Telecommunication: PAKISTAN TELECOMMUNICATIONS COMPANY LIMITED - Analysis of Financial Statements Financial Year 2003 - Financial Year 2008
Pakistan Telecommunications Company Limited (PTCL) is the largest converged services carrier providing all telecommunications services from basic voice telephony to data, internet, video-conferencing and carrier services to consumers and businesses all over Pakistan. PTCL is also the largest CDMA operator in the country with 0.8 million V-fone customers.
The company maintains a leading position in Pakistan as an infrastructure provider to other telecom operators and corporate customers of the country. PTCL has laid an Optical Fibre Access Network in the major metropolitan centers of Pakistan and local loop services have started to be modernized and upgraded from copper to an optical network.
With the promulgation of Telecommunication (Re-Organisation) Act 1996, Pakistan Telecommunication Authority was established as the Telecom Regulatory body. Following the open licencing policy in accordance with instructions from Government of Pakistan and in exercise of powers conferred by Pakistan Telecommunication (Re-Organization) Act 1996, basic telephony was put under exclusivity and PTCL was given a seven years monopoly over basic telephony which ended on December 31, 2002.
The year 2006-07 in the telecom sector was marked by a phenomenal growth in the mobile phone sector in Pakistan, which doubled its subscriber base to 60 million. The teledensity increased from 26% to 40%, helping to spread the benefits of communication technology across the country. PTCL's mobile phone subsidiary Ufone's subscriber base grew by more than 87%, from 7.49 million to 14 million.
The year also witnessed the entry of major telecom companies, most notably China Telecom and Singtel, into the market. Restructuring and re-engineering are in their final stages along with the implementation of ERP system. From the end customer's perspective, a major initiative was put in place in the shape of 'Broadband Pakistan' service launch as a first step towards providing its customer with more value added service and convenience.
With this offering, PTCL will not only be bringing the benefit of high speed Internet access to subscribers in major cities but will also generate new revenue streams for future growth. The company also continued to invest in infrastructure development and addition of network capacity with a view to enhance services and to expand its reach across the country.
The company was privatised in FY06, following the purchase of 26% 'B' class ordinary shares by Etisalat International Pakistan L.L.C. (EIP) on April 12th, 2006. EIP took over management control on 12 April 2006. Since then, the EIP has engaged the services of various technical and management advisors to improve the performance of PTCL.
On the Long Distance and international infrastructure side, the capacity of two SEA-ME-WE submarine cables is being expanded to meet the increasing demand of international traffic. The company has a customer base of 5.7 million customers and employee strength of 65,000 workers. PTCL has a 60% market share in WLL sector and has managed to maintain its stance. A sharp growth was witnessed in this sector during 2006.
PTCL strives to offer leading edge technology to its customers and in this regard, it has introduced Next Generation Network (NGN) Soft Switches at Islamabad and Karachi in addition to 20 Media Gateways in other cities. Telex and telegraph services were ceased during the year as they were replaced by fax, E-mail and internet technologies.
Moreover, the expansion of switching and transmission network across the country has made it possible to connect 189 new towns on NWD and addition of 180 new stations to the nearest Point of Presence (PoP) has enhanced the Internet service of the company. As a result of this, customers can now benefit from Internet service via a local call.
Other projects approved during the year, include the expansion of 2.5 GB DWDM system and 10 GB DWDM system. Additionally, 50 Fiber Optic Links were upgraded to ST-4 and STM-16. 3200 KM Fiber Optic Cable was laid on subsidiary routes during the year. The company also launched an Optical Fiber Access Network (OFAN) project that provides 542,000 lines in 13 major cities for which 2,340K Fiber Optic Cable was laid in the Access/Junction network.
This project provides 100,000 ADSL ports for Broadband Services to corporate customers. The fixed line access has been modernized and upgraded in Karachi, Islamabad and Lahore from copper to optic fiber network. The financial year 2007-08 was a challenging year for PTCL. However, during the year major initiatives have been undertaken to step up transformation of PTCL from public sector organisation to a customer focused, corporate enterprise competing in the deregulated era.
Besides the basic voice service, PTCL expanded its Broadband internet offering to 14 cities across the country, made the dial up internet available across the entire country and commenced soft launch of delivering over 100 television channels using internet protocol providing digital quality phone, broadband internet and IPTV services to its customers in Lahore, Karachi and Islamabad, thereby taking PTCL from a basic telephony company to a voice, data and video provisioning enterprise. Another landmark achievement during the year was the successful implementation and rightsizing through voluntary separation scheme (VSS).
During FY07-08, total revenue of the company was Rs 61.085 billion, showing a decline of 6% compared to Rs 65.277 billion for FY07. The revenues have been lower due to intense competition from mobile services, which are taking up market share in different segments. Despite of losing market share in a few sectors there has been an improvement in the volumes of overseas calls, value added services and domestic long distance calls mainly due to increasing communications need in Pakistan and revision of some calling rates.
The operating expenses fell by 4% to Rs 44.719 billion from Rs 46.56 billion mainly due to enhanced operational controls. The cost of salaries, stores and spares consumed depreciation of property and equipment and provision for doubtful debts fell significantly to bring about a 4% decrease in overall operating costs. Besides the operational costs the company incurred major VSS (voluntary separation scheme) costs amounting to net Rs 23.937 billion (out of total VSS costs of Rs 41.366 billion the Government of Pakistan contributed Rs 17.429 billion).
This cost drastically reduced its earnings but in the years to come this separation scheme would add to efficiency. Non-operating income fell by a significant 29% to an amount of Rs 3.957 billion from Rs 5.541 billion mainly due to decreases in dividend income and return on deposits.
The dividend income is from the subsidiary Pak Telecom Mobile Limited, (also known as Ufone), stood at Rs 350 million as compared to Rs 400 million last year. This year, the financial costs have been up by 66% to Rs 847 million from a mere Rs 510 million in FY07. The markup on loans and advances also fell to almost one-third of those in FY07. The non-operating costs include a loss, unlike a gain of Rs 31 million in FY07, of Rs 50.56 million was on disposal of fixed assets.
Adding up all the costs the total loss for the year has been Rs 4.462 billion and after tax incentive from GoP, the losses have been down to Rs 2.824 billion. If company would have made profit, the tax charges would have been higher as the average effective tax rate would have been higher by 2.57% points in this fiscal year.
The decreasing trends of the profits have persistent in this year too and it seems difficult for the company to show up with a positive growth trend in next few years. Despite the negative numbers on financial statements, the management is holding the view that owing to its newer strategies and ventures into newer market niches they are hopeful to reverse the falling profit trends.
Some of the newer markets for this year have been the PTCL smart line providing interactive television and broadband internet connection. The company has been implementing investment plans aiming to improve quality of services besides bringing new products like EVDO, Broadband, Multimedia and IPTV services. Looking ahead, the PTCL management is striving to improve its market share in the longer run.
The losses have resulted in a decline in the return on assets and return on equity owing to a change in management and VSS. The liquidity position of the company showed a mixed trend, it improved considerably in FY07 but the company failed to maintain it and liquidity fell in FY08. The fall in current ratio is mainly due to a 21% decrease in current assets while the current liabilities increases by a mere 1%. Major contributors to change in current assets were trade debtors and cash and bank balances.
Deposits fell to almost half in this year from Rs 32 billion to Rs 16 billion. The trade debtors included domestic and international. Domestic amounts due from Pak Telecom Mobile Limited and National Telecommunication Corporation (NTC), related parties of the company, amounting to Rs 1,442,670 thousand (2007: Rs 534,685 thousand) and Rs 695,070 thousand (2007: Rs 827,439 thousand) respectively. Included in trade debts - international amounts due from Etisalat - UAE and Mobily - Saudi Arabia, related parties, amounting to Rs Nil (2007: Rs 184,009 thousand) and Rs 655,645 thousand (2007: Rs Nil) respectively.
The debt ratios of the company showed a decreasing trend except some improvement in FY08. The debt to asset ratio had declined considerably in FY05 but the trend reversed in FY06, declining again in FY07. It is important to note that the company has a provision of leveraging by raising funds through borrowing money from financial institutions.
The change in current liabilities was brought about mostly due to a decline in current liabilities of the company in FY05 and an increase in the same period of FY06. The absence of the dividends payable portion of current liabilities in FY05 and its coming back online in FY06 was an important contributor to the trend.
Furthermore, FY06 also saw an increase in short term borrowings of the company, complemented by increases in other components of current liabilities. Increases in assets, mainly arising from higher cash and bank balances, could not prevent the trend f the debt ratios.
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PTCL-KEY FINANCIAL DATA
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BALANCESHEET 2003 2004 2005 2006 2007 2008
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stores and spares 1,755,811 1,854,151 3,326,622 3,435,679 3,879,206 4,954,085
trade debts 14,597,825 17,147,596 15,515,958 16,059,983 11,411,412 13,366,216
cash and bank 13,395,958 24,023,252 12,280,761 22,598,785 33,283,660 17,426,234
total current assets 33,277,423 48,293,558 39,269,186 50,168,177 54,202,838 42,611,233
total assets 130,778,875 141,594,528 135,884,608 152,240,022 152,820,860 140,103,688
current liabilities 34,311,837 42,895,784 20,805,953 30,275,532 24,447,741 24,569,795
non current liablities 16,544,223 15,125,842 15,258,013 16,489,026 17,459,855 17,645,519
total debt 50,856,060 58,021,626 36,063,966 46,764,558 41,907,596 42,215,314
paid-up capital 51,000,000 51,000,000 51,000,000 51,000,000 51,000,000 51,000,000
total equity 79,922,815 83,599,963 100,014,031 105,475,464 110,913,264 97,888,374
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INCOME STATEMENT 2003 2004 2005 2006 2007 2008
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Revenue 67,202,531 74,124,229 75,972,363 69,085,436 65,277,025 61,085,610
Operating costs (32,095,043) (32,185,972) (39,608,639) (41,687,918) (46,564,338)(44,719,939)
Operating Profits 35,107,488 41,938,257 36,363,724 27,397,518 18,712,687 16,365,671
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Finance cost 1,024,715 673,880 455,099 336,401 510,175 847,972
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Non-operating income 2,480,701 2,095,491 3,387,496 3,912,931 5,541,203 3,957,539
profit before taxation 36,563,474 43,359,868 39,296,121 30,974,048 23,743,715 (4,462,616)
taxation 13,482,444 14,190,228 12,690,464 10,196,618 8,104,962 1,638,826
profit after taxation 23,081,030 29,169,640 26,605,657 20,777,430 15,638,753 (2,824,890)
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PROFITABILITY 2003 2004 2005 2006 2007 2008
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Return on Asset 18% 21% 20% 14% 10% -2%
Return on Common Equity 29% 35% 27% 20% 14% -3%
Profit margin 34% 39% 35% 30% 24% -5%
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LIQUIDITY RATIO 2003 2004 2005 2006 2007 2008
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Current Ratio 2.02 1.13 1.89 1.66 2.22 1.73
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ASSET MANAGEMENT 2003 2004 2005 2006 2007 2008
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Inventory Turnover 9 9 16 18 21 29
Operating cycle 88 92 89 102 84 108
Day Sales Outstanding* 78 83 74 84 63 79
Total Asset turnover 1 1 1 0 0 0
Sales/Equity 1 1 1 1 1 1
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DEBT MANAGEMENT 2003 2004 2005 2006 2007 2008
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Debt to Asset(%) 39% 41% 27% 31% 27% 30%
Long Term Debt to Equity(%) 21% 18% 15% 16% 16% 18%
Debt to Equity Ratio (%) 64% 69% 36% 44% 38% 43%
Times Interest Earned 34 62 80 81 37 19
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MARKET VALUE 2003 2004 2005 2006 2007 2008
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Earning per share 5 6 5 4 3 (0.55)
Price earning ratio 6 7 13 10 19 (85)
Book value 16 16 20 21 22 19
Dividend per share 4 5 2 5 2 -
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The financial strength of PTCL was satisfactory till the year FY07 but currently it's alarming as the TIE ratio has fallen considerably. The TIE ratio fell to 19 from 37 in FY07 mainly due to increases in finance cost in FY08 including a loss net exchange of Rs 319 million. The TIE ratio of the company continued to rise in FY06 despite the lower profits during the period.
However, it declined in FY07, as a result of decrease in profits. This reflects little ability of the company to pay off its liabilities as they become due. The major portion of debt arises from current liabilities. Although the loan term liabilities remained almost unchanged this year but he structure changed as the employees' retirement benefits increased by Rs 2 billion and deferred government debt to amount Rs 95 million.
The DSO has shown a mixed trend as upward trends were coupled with two lower growth trends such as in FY05 and FY08. The ratio fell in FY08 due to increases in trade debts and considerable fall in revenue by almost 6% for the reasons discussed before. The ratio jumped up considerably in the FY06, completely nullifying the effect of the decline in FY05, and exacerbating the already long collection period of the company.
However, DSO showed a decline in FY07 showing that management of PTCL is constantly striving for improvement and enhancement despite stiff competition. As a result, the operating cycle has also decreased in FY07. The total assets turnover and sales to equity ratio of the company also declined in the FY06 as revenues shrunk during the period. Sales/equity declined with an increase in equity.
The EPS went into negative 0.55, which was the lowest ever in the company's record owing to the losses incurred this year. This figure is a disincentive for the potential investors and may put on a selling pressure from existing shareholders. Other ratios like book value per share decreased to Rs 19.19 from Rs 21.0 which is not much keeping in mind the current worsening economic outlook.
The book value of the company continued to increase in FY06 as assets increased with no change in the number of shares issued by the company. A drastic fall to negative numbers is seen in P/E ratio only due to the negative EPS. The P/E ratio, however, registered a decline in FY06.
The shareholders' equity has also shown a growth of 5.2% in FY07 as net worth of the company rose to Rs 110.91 billion. This positive growth also reflected in the market capitalization of the company, which increased by Rs 83.01 billion. FY08 has been very challenging for the economy and the stock market; PTCL had been able to minimize the effect and still been able to maintain its share price at Rs 46.78 till June 2008.
FUTURE OUTLOOKThe privatisation of PTCL and transfer of control to the new owner, Etisalat, carries important implications for the company. Etisalat has announced an aggressive 5-year expansion plan for the company and is viewing options to restructure the organization, improve customer care, increase revenue, enhance cost control and change the mindset of employees to bring about a positive change in the operations and running of the company.
The management is also striving for improvement in the field of asset management, with special focus towards revenue assurance and timely collection of overdue receivables and effective utilization of the assets of the company. A new Enterprise Resource Planning system along with a new billing and customer care system is also being implemented. Through these measures, the company hopes to improve its profitability and productivity.
Since the deregulation of the telecom sector, PTCL is learning to survive in a more competent environment and respond effectively to these changes. Despite the deregulation, PTCL effectively remains a monopoly, as it is the only fixed line service provider in the country.
Moreover, the company has a fiber-optic network connecting over 700 cities, which can be used for data transmission and most broadband companies will require the use of this network, hence adding to the strength of the company. The company is likely to face competition from newly companies which are providing similar services like WLL and fixed line services from Worldcall and Callmate.
Despite the competition the company holds more than 90% of the fixed line services mark. The subsidiary, Ufone, has been performing well but due to current revision of regulatory polices its subject to produce lesser profits. PTCL realizes the commercial importance of the WLL or Wireless Local Loop technology and has therefore been increasing its capacity for WLL connections over the years.
PTCL has also subsidized the costs of wireless telephone sets to gain maximum capacity utilization of its WLL connections but is facing competition from another large player in the sector. Moreover, with the tremendous attention towards and demand of mobile phone connections, increased focus on the subsidiary Ufone will be beneficial for the company.
The increased competition from deregulation has hit the profitability of the company as it is forced to reduce its calling rates to maintain its market position. In addition, NWD and International call revenues may decline further in the future due to new phone cards being available in the market. Since these cards are based on VoIP and charge lower rates than PTCL, they pose a threat to the company's profitability in future.
New market venture such as the interactive TV services might take upon coming future and open new avenues of profits but it's important to bear in mind that the company has to get rid of the VSS costs as its taking up a major chunk of earnings apart from that it has a bright earning future.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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