PTCL: into the red

After recording a sizable profitability slump in CY19, the local telecom giant has commenced CY20 on a loss-making note. As per its latest financial results for the quarter ended March 31, 2020, Pakistan Telecommunications Co. Limited Group (PSX: PTC) suffered a bottomline decline that was much worse than the poor showing at the top under revenues.

Breaking down the consolidated financials, the PTCL Company – which provided 56 percent of group revenues – saw its topline decline by just 1 percent year-on-year in 1QCY20. The PTCL management told BR Research that while revenue segments like wireless data, international telephony, IP bandwidth and cloud services grew on a year-on-year basis; there was a slight decline in the fixed broadband (DSL) segment as well as in voice segment due to churn and competition from OTT and cellular services.

Meanwhile, the subsidiaries – mainly Ufone and UBank – had a collective topline decline of 10 percent year-on-year, entirely due to Ufone. As per the management, Ufone’s 1QCY20 revenues were 14 percent lower year-on-year. This is mainly due to the revenue hit the cellular operator (and the sector) has absorbed on account of the loss of “service fee” on mobile top-ups which the apex court had annulled last summer.

On the other hand, UBank continues to grow its topline. The 1QCY20 revenue growth for this financial services firm stood at 44 percent year-on-year, as per the management. This is mainly due to growth in customer loans that has resulted from branch expansion activities, with 60 locations that have been added since 1QCY19.

During the period under review, the group recorded substantial impairment losses – both for PTCL Company and Ufone – which worsened the profitability profile. The increase in “impairment loss on trade debts and contract assets” has been attributed by the management to an uptick in default incidence due to higher customer churn and increase in the amount of default per customer because of the general trend of customers upgrading their monthly packages to higher-priced packages.

‘Other Income’ came to the group’s rescue, as the higher interest rates ameliorated the income on investments and the sales of redundant, obsolete assets on account of network modernization provided windfall gains. But Ufone’s substantially higher finance costs – due to the impact of rupee devaluation on the operator’s forex-denominated liabilities as well as higher cost of borrowing – wiped those gains clean.

As for profits, the PTCL Company’s bottomline declined by 40 percent year-on-year to Rs1.21 billion in the quarter under review. This decline is substantial compared to topline decline, as costs and expenses didn’t come down in tandem, due to inflationary pressures in the economy. While some degree of profitability from the main company was still as source of comfort for the group, it was the subsidiaries that firmly pushed the group into the red.

The two subsidiaries managed a combined net loss of Rs1.61 billion to plunge the group into a sizable net loss of Rs0.4 billion for the quarter. This loss – which has Ufone written all over it – is likely to intensify in subsequent quarters, as the PTCL management believes that COVID-19 may impact group operations and financials.

Being the carrier of carriers, the PTCL group is in a unique position to help Pakistan get through this crisis by keeping wholesale and retail data services up and running. Government ought to facilitate the provision of such services, considering the financial strain the sector will feel from both the demand and supply sides.