PAKISTAN TELECOMMUNICATION COMPANY LIMITED (PTCL) – Analysis of Financial Statements

INTRODUCTION: Pakistan Telecommunication Company Limited (PTC:) is the telecom giant of Pakistan, not least because it has licenses in all the three telecom segments: fixed local loop (FLL), wireless local loop (WLL), and broadband.

Ufone (Pakistan Telecom Mobile Ltd), the wholly-owned subsidiary of PTC, significantly enlarges the latter’s footprint on the local telecom scene. In April 2006, Emirates Telecommunication Corporation, commonly known as Etisalat, assumed management control of Pakistan Telecommunication Corporation Ltd – part of the $2.6bn deal to buy a 26 percent stake in PTCL.

In the FLL segment, PTCL has over 6 million installed PSTN lines (fixed lines) with more than 3 million working. As of June end 2010, PTCL controlled more than 95 percent of the market of 3.41 million subscribers. In the WLL segment, PTCL continues to be the market leader with over 1.3 million subscribers of its V-fone brand as of April 2011.

In the Broadband segment, PTCL has an installed capacity of more than 1 million ports spread across 500 cities and towns and a customer base of 0.61 million as of March 2011. ‘PTCL EVO 3G’, the wireless broadband device has roughly 237,000 subscribers as of March 2011. As carriers-carrier, the corporation also provides core infrastructure services to the cellular, LDIs, FLL operators, ISPs, call centers and payphone operators.

SALES REVENUE

Revenue for FY10 continued the declining run it started in 2005. Revenue from FLL operations continued to decline, which is in line with regional decline of the fixed line telephony. Aggressive price competition, higher taxation and mobile substitution are the major factors. PTCL lost over 100,000 landline subscribers in FY10.

However, like FY09, FLL revenue decline was partially offset by continued increase in the revenue from broadband and international calls. The broadband DSL service remained the highest growth revenue stream for PTCL, increasing its market share in this segment to over 90 percent. During last year, more than 200,000 new DSL subscribers and almost 100,000 EvDO subscribers were acquired during the year.

Revenue from international calls shot up by almost 15 percent to come at Rs 7 billion in FY10.

The management has now renewed its focus on FLL operations by providing corporate solutions, improved customer care and launching of new packages and services.

COST OF SALES

Despite a fall in revenues, cost of sales shot up by 1.4 percent in FY10 compared to FY09. This has primarily been due to a payment of Rs 1.54 billion in employees’ retirement benefits. Other heads under the cost of sales have remained in check.

GROSS PROFIT MARGIN

Depressed revenues and rising cost of sales led to a steep decline in FY10 gross profits which went down by over 12 percent compared to FY09. This is in sharp contrast to a stellar gross margin of 43.7 percent in FY08, owing to higher revenues with similar cost of sales expenditures.

OPERATING EXPENDITURES

Furious competition in nearly every segment made it difficult for PTCL to take cuts in its selling and marketing expenditure, which increased to 3.75 percent as a percentage of revenues from around 3 percent a year earlier. A 57 percent surge in advertisement spending and a 10 percent growth in salaries of sales & marketing staff have driven these expenses higher.

As for administrative and general expenses, they dropped by a whopping 20 percent in FY10. This comes on the heels of cost cutting measures adopted in the previous years. Crucial savings in these expenses are despite rising expenses on salaries, fuel and power.

OTHER OPERATING INCOME

Just like in FY08 and FY09, the company’s cash rich balance sheet provided a much-needed cushion to its core operating performance. Other operating income, which includes dividends from subsidiaries (eg Ufone) and returns on cash parked with banks, increased by 20 percent and 30 percent compared to FY09 and FY08 respectively.

PTC finally received a dividend from Ufone in FY10 amounting to Rs 695 million (FY09: nil; FY08: Rs 350 million). It also earned Rs 603 million in interests accrued from its long term loans, which includes subordinated loans of Rs 7 billion granted to Ufone. PTC also increased its shareholding to 650 million shares in Ufone (FY08 & FY09: 350 million shares).

Prudent utilisation of funds brought the firm over Rs 3 billion in returns on bank placements in FY10. Mark-up in deposit accounts ranged from 5 percent to 13 percent per annum.

OPERATING PROFIT MARGIN

Despite higher selling expenses, operating profit declined by only 2.24 percent due to dividend income and handsome returns from bank placements. This helped the operating margins to improve to 25.68 percent in FY10 compared to 25.36 percent in FY09 and 24.67 percent in FY08.

FINANCE COSTS

During FY10, PTC controlled its finance costs which saw a decline of 55.62 percent. While the bank charges have declined in line with recent years’ trend, the real impact came from a whopping 94.4 percent decline in foreign exchange loss. It must be noted that PTC had previously incurred foreign exchange loss of Rs 458 million in FY09 and Rs 319 million in FY08.

NET MARGIN

Despite lower revenues and higher operating costs, PTC’s net profit margins were higher by 1.56 percent in FY10 – an improvement of 81 basis points over FY09. This was primarily due to higher ‘other operating income’ and lower financial charges in FY10. The otherwise outstanding performance in FY08 was overshadowed by the Rs 24 billion in expenditures incurred on the ‘Voluntary Separation Scheme’, hence a net margin of negative 4.26 percent.

LIQUIDITY MANAGEMENT

Due to better deployment of cash reserves, mainly into long-term investments and loaning to its subsidiary Ufone, PTC’s current ratios during FY09 and FY10 have been lower than in FY08. However, current ratio is still healthy at 1.51 in FY10.

DEBT MANAGEMENT

PTC’s debt to asset ratio is around 0.34 for FY10, well in control. High share capital and revenue reserves have made total equity four times its debt in FY10. Due to lower finance costs, company’s ability to service its debt has increased to more than 36 times in FY10.

PROFITABILITY

Due to higher profits despite declining sales, company’s return on capital has increased by 20 basis points in FY10 to 7.4 percent. Similarly, return in equity has increased over FY09 by 5 basis points in FY10 at 9.33 percent. Both returns and profit margins were negative in FY08 due to net loss.

MARKET VALUE

Company’s EPS increased to Rs 1.82 in FY10 from Rs 1.79 in FY09. Price to earnings ratio has also improved to 9.77 in FY10.

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