Mumbai: Even as the share market remain subdued, stock of PSU telecom major Mahanagar Telephone Nigam Ltd (MTNL) has been in the limelight in the last couple of weeks The MTNL stock has been gathering steam over talks that a possible merger between the company and Bharat Sanchar Nigam Ltd (BSNL).

There have been strong rumours in the market about a possible merger between the two state-owned telecom companies. The MTNL stock had bounced back from its recent low of Rs 95 and is now ruling over Rs 130 levels and many broking houses are now setting a target of Rs 180 price for the stock.

The proposal of merger of MTNL-BSNL is not new. It was first mooted about two years ago. However, the circumstances are quite different now. Unlike the previous attempt, which seemed to block privatisation moves, this one seems to be backed by more genuine intentions, according to analysts with SSKI, a leading Mumbai-based broking house.

Revenues from the core fixed-line business of MTNL and BSNL have seen a marked revival since then, and the upside potential in wireless is only partly tapped. A merger will provide MTNL with the cushion of vertical integration even as BSNL gets a chance to extend its success in wireless to Mumbai and Delhi.

Also the government is unlikely to short change minority shareholders in case of an eventual merger. MTNL and BSNL were much more vulnerable then than now. Long-distance rates were still falling, competition was just beginning, and growth prospects of the wireless industry were still somewhat unclear.

All of that has changed now. Long-distance rates have now stabilised, and any further cuts are likely to be of manageable proportions. Wireless subscriber base has boomed over the past two years, from 6.4 million subscribers in March 2002 to over 35 million now.

At least BSNL has been able to participate in the wireless boom, with its subscriber base currently at 5.5million. Also, the introduction of new interconnect (IUC) regime has revived the core fixed-line business (though investors are still in denial).

MTNL''s revenues were up 10.4% in FY2004, while BSNL''s revenue is up 15% in the fiscal, due to its success in the wireless business. As a result, both companies'' profits have also risen.

BSNL has eight times as many fixed lines as MTNL. Its revenues, however, are only four times those of MTNL''s, despite additional sources of revenue, mainly long-distance carriage.

In the wireless market, BSNL has been far more successful. BSNL''s employee cost as a percentage of revenues was 24.8% in FY2003, comparable with 26.5% for MTNL (FY2004). The employee cost is comparable despite BSNL''s superior lines per employee (100 vs. MTNL''s 75) due to its lower revenue per user.

BSNL had Rs 34 billion cash on its books as on March 31, 2003, as against MTNL''s Rs26 billion as on 31 March 2004. BSNL''s debt levels are manageable, as most of its capex has been funded by internal accruals.