Telecard Limited Company (PSX: TELE) was incorporated in Pakistan as a public limited company in 1992. The company along with its subsidiaries is engaged in the business of providing integrated telecommunication services which includes wireless telephony, long distance and international services and payphones.

Pattern of Shareholding

As of June 30, 2022, TELE has a total of 315 million shares outstanding which are held by 12,264 shareholders. General public has a majority stake of 53 percent in the company followed by joint stock companies which hold 46.69 percent of TELE’s shares. The remaining shares are held by foreign investors and Directors, CEO and their spouse.

Performance Trail (2018-22)

Among five years under consideration, TELE has shown a topline growth in 2019 and 2022. In between these two years, there was a topline slide. Besides, the bottomline had been in the negative zone since 2018; however, in 2021 and 2022, it posted a net profit.

In 2019, the topline of TELE posted a tremendous year-on-year growth of 25 percent which is attributable to a rebound in other revenue stream and Long Distance International (LDI) segment. Moreover, improved rates as well as favorable exchange rates also played their role in buttressing the topline. Revenue from Turnkey projects also massively grew during the year. However, high cost of sales mainly coming on the heels of satellite bandwidth and communication charges, network media charges and cost of turnkey projects kept the GP margin under pressure which dropped to 24 percent in 2019 from 29 percent in 2018. Gross profit also posted a marginal 2 percent year-on-year uptick in 2019. Administrative and Distribution cost was 42 percent less than last year as there were provisions and write-offs against other receivables in 2018. Other income took a major hit and plunged by 87 percent year-on-year in 2019 as provisions written back in 2018 were missing in 2019. Moreover, there was no gain on spectrum in 2019. Favorable movement in administrative and distribution expense facilitated a 47 percent year-on-year jump in Operating income with OP margin clocking in at 8.7 percent in 2019 versus 7.5 percent during 2018. Finance cost rose by 35 percent year-on-year on the back of high discount rate. While fresh short-term and long-term financing secured by the group dropped during the year, interest payable on term finance certificate issued by the group inflated the finance cost in 2019 due to prevalent discount rate. The bottomline showed a net loss worth Rs.22.97 million in 2019 as against a net loss of Rs.42.03 million in 2018. Loss per share clocked in at Rs. 0.08 in 2019 versus Rs.0.14 in 2018.

The subsequent years were slow for TELE in terms of revenue growth as its topline plunged by 7 percent and 1 percent year-on-year in 2020 and 2021 respectively owing to cutthroat competition in the telecom industry. Tough competition not only put pressure on the service rates but also on the volume of service contracts. The cost of sales took a breather during these two years on the back of a drop in satellite bandwidth and communication charges. This buttressed the gross profit which posted a growth of 19 percent and 10 percent year-on-year in 2020 and 2021. Administrative and distribution expense increased in both the years signifying market induced increase in salaries and rental expense. The factors which enabled TELE to make a net profit in 2021 as against a net loss in 2020 was a handsome net other income earned by the company in 2021 coupled with a drop in finance cost. Conversely, in 2020, the company recorded a net other expense and a 41 percent year-on-year rise in the finance cost. Net other expense in 2020 was due to receivables from PTA against Access Promotion Contribution for Universal Service Fund (APC for USF) written off during the year. Moreover, the company also booked a loss allowance against APC for USF from PTA. In 2021, the net other income posted by the company was the result of write off of provisions and liabilities that were no longer payable besides making a net exchange gain. Discount rate dynamics played a role in increasing the finance cost in 2020 as discount rate was high during the first three quarters of 2020 and then started dipping thereafter. The result was net loss of Rs. 75.13 million in 2020 and a loss per share of Rs.0.25. However, in 2021, TELE made a net profit of Rs. 506.6 million with EPS clocking in at Rs.1.61. The NP margin turned out to be 13.1 percent in 2021. TELE had been making net losses since 2017 which upturned in 2021.

In 2022, the topline bagged a 14 percent year-on-year growth. Since the outspread of COVID-19, the dependence on E-commerce has increased. TELE and its subsidiaries took advantage of this opportunity and offered connectivity and beyond connectivity enterprise and business solutions. The company spread its wings in support enhancement in broadband coverage, enterprise energy solutions, cyber and software security, and roll out of digital infrastructure as well as connectivity solutions. The company altered its sales mix to include services that carry higher margins. It also rationalized its direct cost which enabled the gross profit to grow by 20 percent year-on-year in 2022. GP margin of 35.6 posted by TELE in 2022 was the highest since 2016. Operating expenses grew by 16 percent year-on-year on the back of rising inflation. Other income didn’t support either and slid by 20 percent year-on-year mainly on the back of exchange loss coupled with lesser write offs against provisions and liabilities. Consequently, operating profit could only grow by 7 percent year-on-year in 2022 with OP margin clocking in at 19 percent as against 20.6 percent in 2021. Finance cost which came under control in 2021 owing to monetary easing showed an uptick of 4 percent in 2022 on the back of multiple upward revisions in discount rate in 2022. The bottomline fell by 17 percent year-on-year in 2022 to clock in at Rs.421.85 million with an EPS of Rs.1.32. NP margin also dropped to 9.5 percent in 2022.

Recent Performance (1HFY23)

The topline grew by 17 percent year-on-year during 1HFY23 on the back of improved pricing and enhanced sales mix. Rising cost of inputs on the back of inflationary pressure turned down the GP margin to 36 percent in 1HFY23 from 39 percent during the same period last year. Gross profit posted a marginal growth of 7 percent during the period. Rising operating expenses coupled with a massive 85 percent year-on-year dip in other income took its toll on the operating profit which dropped by 32 percent year-on-year in 1HFY23. OP margin also plunged to 14 percent in 1HFY23 from 24 percent in 1HFY22. Another major hit to bottomline came on the back of finance cost which grew by 123 percent during the period owing to restructuring of TFCs and record high discount rate. The bottomline nosedived by 12 percent in 1HFY23 to clock in at Rs.205.28 million with EPS of Rs. 0.53 as against Rs.0.69 in 1HFY23. NP margin also posted a slump to hover around 9 percent in 1HFY23 as against 12 percent during the same period last year.

Future Outlook

While the company is exploring new ways to explore opportunities in the technology sector and enhance its revenues, rising cost, operating expenses and finance cost coupled with exchange losses will continue to dampen its margins and bottomline. Let’s see how the company strategizes its sales mix to include high margin services and counterbalance the rising cost pressure.