The Pakistan Telecommunication Co (PTCL) tariff cut is the right strategy, exploiting its size and thinning the margins in the telephony business, making it difficult for new entrants to make above average returns and invest them back for growth.Last week, PTCL announced reduction in its calling charges for FY05. The company has reduced it International Long Distance (ILD) calling charges by 23.3 percent, Nation-wide Calling charges by 25-29 percent, Installation charges by 44 percent for the urban areas, and made free night local calls from 12 midnight to 6 am.
Sarwat Fatima, research analyst from Elixir Securities, said that while keeping all other factors constant this would bring a reduction of about 9 percent to 11.7 percent in PTCL revenues and profits.
However, this is likely to be mitigated by the aggressive expansion plan of the company.
Furthermore, this change was already anticipated where earlier PTCL was expected to witness a reduction of less than 1 percent due to (I) increase in number of lines, (II) improvement in international traffic, (III) due to lower connection charges, improvement in connectivity ratio and (IV) high price elasticity in NWD traffic.
This decision is also supported by the fact that penetrations are extremely low, demand is available on tap and the present capital base of new entrants in fixed line is weak, Asim Zafar, head of research at Al-Falah Securities said.
"We expect the loss from the reduction in the prices to be offset by the aggressive plan of PTCL to install two million new lines and see less likelihood of earnings erosion," Zafar said.
However, there would be pressure on the dividends by the incumbent, as the requirement to invest in the business will increase in the medium term.
"We are of the opinion that the sentiment-driven weakness will provide the fundamental players the opportunity to invest in PTCL at attractive levels."
He said: "We feel that PTCL is the most appropriate stock to take exposure in the growing Pakistan's telecom market as PTCL's subscriber base and national foot print allow it to invest in new customer segments that will become drivers of future growth. It offers exposure to investors in all segments of telephony including international and domestic long distance (ILD), last mile (LL) and cellular.
Except for the cellular companies, the size of the new entrants are not big enough to be a threat for the incumbent in the medium term. Its national presence will allow it to acquire better deals from international operators for ILD business as compared to new entrants.
The new management's past credential in the private sector makes us believe that the implementation of strategy would be relatively better than other state enterprises."
Faisal Shaji, research analyst from Capital One Equities, said he believes that this tariff rationalisation in NWD & ISD is in line with the company's market penetration strategy in a deregulated environment.
Contrary to market perception, the previous decrease in NWD and ISD tariffs had yielded an increase in call traffic of nearly 25 percent which transformed the projected revenue base beyond expectations in the FY04 (new CEO has already indicated a 15 percent & 25 percent upside in revenue and profit in FY04 from the preceding year).
This also delineates the point that demand is still elastic despite the entry of new players in the market.
"We believe that this tariff restructuring will be beneficial for PTCL, and revenues and earnings will continue to grow as we have seen them do so in the past.
Our initial estimates suggest that PTCL would suffer a loss of around Rs 0.8-1.0 billion in revenues due to reduction in urban connection charges and making local calls free from midnight to 6 am," said Khalid Iqbal Siddiqi, research analyst from Investcapital Securities.
"However, we believe that lowering of connection charges would boost new connections further, and traffic growth that will result in NWD and International calls will more than compensate for the above-mentioned revenue loss. We expect PTCL's revenues and earnings to continue to grow in the future," Khalid said.
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