentiment, and explore the latest retail inflation figures, which have reached a 14-month peak.

THE TAKE

MTNL: Time To Pull The Plug

A few years ago, while moving homes in central Mumbai, I tried to get my state-owned telecom company Mahanagar Telephone Nigam Limited’s (MTNL) landline transferred to the new residence. 

After all, the previous number had been in service for several years, was known to many and had largely worked fine. It took several days of calling and visiting, including by a persistent office boy to establish that MTNL had no cables in the area in question. 

In one call to the telephone exchange, an Assistant Engineer picked up the phone and helpfully asked me if I was okay with a fibre connection for the internet. Sure, I said. And then the engineer was not to be found. In retrospect, I felt he had picked up the phone accidentally.

It finally emerged that there was never any prospect of a new MTNL cable in that area, at least to the apartment complex I was moving into. In frustration and with some sadness, I surrendered the phone line, which by the way is a term that is quite unique to the Indian telephone system.

Unmasking MTNL's Downfall

MTNL’s travails are not new, the company which runs telephone operations in Mumbai and Delhi has been on a death spiral for more than two decades. More than a decade ago, a colleague told me that once he visited a telephone exchange in central Mumbai and was shocked to see that the line to return or surrender the phone was much longer than the one where people were applying for new connections.

That was my first anecdotal but real warning sign. While the explosive growth of mobile phones has obviously edged out the likes of Government-owned MTNL and Bharat Sanchar Nigam Limited (BSNL) over the years, these companies also completely lost out on the fibre opportunity for data-cum-voice. These markets were completely captured by the likes of Reliance, Airtel and Tata.

Reports say MTNL has now failed to repay a Rs 1,000 crore loan from Bank of India which in turn has affected the bank’s second quarter financial results thanks to a Rs 200 crore provision. It is highly unlikely this money will ever materialise unless of course MTNL is liquidated or unless assets are sold to repay loans.

MTNL’s total debt is around Rs 31,944 crore, including Rs 7,873.52 crore owed to various banks and financial institutions, reports suggest. Losses were over Rs 3,300 crore. The current revenue run rate seems to be less than Rs 800 crore and that too on a slowing trot. MTNL is a listed company and quite likely its best asset is prime real estate, already being put to good use by leasing out to other, mostly Government organisations.

Air India’s sale to Tatas, despite it being done at a much-delayed stage when the airline was on life support systems, was a good step and demonstration of the Government’s intent to not be in the business of doing business, particularly consumer-facing ventures like airlines.

The Heavy Price Taxpayers Pay

The last few years have seen some public sector enterprises do well, both in terms of balance sheets and in the stock markets.  Despite those successes, failures like MTNL stand out like sore thumbs. 

A private company that fails to repay Rs 1,000 crore and is in a similar financial condition would have been visited by multiple tax and enforcement agencies by now. It would appear that because it is government-owned, a company like MTNL is getting a pass.

There is no real deadline or sunset date for resolution or closure, for example.

Quite possibly, the government and the Department of Telecom, under whose jurisdiction this falls, have been attempting various methods to resuscitate MTNL. But clearly, those efforts have been in vain. This also raises the issue of who is accountable for rising losses, falling revenue, and the increasing interest burden of unpaid loans. 

Quite likely, no employee or official of the company is under any real pressure, and possibly, they could do little even if there were. This, of course, is the case in any state-owned organization where responsibility is diffused at best, particularly when the stakes are down.  The government has made it amply clear, in actions if not in words, that it wants to be in the business of doing business.

Debating this point might be futile. But the government is accountable for taxpayers' money propping up lifeless enterprises that have no present or future role in our lives. There must be immediate efforts to liquidate the company, dispose of the assets, and return the money to shareholders, which includes the government, too.  And there should be a deadline to do so that is publicly shared.

Taxpayers have a right to hold the government accountable for how our taxes are used in state-owned and run organizations even as they are taking their last and dying breaths.

DECODE THE NEWS

Thrifting Takes Off in India, But The Industry Has Miles to Go

If you ask a certain generation of Indians about wearing second-hand clothes or accessories, no matter how fancy the brand, they would roll their eyes at the idea. Indians have denounced the idea of buying second-hand clothes because of cultural biases. But younger generations are changing that. More young people want to buy better clothes within budget and are also conscious of the impact of fashion on the environment. This is leading them to opt for thrifting. 

In the past few years, India has seen several thrifting businesses emerge, both online and offline in accordance with the rising trend of thrifting. The Indian thrifting industry, largely unorganised and fragmented, is supposed to be worth $3 billion at the moment and is expected to grow to $9 billion by 2032 according to Credence Research data. But while businesses have jumped onto the thrifting bandwagon, does it make business sense?

CO:RELATION

Jubilant Shows The Way

How much money you spend on eating out can say more about the economy than you think. Discretionary spending is a key driver of growth for major consumer products and services companies. There were concerns about the rural economy that has shown signs of recovery. In urban areas, some companies have highlighted moderation in growth. If you look at the quarterly results of WestLife Foodworld, the franchisee of US food giant McDonald’s in the Western and Southern parts of India, you can see a weakness in consumer spending on food. 

The key metric for these companies is the same store sales growth (SSSG). It continues to remain weak for WestLife. However, Jubilant Foodworks, the India franchisee for Domino’s Pizza, another global food company, reported strong growth in SSSG for the September 2024 quarter. Investors were enthused by the performance. Jubilant shares jumped on a day when the Nifty 50 fell 1%. WestLife shares ended flat. There is hope that the good performance of Jubilant could turn around the sluggish sentiment and kickstart a recovery.

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FROM THE PERIPHERY

—📈 India's retail inflation hit 6.21% in October, exceeding the central bank's target, mainly due to rising vegetable, fruit and oil prices. This increase, up from 5.49% in September, topped Bloomberg economists' median forecast of 5.9%, according to data by the Ministry of Statistics and Programme Implementation. The Reserve Bank of India aims for 4% inflation, allowing a 2% margin. Core inflation, which excludes volatile food and fuel, reached a 10-month high of 3.7%. Cereal prices rose 6.94%, while meat, eggs, milk, and pulses saw modest increases, marking a 14-month inflation peak.

—❗As Swiggy's initial public offering (IPO) approaches, market analysts are advising caution. The stock, they say, may only be suitable for investors with a high-risk appetite and a long-term investment horizon. Grey market trends suggest a muted listing, with shares trading at a minimal premium. While the IPO saw decent subscription levels, the current grey market premium (GMP) indicates a lack of investor enthusiasm, potentially due to concerns about the company's financial performance and volatile market conditions. Despite steady revenue growth, Swiggy continues to report losses, which may be dampening investor sentiment.

—🚫 The centre froze thousands of mule bank accounts last year to crack down on cybercrime, The Indian Express, reported. These accounts, opened with fake KYC documents, are concentrated in major banks like the State Bank of India (SBI), Punjab National Bank (PNB), Canara Bank, Kotak Mahindra Bank, and Airtel Payments Bank. Officials from the Indian Cyber Crime Coordination Centre (I4C) recently met with the Prime Minister's Office, highlighting security gaps exploited by fraudsters. The Citizen Financial Cyber Frauds System found around 40,000 mule accounts at SBI alone, with Rs 17,000 crore siphoned off across banks.

—⬇️ Rajeev Misra has formally stepped down from his role as co-chief executive officer of SoftBank Group Corp.'s Vision Fund after a turbulent tenure. Misra, who helped steer the $100 billion Vision Fund through multiple challenges, had earlier launched his investment fund, One Investment Management, a $6.8 billion fund in 2022. Alex Clavel will assume sole leadership as chief executive of the Vision Fund. Misra's departure comes as many Softbank portfolio companies in India are preparing for public listings, including Swiggy, Ola Cabs, Firstcry, OfBusiness, and Unicommerce. Meanwhile, SoftBank Group Corp. reported a strong fiscal second-quarter profit of nearly $7.7 billion, a significant turnaround from the 931 billion yen loss in the same period last year..

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