PTCL profits up; but must innovate for growth

Pakistan Telecommunication Companys bottom-line jumped manifolds during fiscal year 2009. The telecom giant earned Rs 9.1 billion last year, compared with net losses of nearly Rs 3 billion in the year before. But don be fooled by numbers as the growth mainly stems from lower base effect arising out of the huge rightsizing expense it booked last year.
The firm had expensed out Rs 23.9 billion for a onetime extraordinary cost under Voluntary Separation Scheme aimed at gaining efficiency in operations. So, in effect, the blue chips profits have actually declined by 28 percent over fiscal year 2008, deducting the impact of VSS on net earning it booked in that period.
The firms operating profits were dented by 11 percent drop in revenues as its fixed line business - its main bread and butter - continued to struggle, while competitive pricing and inflation axed its gross margins. Consequently, its share price tumbled sharply on Tuesday.
PTCLs stock, which had already been under pressure for most part of yesterdays session, closed at its lower circuit limit, as the last minute announcement disappointed investors with zero payout, despite sitting on a cash pile of Rs 23 billion as of 9MFY09. Two things are likely to dominate PTCLs mancom talk now; a) how to ensure that the efficiency gains are materialised and b) how to deal with the saturation of its fixed line business amid a slowing pace of growth in teledensity, a phenomenon faced by the whole telecom industry.
With price competition in the industry nearing peaking out, the firms margins may increase in the future. PTCL managers must reverse the direction of falling yields on operating assets, by coming up with innovative products, as the firms revenues are likely to follow a downward trajectory unless it moves in niche segments and makes an efficient use of its existing infrastructure.
Having launched a series of new packages including Broadband and Smart TV the firm seems to be moving in a right direction. But it also needs to increase the scope of its offering such as expanding the recently launched bundle package by clubbing internet, TV, and telephonic services.
Other avenues of growth can stem from the expansion in wireless segment to tap the rural population, challenging cellular firms in international calling segment, enhance the capacity of submarine cable to meet the international traffic load and above all - improve its customer services to halt the migration of customers to cellular industry.

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PTCL - P&L

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RS (MN)                         FY09          FY08        % CHG

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Revenue                       59,239        66,336         -11%

Cost of services              37,732        37,346           1%

Gross profits                 21,506        28,989         -26%

Gross margins                     36%           44%        -17%

Admin & general expenses        8935         10823         -17%

Selling and marketing cost     1,817         1,799           1%

Operating income              10,754        16,365         -34%

VSS                               92        23,937        -100%

Other operating income         4,267         3,957           8%

Finance cost                   0.908         0.847           7%

PAT                            9,151        -2,824

EPS (Rs)                        1.79        -0.55

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