PTCL — current constraints point towards future potentials


PTCL, the largest telecommunications company in Pakistan, announced their annual results for the year ended June 30th, 2011 in a meeting held in Islamabad on September 08, 2011. The decline in net profit by 20 per cent over the year, coming at Rs7.46 billion from Rs9.29 billion in the previous year, is indicative of tough macroeconomic conditions and increasing industry competitive position which are negatively impacting Average Revenues per Subscribers (ARPU). However, this gives way to new innovations and reflects changing market dynamics of the telecom sector; an aspect the management at PTCL seems cognizant of.

Financial snapshot
While consolidated revenues for the group rose by six per cent over FY11, revenue for PTCL dipped by 3.4 per cent to stand at Rs55.25 billion from Rs57.17 million during FY10.
The company was subject to declining fixed line subscriptions as a result of market saturation and stiff competition from wireless providers. However, growth in the broadband segment, value added services and provision of corporate solutions partially mitigated the dip in revenues. With a 67 per cent growth in broadband subscribers, revenue from the product line increased 77 per cent.
PTCL seems to have made the DSL segment its forte, commanding a massive market share of 95 per cent while the market share of wireless data services also remains healthy with the company’s recognised brand EVO 3G.
Moreover, the introduction of PTCL’s new products – EvO Cloud and Tablet – have met with positive initial response, however, their sustained success still remains to be seen. Nevertheless, in the context of overall revenues, the dip in sales mirrors the trend faced by many telecommunication companies within the industry as the trend of wireless technologies continues to grow.
PTCL strength lies in the vast geographical network that it has invested in over the years. In so far, the competition from wireless providers is limited within urban areas; although bulk revenues are generated from this customer class, PTCL can capitalise on the opportunity to extend its services to its well established rural area network.
The company continued to witness rising operating costs which rose by nine per cent to Rs41.81 billion with stubborn inflation and rising salaries being the main culprits. Selling and marketing expenses rose by 6.5 per cent, indicating some commitment towards aggressive advertisement for its new products. Other operating income depicted a surge as it rose by 52.68 per cent over FY11 and was reported at Rs7.84 billion.
The bulk of this non-core income represented dividend income from PTCL’s subsidiary, Pak Telecom Mobile Limited – with its recognised brand Ufone. Return on investment on treasuries and rising interest income on loans extended towards PTML.
EPS of the group came out to Rs1.65 of which EPS for PTCL was Rs1.46. No dividend was announced as PTCL had already declared an interim cash dividend of Rs1.75 per share for the year 2010-11.
PTCL’s stock price has witnessed a decline over the year; yet, the scrip offers an impressive dividend yield of 15.35 per cent and trades at a PE of 5.5x.

Strategy for future growth
PTCL, with its new management, has developed a futuristic approach and a strategy of innovation in order to capture the market and build a strong customer base. This is evident from new products being marketed on a frequent basis. The success of recently introduced new lines can be gauged from encouraging market response that has resulted in a footing being established from the onset. As an example, the company’s DSL broadband is the largest and fastest growing in the country with broadband services and has been made available in over 1,000 cities and towns in a short span of time.
In addition, the company is also exploring the possibility of utilizing branchless banking technologies which would offer substantial synergies given the presence in rural areas. PTCL remains a proponent of 3G and 4G technologies and believes, barring short-term constraints, there is sufficient room in the market for the introduction of these. Further, the management correctly points out in its report that ‘time seems ripe for diversification’ and be believe PTCL is on the right track in diversifying exactly in those segments where potential seems high.
PTCL’s innovative approach towards developing its customer base and its key geographical strength are factors which the company progressively plans to focus on. A recommendation for a buy for the scrip of PTCL is a viable option based on its diversified sources of income, a sustained aggressive marketing campaign and a commitment towards innovation and retaining the customer base.