Pakistan Telecomm-unication Company Limited (PSX: PTC) continues to dominate Pakistan's telecom landscape. PTC once used to be a state monopoly, but following the telecoms deregulation in 2003-04, the firm was brought under a private management. As the largest telecom carrier in Pakistan, PTC, as PTCL Group, operates in different telephony segments, having telecom licenses for fixed local loop (FLL - landlines), wireless local loop (WLL) telephony, mobile telephony (Ufone), long distance & international (LDI) telephony, broadband services, and mobile financial services/ branchless banking.
PTC has two main subsidiaries, the fixed-line giant PTCL Company and the cellular arm, Ufone. PTC was partially privatised in 2007 in a transaction where 26 percent management stake of the organisation was acquired by Emirates Telecommunication Corporation (Etisalat). Out of the transaction value of $2.6 billion, some $800 million still remain overdue from Etisalat, apparently on account of a running dispute between Etisalat and Pakistan's Privatisation Commission over transfer of some real estate in PTCL Company's name.
PTC seems to have weathered the first wave of fixed-mobile substitution - during the last decade - fairly well when folks started favouring mobile phones over landlines. Under a private management, PTC shifted its strategic focus towards data services, as a result of which the organisation currently has multiple revenue streams. Even as voice revenues have shrunk over the years, fixed and wireless broadband services have helped the PTCL Company fight the competition.
Besides being a retail/last-mile operator in segments of FLL, WLL and broadband, the PTCL Company is also a carriers' carrier, providing core infrastructure services to other telecom operators, internet service providers, call centers, and payphone operators.
Recent financial Performance
Back in 2013, the PTC management had changed the company's financial/accounting year to start in January instead of July. Therefore, for a meaningful comparison, financial performance of the last four full calendar years since is being taken into account here.
The group's profitability has come under increasing strain in recent years - CY16 net profits reduced to mere 10 percent of what they were in CY13. Part of the story is the declining top line at the PTCL Company, and another is the continuing losses at Ufone. Also at work is the higher proportion of revenues spent on cost of sales. Cost of services as a ratio of revenues were 74 percent in CY16, up from 64 percent in CY13.
It is instructive to break down the group financials into its component subsidiaries. The PTCL Company suffered a year-on-year top line decline of 6 percent in CY16, plausibly on account of decline in revenues from the LDI segment. Tariffs for terminating international calls locally have gone down recently in the wake of the demise of the ICH regime. Some weakness must also have come about from the firm's falling broadband subscribers.
Even though the PTCL Company showed a net profit of Rs 6.8 billion during the year, this bottom-line was 22 percent below the previous year. Besides the top line decline, the Rs 4.6 billion expense on employees Voluntary Separation Scheme (VSS) also explains this fall. The VSS brought financial pain in CY16, but it is expected to help the firm reduce its operating overheads in the coming years.
At Ufone, calculations, which are based on company's group financials, suggest there was finally a single-digit top line increase in CY16, after declines in CY15 and CY14. Thanks to that, also due to a drop in finance costs, Ufone squeezed its net loss during the last year by about a quarter, to stand around Rs 5 billion. Situation at Ufone is the major reason blighting the group financials. But it should reassure PTC shareholders that Ufone seems to be making a comeback, albeit gradually. However, for the most part of last year, the PTC scrip has underperformed the broader index.
Future Outlook
The group seems to be fighting the second wave of fixed-mobile substitution. Similar to what fixed landlines had to deal with the mobile connectivity (2G), the fixed and wireless broadband subscriptions are under threat from mobile broadband (3G and 4G services). PTC is somewhat hedged against that downside, given its cellular arm, Ufone, is a 3G operator.
But lack of growth in PTCL Company's fixed broadband (DSL) and wireless broadband (EvDO) subscriptions are concerning. Already, the company is not growing its LDI and fixed-line segments, which are both considered growth drivers of the past, compared to broadband, which is supposed to be a driver for future growth for the firm.
Going forward, the PTCL Company will have to find ways to revitalize its top line. The focus on cost rationalization is essential, and it will pay dividends over the coming quarters.
However, that alone may not cut it, as cost savings will exhaust over time, so revenue growth is a must for the firm, especially in the broadband segment. As for Ufone, it will do well to grow its 3G user base, as it currently lags other operators in new subscriber acquisition.
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Pattern of Shareholding (as at December 31, 2015) No of Shares % of total
shareholders held shares
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Directors, CEO, and their spouses and minor children 10 245,009 0.005%
Associated companies, undertakings and related parties 2 1,326,000,000 26.000%
NIT and ICP 3 3,400 0.000%
Banks, DFIs, & NBFIs 32 132,340,186 2.595%
Insurance Companies 15 68,878,258 1.351%
Modarabas and Mutual Funds 50 44,377,500 0.870%
General Public 44,568 156,638,357 3.071%
President of Pakistan 2 3,171,067,993 62.178%
Others 308 200,449,297 3.93%
Total 44,990 5,100,000,000 100%
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Source: Company accounts
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PTC's market penetration
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Segment Subscriptions Market as of
PTCL Co. share
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FLL 2.658 95 percent Jun-16
WLL 0.237 50 percent Jun-15
DSL broadband ~ 1.4 mn - Jan-17
EvDO broadband ~ 0.9 mn - Jan-17
Ufone
2G 13.4 mn 13 percent Jan-17
3G 5.1 mn 15 percent Jan-17
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BR Research calculations based on PTA data
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Financial snapshot: PTC (consolidated)
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Rs (mn) CY16 CY15 CY14 CY13
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Operating Results
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Revenue 117,202 118,561 129,918 131,224
Gross profit 30,509 30,507 41,197 47,203
Operating profit 6,111 4,006 6,199 21,990
Profit after tax 1,623 1,868 3,967 15,753
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Financial Ratios
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Gross margin 26.0% 25.7% 31.7% 36.0%
Operating margin 5.2% 3.4% 4.8% 16.8%
Net margin 1.4% 1.6% 3.1% 12.0%
Earning per share (Rs) 0.32 0.37 0.78 3.09
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Source: Company accounts
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