The exemption will be applicable only for the new projects (of which it has a substantial amount). In any case, the company's claim of sharing the amount of tax saved under the exemption is hollow; since the question arises of whether or not it will provide for deferred tax, which will limit the ability to payout incremental profits. The tax exemption is undoubtedly being sought with a view to pushing up valuations ahead of the GDR issue; which have been subsequently slotted for early 2000.

Expectations of strategic investors playing a significant role in the future of the company has played a major part in determining its valuations. The stock currently trades at a historic multiple of just nine times. Analysts have long held that MTNL's valuations are out of sync with reality and also with the kind of valuations that service providers receive worldwide. ``In the light of what the domestic market thinks of the MTNL stock price, the fact that foreign investors are willing to pay a hefty premium is the correct thing, and should trigger a revaluation,'' said one sector analyst. Any progress on the strategic sale of the Government's stake will also determine how the stock performs locally.

To a very large extent, the domestic market has had a negative opinion of MTNL. First and foremost is the fact that the company today cannot be classified as a monopoly from which it once derived a lot of its investment attractiveness. Today, MTNL has competition in Mumbai from Hughes Telecom, which threatens to rapidly eat into its market share, besides taking away its corporate customers. Second, the cellular venture from MTNL has also run into trouble with regulators. Thirdly, there has been the issue of its growth rates which have been perceived to be poor. For the last few years, MTNL has been able to report a compounded annual growth rate (CAGR) of just 20 per cent, which belies its pricing power. MTNL has reported a 4 per cent fall in profits in the first half this year. And lastly, there is the huge on-going capital expansion totalling over Rs 2,000 crore. Doubts persist over MTNL's ability to earn a decent return on the incremental capex; though the tax exemption could change that for the durationof the exemption.

Analysts say that the growth rates could fall even from these levels due to a couple of factors. Firstly, is the emergence or pre-existence of competition in every sphere of MTNL's existing or proposed activities. And secondly, realisations from telecom traffic is expected to come down in the near future (it has already begun to do so in domestic long distance telephony) but the pick up in volumes may not compensate for the fall in revenues immediately.

The prevailing uncertainty over the disinvestment of the Government's stake is one of the reasons for the depressed valuations. This is also true for all PSUs. There is an element of over-supply of MTNL stock coming from the Unit Trust of India (UTI). The UTI is one of the biggest holders of MTNL equity as a result of the last disinvestment effort by the Government. And, according to analysts, it still holds 10 per cent of the outstanding equity, thus threatening any long-term rally in the stock. This represents the darker side of the Government's disinvestment strategy within the PSU world.

Analysts say that the idea of a strategic partner for MTNL is thus appealing both from the shareholders as well as the company's point of view. The shareholders will benefit from an immediate improvement in valuations, which will then be benchmarked against the strategic sale price (in this case over a 50 per cent premium to the current market price). The company, in turn, will benefit over a longer period from the association with its strategic partner, in terms of know-how etc.