Can PTCL bounce back?

This column has been highlighting the top line pressure faced by the Pakistan Telecommunications Company Limited Group (PSX: PTC) in recent years. The stock market doesn’t look amused either (see the illustration). The PTC stock, which has significantly under-performed the KSE-100 index in last four years, is down nearly 22 percent in the year-to-date period.

Last week, BR Research had a wide-ranging conversation with Dr. Daniel Ritz, who took the Group’s reins as CEO and President in March 2016. Selected contents from that sit-down were published in an interview earlier this week (October 23) in the Brief Recording section. This column is about our takeaways from that meeting on the future of the Group’s arms, the PTCL Company and Ufone.

First up, Dr. Ritz was remarkably candid in admitting that there were gaps in the PTCL Company’s service delivery. He said there was “homework” to be done so that the firm could “stop shrinking and over time start growing”. Areas for improvement included network quality, customer service and corporate culture.

That will take some time. Meanwhile the PTCL Company, which routinely provides three-fifth of the Group’s revenues, has been shrinking its top line since CY15. The longtime Etisalat executive framed the firm’s top line problem rather succinctly:

“Some 40 percent of the revenue base that is declining – consisting of PSTN (fixed-line voice), International business (LDI), EVO CDMA (fixed wireless) etc. – currently has a bigger shrinking effect on the overall top line than the amelioration that is coming from 60 percent of the revenue base that is growing – consisting of DSL, wholesale services, corporate services, Charji LTE (fixed wireless), and IPTV.”

Fair enough. But the issue is that we have heard a similar narrative from the PTCL management before. But the President sounded optimistic, noting that the revenue weight of the declining streams was on the way down, with evidence of “accelerated growth” in emerging segments like “DSL, Charji LTE and corporate services”.

The root-cause that needs fixing, and which Dr. Ritz identified again and again, was the quality of the firm’s fixed network. “The key for us to a lot of stuff on the consumer side is to improve the quality of our fixed access network. It will help us on DSL, PSTN, and IPTV. We have some homework to do on the basics.”

That homework is apparently underway. An ongoing “network transformation programme” is trying to upgrade 100 of the firm’s 427 exchanges, by 1QCY19, at a cost of about Rs27 billion. It’s a laborious, complex process of digging up a whole lot of earth, upgrading the legacy PTCL exchanges, putting in the fiber optic on the way, and rehabilitating the copper wires that eventually go to a customer’s home.

This programme, Dr. Ritz claimed, will help the PTCL network achieve broadband speed of up to 20Mbps on a rehabilitated copper network and a speed up to 100Mbps on a fiber-to-the-home (FTTH) network. About 13 exchanges have been transformed thus far, with more expected to be upgraded by end of this year. Naturally, the programme’s focus is on high-income areas within the cities.

After shaking up their payroll via several rounds of voluntary separation schemes in recent years, the management is now looking to overhaul the fixed network. The firm has miles to go before the job is done to get the supply-side up to speed. And even then, it won’t yield results overnight.

But once a critical mass of messy exchanges is modernized, the PTCL Company can tap the insatiable data demand that the likes of mobile broadband operators can never satisfy. (Folks tend to prefer an unlimited fixed Internet connection at home, as mobile broadband is good on-the-go.)

Due to network issues, fixed broadband (DSL) penetration is currently languishing really low at 5 percent of households in the country. Ergo, if the PTCL Company can stitch up its constrained supply with a high-quality fixed network, there is no reason why it cannot quadruple that penetration level within a few years. Doing so would also ensure that PTCL becomes the only operator in the market which can scale the lucrative triple-play service proposition: high-quality data, video, and voice, all on the same cord.

While PTCL’s fortunes seem linked to modernization of its fixed network, the fate of Ufone, which operates in the mobile broadband market, looks uncertain at best. Ufone has been in the red since CY14, draining the Group’s profitability. Dr. Ritz didn’t hesitate to address Ufone’s difficulties. On a question about whether further consolidation in the sector was imminent following Mobilink’s Warid acquisition, he had this answer:

“Let me answer it the following way. The way the market is currently going, and the way the regulator doesn’t step in, then it’s a logical consequence – so, the answer is yes.”

Readers should read between the lines. Ufone’s top line is under stress. It continues to make a net loss, though the extent is less severe this calendar year. It hasn’t made any investment in acquiring new spectrum lately. It has no presence in the 4G segment, and holds only 12 percent and 14 percent shares (by subscription) in the 3G and 2G segments.

So, is Ufone up next on the auction block? Dr. Ritz later clarified that he was “looking at it from a macro perspective” and that it’s not the Group’s strategy per se. He suggested a number of regulatory interventions to create “a strong and conducive business environment framework”. While the odds of a regulatory shift seem long, it seems that at some point in the near future the telecoms authorities will have to address the CEO’s question of whether or not they want a “healthy four-player market”.