State of Telecom Industry in Pakistan

Telenor recently announced second quarter results for 2008 and lowered its growth forecast. The stock price fell down afterwards. This comes at a time when the leadership of Telenor Pakistan is about to change. This is in line with my previous post in which I commented on the slowdown for Telenor after a few months of rapid growth. On a positive note the margins improved.

According to Bloomberg “Increased costs of living in Pakistan, Bangladesh and Thailand and a rising Norwegian krone prompted Telenor to lower its 2008 revenue growth forecast to 3 percent from 5 percent. The company relies on eastern Europe and Asia for growth as Nordic markets reach saturation and traditional phone usage decreases.”

Among other trends, revenue per user (ARPU) continues to slide and there were fluctuations in the currency exchange rates. The highlights below are taken from Telenor’s second quarter earnings report available at Telenor website.

• The subscription growth slowed down compared to the previous quarter with net additions of 1.4 million, while the market share have remained stable at 20%, ranking Telenor Pakistan as the second largest mobile operator in Pakistan.

• ARPU in local currency decreased by 14% as increased average usage was more than offset by declining average prices.

• Total revenues in local currency increased by 54% mainly due to subscription growth of more than 7 million, partially offset by lower ARPU.

• EBITDA continued to improve and increased by 29% measured in local currency compared to the previous quarter.

• Capital expenditure was related to network roll-out to accommodate subscription growth and increased traffic.

• From 1 June 2008, in line with the national regulator‘s decision, the mobile termination rates in Pakistan were reduced from PKR 1.25 to PKR 1.10. The rates will be further reduced to PKR 1.00 from 1 January 2009 and to PKR 0.90 from 1 January 2010.

As reported in Daily Times and blogged about at Karachi Metblogs. Regardless of the fairness of this rule, I think it is absurd to assume that such rules can be realistically implemented. There will be a task force which monitors all the SMS traffic and figures out who is “manipulating” the market, yeah right! This is more of a PR tactic. Lets see when the first offender gets nabbed.

Manipulation of the stock exchange market through short messaging services (SMS) from mobile phones will be treated as a cyber crime, the federal government decided on Sunday, July 20, 2008.

The Federal Investigation Agency (FIA) will deal with creating disinformation about the stock markets through SMS. The government has also directed the agency to take immediate notice of such cases in future.

The decision to bring the practice under the agency’s supervision comes in the backdrop of a major stock market decline last week, which saw small investors, the most affected by the slide, demonstrating violently outside the major exchanges at Karachi, Islamabad and Lahore.

The recent sharp fall was attributed to a range of factors. Most immediate was the decision of the Securities and Exchange Commission of Pakistan to remove a 1% daily limit on how far share prices could decline, bringing it back up to 5%.

$99 unlimited calling plans have been recently introduced in the US by 3 of the largest wireless carriers. This has been making headlines in the US media and blogs. Many thought such plans will not come this soon as the US wireless industry has been very slow to adopt consumer-friendly trends. I started thinking whether this kind of flat rate unlimited calling plan will ever make sense in Pakistan? If so, for how much? Is Rs.10,000 a reasonable number?

Back to the US market - there are a number of analysts who think that this price war is going to hurt the wireless carriers’ bottom line. These announcements sent the shares of the wireless carriers like Verizon and AT&T down.

I see this as an interesting experiment which these large companies can afford. It will squeeze companies like Sprint who are already struggling - and may be that is part of the intended impact. Interestingly a large percentage of the revenue grwoth of these wireless companies is from data usage, for which the plans are different from calling plans. For instance Verizon will offer customers monthly data plan options of 50 MB for $39.99 a month or 5 GB for $59.99 a month.

I am interested in a true flat rate unlimited data and voice plan - which should make a phone like BlackBerry an even more attractive choice!

Telenor has announced solid results for third quarter 2007. See details at Telenor’s corporate site. Telenor’s stock is up since the earning announcement.

Telenor subscribers in Pakistan reached to 12.58 million - however the rate of growt slowed a bit. For details and Pakistan specific information, see the complete spreadsheet from Telenor or click on the thumbnail for a higher resolution quick snapshot. For a review of Telenor’s worldwide performance see this piece from Telecom magazine.

As presented in my previous coverage, Telenor has been successfully working to build its reputation and subscriber base.  When you look at the performance and subscriber numbers note the very high percentage of prepaid customers. This is true for all operators in Pakistan and a common phenomenon present in the emerging market telecom which pulls the ARPU down. The next challenge for operators such as Telenor is to bump up the ARPU. By introducing a wide range of value-added services such as comics, mobile tv and convenient picture uploading they are already on track for this. Next year results will show the uptake on these services.

This article notes that a study at Cambridge University found that 40 million adults in Europe (around 9 percent of the adult population) experience problems using mobiles, and the number of people who encounter difficulty increased with age. The elderly can often have trouble using modern mobile phone keypads.

Well, in Pakistan some of our adult population has difficulty due to many other reasons including illiteracy and unfamiliarity with gadgets.

In India people are willing to spend big money on so-called vanity or premium mobile numbers. Economic Times writes:

Guess how much will it cost to own 9999999995? Please pay Rs 15 lakh! Or if you are interested in 9855555555, then put a minimum bid of Rs 2 lakh, say mobile phone marketers. 

According to industry sources, many operators reserve some special series for politicians and bureaucrats, which are doled each time a government changes. Thus, few numbers never get released in the open market.

The craze for VIP numbers is highest in Punjab - where often the price of a VIP registration number exceeds the price of a car. Says a Hall Bazaar (Amritsar)-based mobile distributor: “Until now, the highest bid we have received is Rs 7.5 lakh for the number 9800000001. But other numbers like 9780000091 or 9780000009 can be bought for upwards of Rs 1 lakh. The series is open for sale.”

From Korea. Samsung Electronics and LG Electronics achieved the most successful quarterly results at the 3rd quarter of this year, selling 43 million and 22 million. Stock experts predict that Samsung will record KRW 16 trillion in revenue and 1.7 trillion in operating profit, a big increase from the result of the 2nd quarter, and LG will show 9 trillion in revenue and 280 billion in operating profit, offset by low sales of home appliances.

Research In Motion Ltd. reported that its quarterly revenue and profit more than doubled from a year earlier. The handset maker signaled its intention to move more aggressively into the wireless-content space, outlining a new free service called BlackBerry Unite. The desktop software will allow small groups of users like families to share content like calendars, music and documents wirelessly.

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Media is abuzz with news about reduction in force and restructuring at PTCL, which has 65000 employees. We have provided various views and news about PTCL at this blog before. Going through the time lines since last year, one can see that PTCL is at a critical junction. Depending on who you ask, PTCL is a management fiasco or a great opportunity. The stakeholders in this story include staff and workers (who have a union), Etisalat which manages PTCL with its 26% stake (and would like to get additional 25%) and the Pakistan government. The PTCL union leaders have announced their opposition to cut jobs. The state has not responded yet.

Significant questions have been raised by concerned public in media, blogs and online discusion forums about strategy and operations of PTCL. There are those who question the whole privatisation deal and whether it was good for Pakistan. Others point out to the hefty price paid by Etisalat and feel that this was the best possible option. Anyway, there is no going back to the days of state-owned monopolies in the telecom market of Pakistan.  It is clear that Etisalat is trying to turn around a big ship and it will face considerable difficulties on the way.  Even though job cuts are hard, in the long term there is no way around them. I want PTCL to get its act together and thrive in a fair and just manner.

According to Farhan Bokhari in the Gulf News:

As Etisalat moves to increase its stake in PTCL, it will inevitably be left with few options other than to work towards a robust plan for reforming the company with the ultimate objective of tackling its falling profits. Unless PTCL’s profits are not just lifted but turned into significant gains, the company’s long term outlook is likely to suffer.

While PTCL has been privatised for some time now, the Pakistani public is yet to witness the fruit of the change of management from public sector to private sector. Pakistani consumers may have seen the benefit of this change in ways such as much easier access to new telephone connections that once took several years to be provided.

But the quality of service by PTCL’s staff in areas such as dealing with complaints from subscribers still remains of simply pathetic quality. Stories such as subscribers waiting for several days before the PTCL staff were able to deal with out-of-order phone lines in rain drenched neighbourhoods still make the rounds across Pakistan.

Read on for more background.

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Pakistan Telecommunication Co Ltd (PTCL) on Friday reported a 24.7 percent fall in net profit for 2006-07 financial year, as rising competition led to a decline in revenues from call traffic. Sources: Reuters and other news sources.

The full results are not available on the investor section of PTCL site as of this writing but I hope that the details will be posted there soon. It will be interesting to watch the stock performance after these results and the recent announcement by Etisalat about acquiring controlling stakes. The analysts comments below are worth reading.

Highlights of PTCL financial results 2006-07:

1. PTCL earned net profit of 15.64 billion rupees ($258 million) for the year ended on June 30, down 25% from previous year. Earnings per share fell to 3.07 rupees from 4.07 rupees. This was in line with the market expectations of 15.41 billion rupees to 17.69 billion rupees range. 
2. The company said its revenue for the year fell to PKR65.28 billion, from PKR69.08 billion a year earlier.
3. Operating costs increased to PKR46.56 billion, compared with PKR41.69 billion a year earlier.
4. PTCL announced a cash dividend of 2.0 rupees per share, its first payout for 2006-07.

Analysts Are Optimistic

As reported by Reuters, Analysts said the fall in profits was a result of lower revenue from international and domestic call traffic and increased competition from new market players.

“Since the implementation of deregulation policies in the domestic telecom sector, the company is facing immense competition from new players, especially in the long-distance and international calls segment,” said Abrar Hussain, an analyst at First Capital Equities Limited.

But analysts said PTCL’s profitability is expected to rise in coming years as it expands network and attracts more customers.

“We anticipate an 11 percent annual growth in net profit of the company during the next three years,” said Abrar Hussain, an analyst at First Capital Equities. PTCL’s profitability growth is to result from the cumulative impact of expanded fixed line network, including profit of 20.78 billion rupees last year.

“The company has potential to grow in the longer run if the management succeeds in implementing steps for network expansion, service customization, cost-cuttingand the introduction of new services and efficiency measures,” said Hifza Zia, an analyst at Atlas Capital Market.

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An article in Wall Street Journal today talks about the Pakistan economy, entrepreneurs and money from aborad in the forms of aid, remittances and expat investments. The title is “In Turbulent Pakistan, Start-Ups Drive a Boom” and it talks about the apparent paradox: Pakistan’s political scene is growing more clouded, but a clear demonstration of confidence in the country’s future is coming from an emerging economic force: Entrepreneurs. Since 1999, Pakistan has become one of Asia’s fastest-growing economies, the article mentions.

The article briefly mentions the growth in Telecom but does not go in the details of how the growth in telecom has provided additional jobs and opportunities for the public. I think more details on Telecom’s contribution to Pakistan’s economic growth would have been an interesting point in this article. A separate study estimated that the mobile industry has created 220,000 high-paying jobs in Pakistan and accounts for 5% of its Gross Domestic Product (GDP) and approximately 6% of the total taxes collected by the Central Board of Revenue.

Some excerpts are given below. I disagree with the ‘credit-friendly banks’ line - the banks in Pakistan have acted as aggressive loan pushers and have made tremendous fortunes at the expense of common people. However the point about the importance of younger generation is very true and businesses - including telecom companies - seem to be aware of this market segment.

Pakistan now permits 100% foreign ownership of its banks, prompting more consumer-friendly lending for home mortgages and cars. Meanwhile, a telecommunications monopoly has been broken up and policies have been tweaked to reduce user fees. Cellular subscribers have expanded 94% a year since 1999.

Not all are convinced the economic traction is sustainable, though. While Pakistan has seen an unprecedented consumer boom, 7.9% inflation and a sluggish job market have undercut modest income gains, contends ABN Amro’s senior economist in Islamabad, Sakib Sherani. In luring new industries and cultivating a broad-based business class that will keep the economy globally competitive, Pakistan lags behind countries such as Vietnam, as well as China and India, Mr. Sherani says.

Many critics also contend that substantial amounts of U.S. assistance — estimated at more than $1 billion a year — may be the biggest underlying reason why Pakistan’s economy is doing well. But the economy is also sprouting from the bottom, thanks to seed capital from abroad and more credit-friendly banks. Last fiscal year, Pakistan received a record $5.1 billion in foreign direct investment, the government says. Overseas remittances, which are what Pakistanis are returning from bank accounts overseas, hit $5.5 billion in the same period, also a record.

By sheer demographic weight, the younger generation will determine Pakistan’s direction. Of its 160 million people, 100 million are under the age of 25. Many are rural, poor and unprepared for a role in the global economy. But fast economic growth has also drawn more men and women to the cities, propelling some up the income ladder through education and new jobs.

Source: WSJ  (subscription required)

2007 continues to be THE year of acquisitions for telecommunication companies in Pakistan. According to media reports, after months of talks, the deal has been officially announced: Omantel is to buy 65 percent of Pakistan’s Worldcall for $156 million. See our previous related coverage and detailed analysis here and here.

Oman Telecommunications expects to conclude a deal to buy 65 percent of Pakistan’s Worldcall by the end of the month, its chief executive said on Sunday. The deal would be worth 9.43 billion Pakistan rupees ($156 million) at the stock’s closing price of 19.3 rupees on Friday.

“It is a 65 percent stake,” Mohammed al-Wohaibi told Reuters by telephone. Omantel had initially expected to conclude the purchase of a majority stake in the Pakistan-based wireless local loop operator in June, without saying the size of the stake it was seeking or how much it would pay. “We expect to conclude the deal before the end of the month. There were procedural delays,” Wohaibi said.

Omantel, the country’s second-largest firm by market value, is bracing for the end of its fixed-line monopoly this year, two years after the government opened the mobile business to competition.

Shares of the state-controlled company, which reported a 13 percent rise in second-quarter profit on Sunday, have risen more than 3 percent this month.

As I have written before, it is not easy for individual investors to invest in Pakistan’s telecom sector as majority of the companies are not listed on any of the Pakistan stock exchange. This works in favor of Ufone and its parent PTCL, listed as PTC on Karachi Stock Exchange (see wikipedia entry on KSE) even though the investor section of the PTCL web site does a lousy job of public relations for investors. 

This was also mentioned in Pakistan telecom sector review section of the July issue of Pakistan Pulse, an investment strategy report from Merrill Lynch:   

Lack of actionable ideas restricts choices
Despite the immense potential, general lack of listed telecom companies and price distortion due to potential merger and acquisition stories restrict actionable ideas in the sector. None of the six cellular companies are listed and only four out of the 38 fixed line and WLL operators (operational and non operational) and 12 LDI operators are listed. The merger of four WorldCALL group companies in 2006 has shrunk the universe further and to top it all, the four too are surrounded by M&A stories. If you bring size and liquidity into the picture, we believe the incumbent PTCL remains the only liquid investable stock in the telecom space in Pakistan.

Perhaps what’s needed is a new generation of technology startups in Pakistan with their successful IPOs.

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This post is a brief overview of how Telenor did in Pakistan for second quarter of 2007 . I’ve included the extracts from the reports available at Telenor’s website. Most indicators are good: Revenues have soared, subscriber share is steadily increasing. The EBITDA (earnings before interest, tax, depreciation and amortisation) is positive for the first time, though the ebitda margin is only 7%. Another thing which needs to be noted that Telenor’s operating losses have reduced in 2007. Yes, they lose money. The losses are  due to leasing line costs and capital expenditure, among other factors. I still rate Telenor “buy” but at the time of this writing they are trading a bit on the high side.

The average revenue per user (ARPU) has stabilized around Rs 280 per month for Pakistan - its low but that’s the reality of the market. The bottom chart below shows the minutes of use and the average price per minute, which for Pakistan is around Rs 2/min. Interesting to compare the same for Bangladesh.

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As we all know Singapore Telecom had been working to get a slice of Warid Telecom. The deal has gone through and it is valued at US$758 million, which gives them a 30 percent stake in Pakistan’s third largest mobile phone operator, Warid Telecom. This is a great win-win deal in my opinion. As I wrote before Warid wanted to partner with a leading company to raise funds while keeping control of their business. They have succeeded in their goal. Simple back-of-the-envelope calcualtions show that SingTel paid a very decent price, unlike the Etisalat case a few years ago in which they paid over $1200 per subscriber. My hope is that Singapore Telecom will bring in some of their discipline, attention to detail and care for customers to Warid in Pakistan. We really need that, more than anything else.

Here’s the official stuff:

In a statement, SingTel said the investment was part of a strategy to support Warid Telecom’s continued growth and to enhance its market position.

Warid Telecom is part of the Abu Dhabi Group.

According to earlier media reports, the Abu Dhabi Group will still hold the remaining 70 percent stake in Warid Telecom.

Pakistan’s telecom sector has attracted US$9 billion in foreign investment in the last three years.