Pakistan Telecommunication Company Limited

Pakistan Telecommunication Company Limited (PSX: PTC) was incorporated in Pakistan in 1995. The company is engaged in providing domestic and international telephone and other communication services such as Broadband internet, Smart TV services and over-the-top (OTT) applications across the country. The company also provides such services in the territories of Azad Jammu and Kashmir & Gilgit Baltistan. In 2006, Etisalat International Pakistan assumed the management control of PTCL which marked the privatization of the state owned enterprise. Ufone (Pak Telecom Mobile Limited), U Microfinance Bank,DVCOM Data (Private) Limited and Smart Sky are the wholly owned subsidiaries of PTC.

Pattern of Shareholding

As of December 31, 2022, PTCL has a total of 5100 million shares outstanding which are held by 43,069 shareholders. President of Pakistan is the major shareholder of PTC holding 62.18 percent of its shares. This is followed Etisalat International Pakistan holding 26 percent of PTC’s shares. Local general public have a stake of 4.8 percent in the company while Banks, DFIs and NBFIs and Insurance companies account for 2.13 percent and 2.07 percent of the outstanding shares of PTC. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

Except for a marginal downtick in 2020, PTC’s consolidated topline has been posting growth in all the years under consideration. Conversely, its bottomline only posted a year-on-year growth in 2020. In the remaining years, PTC’s bottomline had been shrinking and ended up being deep in red in 2022 despite the highest topline growth attained by the group during the year. PTC’s gross and operating margins follow a downward trend during the period under consideration with the highest margins recorded in 2018 and the lowest in 2022.NP margin posted a spike in 2020 which subsided in the subsequent years. The detailed performance review of each of the years under consideration is given below.

In 2019, PTC’s topline posted a meager 2 percent year-on-year growth with all the group companies contributing positively to the revenue growth. Ufone’s revenue grew by 1 percent while U bank revenue posted a significant 48 percent growth in 2019. PTCL’s standalone revenue of Rs.71,548 million was 0.4 percent higher than the last year. A sneak into the revenue segments show that in December 2019, revenue from retail services form a major 72.6 percent chunk of PTC’s topline followed by corporate and wholesale services (16 percent), international clients (6 percent) and banking services (5.22 percent). Within retail services, cellular and other wireless services have the major contribution, followed by Broadband and IPTV and then fixed line voice services. During 2019, cost of services grew by 3 percent year-on-year mainly on account of an increase in fuel and power charges. This resulted in a minor downtick in GP margin from 26.8 percent in 2018 to 26.2 percent in 2019. Administrative and general expense as well distribution expense grew by 8 percent and 7 percent respectively in 2019 as a result of higher staff cost – both in-house and outsource as well as technical services assistance fee. PTC also booked a 43 percent higher impairment loss on trade debts and contract assets in 2019. This resulted in a 29 percent lower operating profit earned by the company in 2019 with OP margin sliding down from 7.5 percent in 2018 to 5.2 percent in 2019. The group recorded an 8 percent year-on-year growth in other income as a result of higher deposit on bank accounts, government grants recognized as well as gain on the disposal of property, plant and equipment. Finance cost and other expenses grew by 12 percent year-on-year in 2019 on the back of an increase in borrowings as well as high discount rate. Net profit shrank by 58 percent year-on-year in 2019 to clock in at Rs.2377.10 million with an NP margin of 1.8 percent versus 4.5 percent in 2018.

In 2020, PTC group’s topline posted an insignificant downtick of 0.1 percent. This was despite 0.4 percent growth in PTCL standalone revenue and 50 percent growth in U Microfinance revenue during 2020. This clearly puts the onus on Ufone. Across the services, the downtick in revenue was on account of a drop in revenue from cellular and other wireless services as well as fixed line services which drove down the revenue from retail services by 6.87 percent year-on-year in 2020. Revenue from other three categories – corporate and wholesale, international and banking services grew in 2020. Cost of sales grew by 1 percent year-on-year in 2020, pushing the gross profit down by 2 percent in 2020 with GP margin ticking down to 25.6 percent. Administrative expense grew by 2 percent year-on-year in 2020 on account of higher staff cost and depreciation. Conversely, distribution expense tapered off by 2 percent year-on-year due to lower advertisement and publicity charges. Impairment on trade debt posted a 5 percent year-on-year growth in 2020 which is mainly attributable to impairment loss emanating from non-performing loans to banking customers. Operating profit further shrank by 16 percent in 2020 with OP margin slipping to 4.4 percent. Other income posted a tremendous year-on-year growth of 34 percent in 2020 mainly due to government grants recognized during the year and gain on disposal of property, plant and equipment. PTC also booked gain on fair value re-measurement of forward exchange contracts in 2020 which also contributed a great deal to drive the other income up. Finance cost grew by just 1 percent in 2020 which was due to higher exchange loss. Interest payments reduced during the year due to a drop in discount rate. Superior other income translated into a 38 percent year-on-year growth in PTC’s net profit in 2020 which clocked in at Rs.3272.67 million with an improved NP margin of 2.5 percent.

In 2021, PTC’s topline grew by 6 percent year-on-year which came on the back of 7 percent growth in the revenue of PTCL, 4.3 percent growth in the revenue of Ufone as well as 8.4 percent growth in the revenue of U bank. Across the services, except for a drop in the revenue from fixed line voice services, all other categories posted a year-on-year growth in 2021. Considerable hike in power tariff, depreciation of Pak Rupee and inflation resulted in 7 percent year-on-year growth in the cost of services. This further trimmed down the GP margin to 25.1 percent in 2021. Administrative and distribution expense swelled up by 8 percent and 14 percent respectively in 2021. Higher operating expenses were the result of higher staff cost, technical services assistance fee payable to Etisalat UAE at the rate of 3.5 percent of the group’s revenue and also because of high advertisement and publicity charges incurred during the year. Impairment loss plunged by 10 percent year-on-year in 2021 on account of lesser charges on both trade debts and contract as well as loans to banking customers. Operating profit dwindled by 10 percent year-on-year in 2021 with OP margin diminishing to 3.7 percent. Other income grew by 19 percent year-on-year in 2021 as a result of higher returns on bank deposits and investment in government securities, gain on fair value re-measurement of forward exchange contracts as well as government grants recognized during the year. However, robust other income in 2021 was swallowed by a 23 percent year-on-year spike in finance cost due to higher exchange loss and also because of increased borrowings which escalated the interest payments despite monetary easing during the year. Net profit slumped by 21 percent year-on-year in 2021 to clock in at Rs.2575.27 million with an NP margin of 1.9 percent.

2022 mustered 10 percent year-on-year growth in PTC’s topline – the highest growth among all the years under consideration. This came on the back of 8.6 percent growth in PTCL’s revenue while Ufone and U bank posted a year-on-year growth of 7.1 percent and 35.4 percent respectively in their revenues. High fuel and power tariff, Pak Rupee depreciation, inflation and cost associated with the acquisition of 4G spectrum and associated network rollout resulted in a 17 percent year-on-year growth in the cost of sales. This pushed the gross profit down by 9 percent year-on-year in 2022 with GP margin inching down to 20.8 percent. Administrative and distribution expense jumped up by 12 percent and 5 percent respectively in 2022. Impairment loss shrank by 72 percent year-on-year in 2022 on account of loans to banking customers written off during the year. Operating profit fell by 78 percent year-on-year in 2022 with OP margin sliding down to 1.1 percent. Other income posted a significant 60 percent year-on-year growth due to high profit earned on bank deposits and government securities as well as rental income and gain on the disposal of property, plant and equipment. However, this was nullified by a steep rise of 158 percent in finance cost on account of high discount rate, exchange loss as well as increased bank borrowings obtained during the year. High finance cost pushed PTC’s bottomline into red zone with a net loss of Rs.7788.58 million in 2022.

Recent Performance (1HCY23)

During 1HCY23, PTC’sconsolidated topline grew by 27 percent year-on-year. The breakup of revenue shows that PTCL itself achieved a 17.3 percent year-on-year growth in 1HCY23 while Ufone and U bank posted a year-on-year growth of 22.4 percent and 96.5 percent respectively in their revenue. However, the vigorous topline couldn’t trickle down into a robust bottomline as PTC posted a net loss which was 179 percent higher than the net loss posted by the company during the same period last year. The main factors behind the huge loss was high cost of services due to high inflation, power and fuel charges and Pak Rupee depreciation. GP margin inched down from 21.7 percent in 1HCY22 to 20.6 percent in 1HCY23. High operating expense and impairment loss pushed the operating profit down by 87 percent year-on-year in 1HCY23 with OP margin dropping from 1.1 percent in 1HCY22 to 0.1 percent in 1HCY23.

While other income posted an encouraging growth of 107 percent year-on-year in 1HCY23 on the back of translation gain on company’s foreign exchange denominated receivables and gain on disposal of assets as the company upgraded its network and sold off its obsolete assets. However, the growth in other income was quashed by a 103 percent year-on-year hike in finance cost on account of high discount rate, increased borrowings and exchange loss. This culminated into huge loss of Rs.8519.13 million in 1HCY23.

Future Outlook

The macroeconomic challenges which marring the profitability and margins of PTC such as high energy cost, inflation, Pak Rupee depreciation etc are not likely to resolve any time soon the group’s financial performance will remain under pressure despite solid efforts put forward by the management to improve its revenue by strengthening its existing brands and launching new brands.