In a sign that the telecommunications sector is under increasing distress amid the ongoing macroeconomic crisis and rising cost of utilities, one of the prominent and profitable mobile network operators (MNOs) has declared a massive operating loss in the half-year ended June 30, 2022. As per the latest financial results released by the Telenor Group, its Pakistan subsidiary posted an operating loss of Rs42 billion in 1HCY22, (compared to an operating profit of Rs12 billion in the same period last year).
(The reporting currency of Telenor Group Norwegian Krone – NOK. The results analyzed here are provided in PKR (rupee) terms, after conversion from average NOK/PKR in the relevant analysis period).
It doesn’t help if the topline growth is meager. The Rs53 billion topline of Telenor Pakistan during 1HCY22 was only 0.7 percent higher on a yearly basis. The abysmal topline growth looks even lower in real terms, after adjusting for double-digit inflation. The topline growth came in low despite the MNO taking price increment in this period. The 1 percent+ yearly gain in number of subscriptions, which reached 49.54 million as of June-end 2022, also couldn’t provide a proportional increase in revenues.
As a result, the average revenue per user (ARPU) during 1HCY22 fell by 2 percent year-on-year to Rs163 per month, compared to Rs167 per month in 1HCY21. The lack of topline vigor was further aggravated by the large 21 percent yearly increase in operating expenses to Rs20.9 billion in the half-yearly period. Rising electricity tariffs, fuel prices and other input costs meant that Telenor Pakistan spent 40 percent of its total revenues on operating expenses in 1HCY22, higher than 33 percent in 1HCY21.
Consequently, the operator’s EBITDA fell by 9 percent year-on-year to Rs25.9 billion in the analysis period. This led to EBITDA margin of 48.9 percent (in terms of total revenues), down from 54.4 percent seen in the same period last year. This isn’t really catastrophic for financials, as recovery can be made from the business downtrend in a better economic climate. What is surprising in the latest Telenor Group report is the massive operating loss of Rs42 billion (NOK 2.064 billion) in 1HCY22 for Telenor Pakistan.
It turns out that the huge operating loss is due to accounting treatments made to reflect updated value of Telenor Group’s assets in Pakistan. Specifically, Telenor Group booked an ‘impairment loss’ of NOK 2.5 billion (almost Rs51 billion) in the second quarter, related to “property, plant and equipment, right-of-use assets and intangible assets”. The Telenor Group has cited “deteriorating macro-economic situation and adverse Supreme Court ruling” as the reasons behind booking this large-sized impairment loss.
The former aspect (macro-economic situation) concerns rising interest rates and higher country risk premium for Pakistan, impacting the weighted-average cost of capital to operate in the country. And the latter (legal) aspect is on account of the apex court’s rejection (dated May 25, 2022) of Telenor Pakistan’s appeal against the PTA’s license-renewal terms and conditions (mainly renewal price).
A large loss in the subsidiary’s valuation – which comes on top of diminishing growth in NOK terms, as PKR depreciation dilutes any local growth – is bound to impact Telenor Group’s long-term investment perspective on this market. The operating environment has been challenging for some time now. During the half-year, the capital spending (non-license/non-spectrum) reduced by 14 percent year-on-years to Rs7.5 billion. The trajectory of capex in coming quarters will be a key factor to assess continued sponsor interest.
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