Telecom giant sees profits fall

Tring! Tring! Anybody and everybody who held PTCL in his portfolio had a field day yesterday. Within seconds of the telecom players nine-month result announcement its stock price shot up to its upper circuit limit; as the company surprised its investors with an interim dividend of Rs1.75 per share.
And although the stock closed lower than its upper-level, by the end of the day, nearly 22 million shares had exchanged hands - the highest single-day volume since March 2010 - as against an average 1.9 million shares in the calendar year to date.
But thats all the excitement there is to PTCL. The telecom giant continues to show signs of fatigue with net earnings falling by a massive 37 percent for the nine months ending March 2011.
Intense competition in the sector and the gradual shift away from fixed line telephony to mobile telephony in the country put a strain on the companys fixed line business. This caused a 5 percent decline in the top line for 9MFY11 compared to the same period last year.
This was despite the strong growth momentum in emerging segments of broadband and corporate services. The broadband DSL service remained the highest growth revenue stream for PTCL, increasing its market share in this segment to 90 percent.
Compared to its growth in revenues, PTCLs cost of sales jumped by a higher percentage - squeezing its gross margins by around 900 basis points.
Following governments directives, PTCL had raised employees salaries by 50 percent. Half of this increase materialized in December, further pushing up costs for the company. On the other hand, price wars with competitors also eroded margins for PTCL during the period under review.
The company managed to maintain its administrative expenses as a percentage of sales around 12.5 percent, while its selling and marketing costs shot up 100 bps as a percentage of sales.
As usual, the companys cash rich balance sheet came to its rescue. Other operating income, which includes dividends from subsidiaries (e.g. Ufone) and returns on cash parked with banks, increased by 7 percent in 9MFY11 compared to the last year. However, the gain wasn enough to improve net margins that fell by nearly 6 percentage points over the period.
Going forward, negative growth in fixed line & wireless local loop operations and high operating expenditures pose major downsides to PTCLs margins. Industry sources believe that PTCLs revenue would be depressed if PTA slashes APC rates - a fee charged to raise funds for mobile telephony in Pakistan - further on incoming international calls.
While the fixed line telephony business is set to decline further, PTCLs market dominance in the value added services is also under threat from smaller players who are scrambling to find a niche for themselves.

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PTCL

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(Rs mn)                  9MFY11    9MFY10      Chg

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Revenue                  41,024    43,119      -5%

Cost of services         30,560    27,883      10%

Gross profit             10,463    15,236     -31%

Gross margins               26%       35%     -28%

Admin and general         5,136     5,333      -4%

Selling and marketing     1,704     1,439      18%

Other income              4,189     3,923       7%

Operating profit          7,812    12,386     -37%

PAT                       4,971     7,860     -37%

EPS (Rs)                   0.97      1.54

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Source: KSE notice