State of Telecom Industry in Pakistan

This post examines the challenges faced by PTCL and its future prospects.  As we know the Etisalat owned PTCL has been engaged in battles with new competitors and regulatory body (PTA) on one hand and faces internal organizational issues on the other. Its profits have been sliding. Notwithstanding the grand claims by its executives, Will PTCL be able to reverse the trend and prove to be a good investment?

Background
In the last couple of years the impact of deregulation and increase in competition in telecommunication industry in Pakistan has been increasingly felt by PTCL. This phenomenon is not unique to PTCL - incumbent providers all over the world have gone through this difficult transition from being a monopoly to a free market competitor.

Let’s take a look at 2006 financial results of PTCL (As of Sep 30, 2006). The following is based on the information posted on PTCL web site and as reported on Business Recorder.

- During the period under review, PTCL added net 108,000 new working connections to its network. Overall, PTCL’s sales revenue for the first quarter was Rs.16.9 billion as compared to Rs.17.7 billion during the corresponding period of last year.
-The company announced net profit of Rs 8.4 billion translating into an EPS of Rs 1.64 for the first half of 2007, a decline of 23 percent over the corresponding period’’s net earnings and EPS of Rs 10.8 billion and Rs 2.12 respectively. The major factor for the decline in the top line was six percent downfall in the revenues from Rs 34.9 billion in first half of 2006 to Rs 32.7 billion in IH/FY07 owing to rapidly declining market tariffs
- Slide in profit is a continuing trend … question is when would it be stable? Investors do not welcome this uncertainty.

Threats and Weaknesses
* Increased competition in long distance continues to exert pressure.
* VOIP use is increasing despite ambiguous and discriminatory policies - this will eat into its profits (example: international outgoing calls). Note that PTCL itself is also utilizing VOIP technology (from iBasis) and as a result it has reduced its international rates drastically in 2007. Rs 2/min call to US is cheaper than Rs 2.5/min call to mobile phone.
* Bandwidth rate dispute with PTA is been dragged in court: if PTCL loses it will be a major cost, EVEN IF PTCL wins the case their artificially high bandwidth rates cannot be sustained.
* Paknet, the Internet service provider arm of PTCL continues to incur losses due to poor managment and lack of network optimization.
* PTCL-V, the fixed wireless phone service is poor.  They should use some their marketing Rupees and use it for better service delivery, correct billing and competent customer service.
* Recent censoring fiasco  and its poor handling exposed deep problems with administration and bureaucracy at PTCL. It was yet another major public relations disaster.

Strengths and Opportunities
o Made large capital expenses on network improvement to stay competitive.
o Ufone is performing well though Warid and Telenor are tough competitors. PTCL, Ufone’’s profitability increased by 49.2 percent to Rs 977 million in 1H/FY07 as compared to Rs 655 million in the corresponding period last.
o IPTV rollout can change the game, if done right it will tilt the odds in PTCL’s favor. It will make sticky bundles possible (tv+pohne+mobile) with say a single bill for convenience.
o With over 2 million lines PTCL is the largest WLL provider. 1134 base stations cover 720 cities and capacity is being added.
o Local service revenue is ok, paying bills through phone is a commendable start.
0 Has vast infrastructure and real estate assets which can be leveraged further.
0 Global connectivity reliability has been improved. PTCL is expanding the long distance and infrastructure side through spreading out two SEA-ME-WE submarine cables.

Conclusion & Recommendations