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If there was still any doubt that year 2019 was a particularly bad year for the local telecom industry, the latest financial results of Pakistan Telecommunications Co. Limited Group (PSX: PTC), for the year ended December 31, 2019, should provide some clarity. After having a rather good year in 2018, the telecom giant had to watch profitability more than halve in a difficult year of rising costs and expenses.

It all started with a weak showing at the top. The group topline scored a yearly gain of just 2 percent in CY19. This is down from a healthy growth of 8 percent the previous year. With inflation in double digits, this is negative growth in real terms.

The topline has flat-lined mainly because the PTCL Company – the behemoth that provides over half of group topline – could grow its revenues by a meager 0.39 percent year-on-year. It appears that the company’s broadband business, which is a promising segment given the untapped market, is growing just enough to compensate for the declining revenue streams, but not enough to boost company financials.

PTCL GROUP (consolidated)
Rs (mn) CY19 CY18 Chg
Revenue 129,543 126,862 2.11%
Cost of service (95,661) (92,915) 2.69%
Gross profit 33,881 33,948 -0.19%
Administrative & general expenses (17,027) (15,412) 10.48%
Impairment loss (3,225) (2,256) 42.95%
Selling & marketing expenses (6,947) (6,819) 1.87%
Operating profit 6,682 9,460 -29.37%
Other income 6,157 5,722 -7.61%
Finance costs (9,203) (8,232) 11.80%
Profit before taxation 3,636 6,949 -47.68%
Provision for income tax (1,259) (1,239) 1.56%
Profit after tax 2,377 5,710 -58.37%
Source: PSX

The consolidated topline growth, therefore, was mainly carried by subsidiaries – mainly Ufone and UBank – which had a combined revenue lift of 4 percent year-on-year. This gain could have been even more had Ufone revenues not been affected by the apex court’s ruling last summer that disallowed the mobile network operators from deducting 10 percent of airtime recharge under “service” fees/charges.

Despite some revenue growth, the group’s operating profitability took a dive, driven by decline in operating profits of both PTCL Company and the subsidiaries. The inflationary pressures during the year raised costs for the telecom industry, through higher prices of electricity, and fuel. Besides PKR depreciation between January and July last year also raised the cost of imported components. In addition, network expansion at Ufone and branch expansion at UBank also drive the costs.

In the end, the group bottomline, while still profitable, saw its growth hurt by visibly-reduced profitability at the PTCL Company along with the subsidiaries’ combined net losses which more than doubled compared to CY18. The latest financials suggest that higher interest rates in the period had wiped out operating profit and increased the net loss at Ufone, which has financed its expansion through loans.

A challenging macro-economy is hurting all telecom players, but since the PTCL Group has the advantage of “scale”, it should do better than the rest. The PTCL Company needs to expand its network transformation program to drive more growth from its DSL broadband business. And Ufone needs to find cheaper financing alternatives to fuel the next round of growth.

Over at the bourse, the PTC stock has moved in tandem with the broader index. This perhaps reflects that the stock’s trading is influenced more by daily market movements than by long-term company fundamentals. However, the stock has lost almost 10 percent of its value in the last 12 months. Under the new CEO who took charge last year, it remains to be seen whether PTC will be able to regain its footing.