For Pakistan Telecom-munication Company Limited (PTCL), FY11 was another year marked by a slowdown in revenues. Struggling to arrest the decline in fixed line telephony and maintain its market leadership, the telecom giant saw its revenues fall by 3.4 percent.
Market dominance in the DSL & wireless broadband segments, renewed focus on corporate services and growth from international revenues are growing signs that the company wants to diversify its services portfolio. PTCLs focus on emerging segments is already paying dividends, as during 11MFY11, it acquired over 178,000 DSL and 183,000 wireless subscribers.
PTCL wants to position itself as a leading integrated telecom service provider; however, the fixed line business would likely be the bread and butter of the company for many years to come.
During FY11, the firm encountered an uncontrollable hike in cost of services that rose by nine percent over FY10, and consumed 75.68 percent of revenue compared to 67.1 percent in FY10. This could be traced back to December 2010 when following the government directives; PTCL had to increase its employees salaries by half of the 50 percent raise demanded.
The companys gross margins shrank to 24.32 percent in FY11. Both the administrative expenses and the selling and marketing expenses showed a nominal growth of 3.58 percent and 6.5 percent respectively over the same period last year.
Like always, PTCLs cash rich balance sheet provided a cushion to its operating performance. Other operating income, which includes dividends from subsidiaries (Ufone) and returns on cash parked with banks, was a whopping Rs7.84 billion in FY11 - a tremendous increase of 52.68 percent over FY10. This certainly lifted the operating margin to 21.03 percent; however, it was still 465 bps below last year.
The company reined in its finance costs in FY11 by almost half of what they were in FY10. While bank charges may not have varied a lot, real impact seems to be the gain or loss on foreign exchange. It must be noted that PTCL incurred foreign exchange losses of Rs25.2 million in FY10, Rs458 million in FY09 and Rs319 million in FY08.
In the end, it is all about earnings, and earnings have declined for PTCL significantly over the period under review. Declining landline business, intense competition and rising cost of services have taken their toll and led to a sharp dip in net margins by 281 bps. Naturally, it was not good enough to excite the investors who have seen PTCLs stock price fall to as low as Rs10.5 last month.
Relative to KSE, PTCLs stock price has shown more volatility in FY11. Stock analysts contend that foreign selling pressure has eased off and the stock is expected to recoup lost ground in the future as it offers an attractive dividend yield of 15.5 percent.
Despite lower margins, certain market quarters believe there would be no major decline in PTCLs consolidated earnings, owing to healthy profitability of its subsidiary, Ufone. Apart from holding 650 million shares in Ufone, PTCL has also provided Ufone with subordinated loans worth Rs7 billion at subsidised rates.
Going forward, innovative services and creative marketing can lift the business volume. Offers like 3 in 1 Smart Pack, which provides DSL broadband and IPTV services clubbed with a landline connection, are a step in the right direction. Will PTCL be able to renew investor interest is a question only time will tell!
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PTCL P&L
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Rs (mn) FY11 FY10 Chg
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Revenues 55,254 57,174 -3.4%
Cost of services 41,814 38,361 9.0%
Gross profit 13,439 18,813 -28.6%
Gross margin 24.3% 32.9% -
Other operating income 7,839 5,134 52.7%
Operating profit 11,621 14,684 -20.9%
Net Profit 7,428 9,294 -20.1%
Net margin 13.4% 16.3% -
EPS (Rs) 1.46 1.82 -19.8%
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Source: KSE announcement
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