KARACHI – Pakistan Telecommunication Limited (PTCL) is facing faster than anticipated revenue attrition in stagnating Fixed Local Loop (FLL) business; escalating operating expenditure (Op-ex) following appreciation salaries which lead to margin contraction; and weak pricing outlook in the wake of strong competition, especially in the cellular segment Yet, market analysts are optimistic of the scrip on premise of continuous strong performance of cellular subsidiary given Profit After Tax (PAT) in the first half of the Financial Year (FY) is up 35 percent in annual terms rising to Rs1.8 billion; growing incomes from other avenues such as interest earned on loans to subsidiaries and investment of surplus cash in government treasuries; and growing broadband footprint following aggressive investment in technology and marketing campaigns.
Analysts stressed their belief that existing concerns regarding core profitability are reflected in the poor performance on the bourse. Mustafa Bilwani at JS added that with vigorous investment in broadband; the management’s focus on bundling of services alongside enhanced concentration on corporate solutions and new inflows in the case of the Universal Service Fund (USF) are all likely to play a positive role in supporting the bottom line, but add to costs incurred. Furthermore, the use of surplus cash to generate additional income has diversified risk from core operations. He stated that, “We cut our FY11-FY13 estimates for PTCL by 20- 22 percent after the first half results, while revising our target price down by 7.7 percent to Rs 24.”
The revenue base lost ground during the period, as it was shrunk by 6 percent since the same time last year, primarily due to lower revenue from Fixed and Wireless Local Loop. Additionally, no major effect of the Hajj season was observed in the second quarter, as revenue growth remained muted on the basis of the quarter.
Rising operating costs (up eight percent to Rs20.1 billion), attributed to the growing salary bill, which make up 22 percent of total operational expenditure, and rising marketing costs (up 30 percent to Rs 1.2 billion) led gross and operating margins to decline by 9.0 percent and 5.8 percent, respectively.
As a result, these settled at 27.5 percent and 22.8 percent, in the first half of FY11. However, on an encouraging note, other income streams continued to mature, up 43 percent to Rs 3.2 billion, as interest income on loans advanced to Ufone alongside return on investment in government treasuries (Rs 7.0 billion as of Dec 31) picked pace. Moreover, PTCL also booked dividend income of Rs644 million (Earning per Share impact of Rs 0.11) from Ufone in the second quarter of 2010. As a result, non-core income made up 52 percent of Profit before Tax in the current period (an average of 26 percent in FY06-10).
JS has tweaked its assumptions post release of 1H results and now anticipates PTCL to register earnings of Rs 7.8 billion (EPS of Rs 1.53) in FY11. For FY12 and FY13 as well, the estimates are trimmed by 21 percent and 22 percent for the scrip with EPS of Rs1.63 and Rs1.74, respectively as aggressive competition with the cellular services, leading to pricing pressures, is likely to restrict revenue growth.
On an additional note, the estimates for operational expenditure have also appreciated, taking into account rising salaries which are likely to have a negative impact, evident from an eight percent rise in op-ex.
