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The Pakistan Telecommunication Company Limited (KSE: PTC) has closed the half-year with a healthy bottom line growth, despite a lacklustre top line performance.
The company’s revenues grew by 7 percent year on year in the six-month period. That is obviously a disappointment compared to the 20 percent top line growth seen in full year CY13. In all likelihood, the damage has been inflicted yet again by the flailing international telephony or LDI business operations, which has recently accounted for roughly a quarter of the firm’s revenues.
The LDI revenues have presumably been lower due to falling international minutes due to higher call rates on international calls that had set in after the controversial ICH mechanism was put in place in October 2012. The LDI revenue decline probably worsened in 2Q CY14 when overall revenue growth came down to 5.4 percent year on year.
From August 1, the call rates to Pakistan are expected to be brought down which may improve the volume of minutes landing in Pakistan. However, the concern is that any increase in volume may not going to be as sharp as the decline in call rates, so the revenue bump may only be partially offset for PTC, the largest LDI operator.
Throughout the ICH regime, PTC mostly outperformed the KSE-100 index (see illustration). But, as the regime collapsed last month, the scrip also declined its sheen a bit. But, that’s a short-term concern. As noted in this column earlier, PTC has been focused on the broadband market, instead of voice alone, for the past many years under the Etisalat management.
Now, it is among the fruits of a five-year long turnaround effort that despite a significant hit to the LDI business this year, the company still managed to post a 7 percent top line expansion. Rapid growth is reported in the revenues and subscription base of both wireless and wire line broadband segments, besides net additions in the landline subscriber base as well. Revenue growth is said to be especially robust from the EVO wireless segment.
On the cost side, things seem to be under control. Core costs have had a less-than-proportionate growth of 4.3 percent. Thus, these costs consumed 64.18 percent of revenues in 1H CY14, 173bps lower than 1H CY13.
There is some slippage on operating expenditures side, as administrative expenses grew by 18.2 percent and selling expenses 11.7 percent. Together, these two exhausted 15.61 percent of revenues, 126bps more than same period last year. However, this lapse still couldn’t stop operating margin to show a 46bps improvement over previous year to reach 20.21 percent in 1H CY14.
More support came from ‘other income’, which PTC receives from interest on subsidiary loans and return on bank placements. This income head grew by 27 percent year on year due to strong receipts in the second quarter, and directly helped the net margin, which improved by 59bps to reach 16.3 percent in 1H CY14. Profit after tax increased by over 11 percent to reach Rs6.99 billion for the period.
What’s next for PTC? The irritant of LDI revenue slump will continue to hamper top line growth, but it will be a short-term issue. The company is showing strong growth in its core business, the broadband and landline segments, which should help the firm record decent growth in the near term. As the market is set to increasingly move towards mobile broadband in line with the gradual 3G services rollout, PTC looks set to benefit from this growing ecosystem in the long run; thanks to its massive network infrastructure and retail market presence.


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PTCL COMPANY
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Rs (mn) 1HCY14 1HCY13 Chg
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Revenues 42,849 39,978 7.2%
Cost of services (27,502) (26,348) 4.4%
Gross margin 35.8% 34.1% -
Administrative expenses (5,116) (4,327) 18.2%
Operating margin 20.2% 19.7% -
Other income 2,580 2,030 27.1%
Profit after tax 6,998 6,294 11.2%
Net margin 16.3% 15.7% -
EPS - Rs 1.37 1.23 11.4%
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Source: KSE announcement
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