PTC: ICH woes, Ufone plague top line

The telecom giant continues to feel the pinch from the suspension of the International Clearing House (ICH) arrangement that had guaranteed high rates on long distance and international calls (LDI). In the recently concluded half-year, PTCL groups (KSE: PTC) top line was trimmed 11 percent due to this and lower Ufone revenues.
The company's standalone top line continues to be marred by low tariff and low volume of incoming minutes from its LDI telephony business. Company revenues fell just over eight percent year-on-year to Rs39.35 billion in 1HCY15. But the ICH hangover may be receding. First, the firm's top line has absorbed much of the damage from LDIs fall. Second, market vibes suggest that incoming LDI minutes have started to go up.
It was the emerging segments - broadband and enterprise services (B2B connectivity) - that contained the impact of LDI businesss weakness. Both wireless and wireline broadband have been raking up additional subscribers. Official stats show that as of March 2015, both these broadband services had nearly 3.5 million subscribers between them.
Yet PTCL Company's woes alone do not explain why the PTCL groups 1H profits were more than halved. Its Ufone, the group's cellular subsidiary that takes much of the blame here.
Latest financials suggest that Ufone made a loss in 1HCY15, which further drained the groups profitability. The subsidiary's woes are mostly on account of its top line decline, brought about by a loss of nearly 3.7 million subscribers between Jan-Apr 2015. Moreover, higher finance costs for the loan it took to acquire 3G license and finance subsequent network rollout are also at work here.
The groups consolidated cost of sales mounted despite lower sales. As a proportion of the top line, cost of sales stood at 71 percent in 1HCY15, compared to just 63 percent in 1HCY14. The resultant impact on gross margins was a decline of eight percentage points. There was nothing in the rest of the P&L statement that could blunt the impact of the top line slump and stubborn core costs, forcing the firm to close the first half on a dismal note.
In the near future, PTCL group seems set to derive strength from PTCL Company's growing broadband services and enterprise operations. Besides, revenues from the LDI stream may also start turning positive growth. But it is Ufone's business that is showing weakness. Understandably, the last-ranked 3G operator is in a market-making mode for mobile broadband, just as its peers. It will be a while before Ufone can be a source of financial strength for the group.

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PTCL Group (consolidated)

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Rs (mn)                1HCY14      1HCY15         chg

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Revenues               68,509      60,985        -11%

Cost of services       42,950      43,574          1%

Gross profit           25,559      17,411        -32%

Gross margin              37%         29%

Other income            2,499       2,638          6%

Operating profit       11,096       4,186        -62%

Profit after tax        8,237       3,163        -62%

Net margin                12%          5%

EPS (in Rs)              1.62        0.62

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