Pak Datacom Limited

Pak Datacom Limited (PSX:PAKD) was incorporated in Pakistan as a private limited company in 1992 and was converted into a public limited company in 1994. The principal activity of the company is the setting up, operating and maintaining a network of data communication and serving needs of the customers.

Pattern of Shareholding

As of June 30, 2023, PAKD has a total of 11.59 million shares outstanding which are held by 2161 diverse shareholders. Around 75 percent of PAKD’s shares are held by its associated companies, undertakings and related parties followed by local general public holding 12.73 percent of the company’s shares. Banks, DFIs and NBFIs have a stake of 7.2 percent in the company while foreign companies account for 2.45 percent of the outstanding shares of PAKD. Around 1.83 percent of the company’s shares are owned by Modarabas & Mutual Funds while the remaining ownership is distributed among other categories of shareholders.

Historical Performance (2018-22)

Except for a dip in 2020, PAKD’s topline and bottomline has been ascending since 2018. Its margins have been fluctuating since 2018 (see the graph of profitability ratios). Gross margin touched its optimum value in 2019 while operating margin and net margin peaked out in 2022 and 2023 respectively. Owing to the other income and finance income made by the company, its operating margin and net margin often exceeded its gross margin over the years. The detailed performance review of each of the years under consideration is given below.

In 2019, PAKD’s topline grew by 19 percent year-on-year which mainly came on the back of growth in the revenue from communication value added services (CVAS). Conversely, telecom infrastructure services registered a plunge during the year. Overall, the year was difficult for the telecom industry owing to sharp depreciation of Pak Rupee, high inflation and hike in energy prices. However, PAKD’s efforts to rationalize its media cost, terrestrial cost, network and other operational cost resulted in 56 percent improvement in its gross profit in 2019 which translated into a GP margin of 24.6 percent versus 18.7 percent in 2018. Operating expense posted a marginal 1 percent growth in 2019 which was mainly on account of advertisement and marketing expense incurred during the year. Operating income magnified by 87 percent year-on-year in 2019 with OP margin picking up to 7.4 percent from 4.7 percent in 2018. PAKD made a finance income of Rs.88.70 million in 2019 as against the finance cost of Rs.1.93 million in 2018. This resulted in 6.5 times bigger net profit in 2019 Net profit stood at Rs. 143.02 million in 2019 with NP margin clocking in at 15.10 percent versus 2.38 percent in 2018. EPS also climbed up from Rs.1.94 in 2018 to Rs.14.59 in 2019.

With a 19 percent year-on-year shrinkage in its topline, 2020 appears to be a tricky year for PAKD. The decline in turnover was the result of COVID-19 and the country-wide lockdowns which curtailed the special business projects and telecom infrastructure services of the company during the year. This offset the growth seen in CVAS. High inflation and Pak Rupee depreciation continued to take its toll on the financial performance of the company, resulting in 37 percent smaller gross profit recorded in 2020 with GP margin sliding down to 18.95 percent. Operating expense surged by 17 percent year-on-year in 2020 mainly on account of higher payroll expense although the HR tally increased from 220 in 2019 to 223 in 2020. PAKD kept a check on its advertisement and promotional activities during the year to achieve operational efficiency yet couldn’t help operating profit from registering a 41 percent year-on-year decline in 2020. OP margin also fell to 5.4 percent in 2020. PAKD’s finance income also squeezed to Rs.5.65 million in 2020, down 94 percent year-on-year due to lower exchange gain as company’s foreign business was greatly affected by COVID-19 related restrictions on the movement of people and goods. Finance lease charges also trimmed down the finance income in 2020. As a consequence, net profit measured down by 95 percent year-on-year in 2020 to clock in at Rs.7.41 million with an EPS of Rs.0.69 and NP margin of 0.96 percent.

2021 was the recovery year for PAKD with 16 percent year-on-year rebound in its net sales. The topline growth was primarily the effect of specialized projects executed by the company in 2021. Improved turnover due to completion of projects which were halted during the lockdown period coupled with widespread cost cutting measures and strengthened local currency culminated into a 25 percent year-on-year rise in gross profit in 2021 with GP margin ascending to 20.28 percent. Operating expense grew by 7 percent year-on-year due to hike in payroll expense and advertisement expense in 2021. Superior other income on account of excessive plan assets of gratuity fund realized back also propelled the operating performance. Operating profit picked up by 87 percent year-on-year in 2021 with OP margin rising to 8.7 percent. PAKD incurred finance cost of Rs.9.7 million in 2021 as against finance income during the past two years. This was the consequence of exchange loss incurred during the year. The bottomline posted 107 percent increase to clock in at Rs.15.37 million with an EPS of Rs.1.3 and NP margin of 1.71 percent in 2021.

PAKD continued its growth trajectory with even stronger topline growth of 38 percent year-on-year in 2022. All the revenue streams of the company i.e. CVAS, specialized projects and telecom infrastructure services showed staggering performance during the year. Steep depreciation of Pak Rupee, unprecedented level of inflation and elevated energy prices pushed the cost of sales up by 52 percent year-on-year in 2022. This squeezed the gross profit by 18 percent year-on-year, translating into a thinner GP margin of 11.98 percent. Operating expense spiked by 7 percent year-on-year in 2022. While payroll expense was in check during the year, higher repair and maintenance charges, travelling and conveyance charges and depreciation on right of use assets were the drivers for higher operating expense in 2022. Other income registered a robust 286 percent rebound in 2022 on account of liabilities written back during the year. This drove the operating profit up by 142 percent year-on-year in 2022 with OP margin climbing up to 15.2 percent. Splendid exchange gain on international business on account of Pak Rupee depreciation resulted in a finance income of Rs.66.2 million in 2022. Net profit multiplied by over 14 times in 2022 to clock in at Rs.231.30 million with an EPS of Rs.19.5 and NP margin of 18.66 percent.

Recent Performance (2023)

PAKD’s topline growth was recorded at 10 percent year-on-year in 2023 which came on the back of superior revenue from CVAS. Improved revenue mix, upward revision in the prices of services and cost cutting measures adopted by the company buttressed the gross profit which improved by 95 percent year-on-year in 2023. GP margin also posted a remarkable improvement to reach 21.19 percent in 2023. Operating expense surged by 32 percent year-on-year in 2023 on account of higher payroll expense (despite reduction in the number of employees from 227 in 2022 to 193 in 2023), higher advertisement and marketing expense as well as higher vehicle running and travelling expense. Other income slid by 36 percent year-on-year in 2023 due to high-base effect produced by liabilities written back in 2022. Higher operating expense and lower other income took its toll on the operating performance of PAKD. Operating profit slipped by 17 percent year-on-year in 2023 with OP margin inching down to 11.5 percent. Tremendous finance income of Rs.242.39 million earned during 2023 due to massive exchange gain proved to be the game changer for PAKD’s financial performance and culminated into 25 percent higher net profit registered in 2023. PAKD’s net profit stood at Rs.289.86 million with an EPS of Rs.24.44 and NP margin of 21.27 percent in 2023.

Future Outlook

Spiraling inflation, steep depreciation of Pak Rupee, high discount rate and elevated energy charges are some of the off-putting factors of the local economy which are shattering the investor and business confidence. Low business activity directly affects the telecom industry whose success depends on the infrastructure development and enrichment of R&D of businesses. The macroeconomic and political risks are not expected to subside anytime soon and will pose grave challenges to PAKD in 2024. However, enhanced focus towards international business amid Pak Rupee depreciation will be a good omen for the company and translate into striking exchange gain which can offset the devastating impact of depressed local turnover and high cost of doing business.