Trends are changing very rapidly these days. Every industry has to face tough competition. Large number of countries are adopting privatization to advance and improve their telecom sector .The results of privatization have been impressive in accordance to the growth in the telecom sector. Pakistan has also adopted this strategy and has recently privatized one of its renowned company PTCL.
Current situation of PTCL
Pakistan Telecommunication Company Limited (PTCL) is the largest telecommunication service provider in Pakistan. It has 30,000 employees and 5.7 million customers (Ref). PTCL is a leading infrastructure provider to the other telecom operators and corporate customer in Pakistan. PTCL provides a variety of up-to-date home user, corporate and wholesale communication services e.g. telephone, internet, television, broadband,I PTV,video conferencing etc in major part of the country. Geographically, the company is divided into: Headquarters, North, South, Central, and West Zones and functionally in Commercial, HR & Admin, Corporate Development, Finance, Operations, Technical departments. Monogram?
On 16th August 2010, PTCL employees went on strike against management for not increasing their salaries in accordance with the government decision in 2008?.which badly effects PTCL customers, as the whole network was running at its own with no maintenance and operation at all. As a result, its after sales and support services for voice, IPTV, DSL, broadband, Wireless Internet and Dial-up became poor?. The major loss is in Khyber Pakhtunkhwa due to floods, also the rehabilitation works has not started there due to damaged system, including workers' strike.
On September 7th 2010, strike softened and salaries and bonuses were transferred to the employees??
Emirate Telecommunication Company Etisalat
PTCL took a U turn in 2006 when the ownership of the company changes as Emirates Telecommunication Corporation, a Dubai based Telecom Company commonly known as Etisalat, assumed the management control of PTCL as 26% Management Share of the largest telecommunication company was sold out for US$ 2.6 billion.
Emirates telecommunications Corporation-Eitsalat-provides telecommunication services to the United Arab Emirates and Africa.In Asia it operates in 18 countries. It was founded on August 30, 1976..it is among the best companies in the Middle East who are providing telecom services. The company is introducing and adopting new technologies, new philosophies and new ways of doing business. It was one of the pioneers to introduced mobile telephones in the Middle East in 1982 and launched the GSM Service in September 1994.The Chief Executive officer of Eitsalat believes that the new Management will put the best effort to improve quality, reorganization and extension of PTCL services to more areas in Pakistan. Emirates Telecommunications Corporation (Eitsalat) was the highest bidder for the acquisition of a 26 per cent stake in Pakistan Telecommunication Corporation Limited (PTCL). This was the commitment and determination of Etisalat towards success.It was another strategic step taken by the company to be he leading telecom service provider in the region. The acquisition of 26 per cent of PTCL provides Eitsalat International access to the management of the company and a pool of experienced professionals..Etisalat received seventeen industry awards in 2009.where three awards were for innovation and three for customer service. Since 2006 it has been nominated as the 'Best Overall Operator' in the Middle East six times. It has also been named as Best International Carrier at the World Communications Awards in 2008.
Subsidiary of PTCL
PTCL is the leading provider of basic telephony in Pakistan .Although it is a successful player of fixed line, value added and other communication services, PTCL also owns a subsidiary to provide cellular services .In 1996 the status of PTCL changed from a public sector corporation into a publicly listed corporate entity .In the same year the company has gone through aggressive restructuring. The main purpose of restructuring was to improve efficiency,customer focus and competitive position in order to achieve long term profitability.
UFONE
The company under brand name of Ufone was founded on January 29, 2001 in Islamabad. Being part of PTCL, the management of Ufone has also been handed over to Etisalat after privatization.Ufone journey of success strengthened after 2006. The company has broadened its network and coverage to new cities and areas. Recently Ufone is providing network coverage in more than 4745 locations (ref) and in most parts of the country. . The company has also got a new License for operating in Azad Jammu & Kashmir and Northern Areas (ref). In such a short span of time Ufone has the second largest customer base in the industry. Currently the ratio of Ufone users in Pakistan mobile industry is 20.53% .which means U-fone has 17,800,424 subscribers.Both postpaid and prepaid Ufone subscribers can enjoy any/ all Ufone is providing various services to its customers including MMS, Ufone Internet, Global SMS, and Pocket Stocks etc. (ref).The company is bringing new ideas and innovation to capture the market successfully. As far as International Roaming is concerned, it is giving services in more than 130 countries.It has initiated International roaming facility for Prepaid subscribers (with lowest rates, featuring no security deposit and activation charges) in Saudi Arabia, United Kingdom, United Arab Emirates, Singapore, Portugal, Thailand, Cyprus, Bangladesh, Uzbekistan, Tunisia, Sri Lanka, Belgium and Kuwait (ref).Ufone is facilitating its users with GPRS Roaming across 85 countries.All these facts reflect that Ufone is working efficiently and effectively in cellular industry and has strengthened its position in the highly competitive environment..
Company Background
History of Telecommunication
In Pakistan, Posts & Telegraph Department (P&T) was established in 1947 and Pakistan Telephone & Telegraph Department (T&T) in 1962. The history of telecommunication in the sub-Continent is very old. In the subcontinent, before independence, this sector was under the Indian Post & Telegraph Department and has developed very successfully. The role of telecommunication in Pakistan can be broadly divided into four phases.
Pakistan Post & Telegraph (P&T)
This department started its telephone service with only 12346? telephone lines and seven telegraph offices all over Pakistan. The telephone system at that time was manual. This department worked up to 1962. At the time of independence, the postal and telecommunication services were performed by a single department known as Pakistan Post & Telegraph (P&T). The Government of Pakistan adopted the Government of Indian Telegraph Act, 1885 to control and direct the activities of telecommunications.
Pakistan Telephone & Telegraph (T&T)
Two separate organizations with the name of Pakistan Post and Pakistan Telephone & Telegraph (PT&T) were created under presidential ordinance to reform the telecommunication sector in the country. This decision was made in 1962, when Ayub Khan's government decided to split up the P&T department into two separate departments. Both the departments were headed by two separate Director Generals?? . DG had the decision making power, while the responsibilities were delegated to General Managers and Chief Engineers throughout the organization. The PT&T was in fact a civil service department under the ministerial control. It had 20 Chief Engineers and General Managers reporting directly to the Director General. At the time of inception of PTC, the total number of employees working in PT&T was 45686? and the total network comprised of 922,000 telephone lines?.
Pakistan Telecommunication Corporation (PTC)
A major breakthrough in the history of telecommunication in the country occurred with the gradual deregulation of the sector. In the first stage, Pakistan Telephone & Telegraph Department (T&T) was converted into a statutory corporation called Pakistan Telecommunication Corporation. On December 15, 1990, the PT&T department was transformed into Pakistan Telecommunication Corporation with a legal identity separate from the Government.
With Pakistan Telecommunication Corporation Ordinance, 1991, government opened the way for private competition and started awarding licenses for cellular phone and card operated pay phones. With this liberalization in 1991, Government of Pakistan decided to privatize PTC and used voucher method in 1994 for privatization that later were convertible to shares. Total number of vouchers was six million that were equal to 600 million shares at the rate of Rs. 10 per share. Offered? Time period - when converted to shares.
Reorganisation of Telecommunication Sector
Under the PTC Reorganization Act, 1996, the telecommunication sector was split into four entities.
Pakistan Telecommunication Company Limited (PTCL)
Pakistan Telecommunication Authority (PTA)
National Telecommunication Corporation(NTC)
Frequency Allocation Board (FAB)
Pakistan Telecommunication Company Limited (PTCL)
PTCL was established with a view to undertake the telecommunication business formally carried in Pakistan. Pakistan Telecommunication Corporation (PTC) was transformed into Pakistan Telecommunication Company Limited (PTCL) on January 1, 1996 under Pakistan Telecommunication Reorganization Act, 1996 according to which PTCL took over all the properties, assets, rights and obligations of PTC. Also the company has been listed on all stock markets in Pakistan in 1996 (uz Zaman, et al.).
Pakistan Telecommunication Authority
Pakistan Telecommunication Authority (PTA) is a regulatory body responsible for monitoring the telecommunication business in Pakistan. It frames rules and regulations for private telecom companies such as Mobile Phone Companies, Internet service providers, paging companies and pay card phone companies. Moreover, issues licenses to the new companies entering into this business.
National Telecommunication Corporation (NTC)
National Telecommunication Corporation (NTC) is responsible to provide the telecommunication services to the various departments of government and armed forces.
Frequency Allocation Board (FAB)
FAB has been assigned the responsibility of allocating radio frequency spectrum to government, providers of telecommunication services, radio and television broadcasting operators, public and private wireless operators' etc..
Privatization
In 1991, Government of Pakistan showed its intention to privatize PTC for economic growth of country A consortium of consultants was hired for this purpose and asked to develop a strategy and roadmap for the privatization of PTC. As a result of consultants' report, government decided to sell out 26% shares along with management rights. On their recommendations, PTC was also converted into a limited company (Thesis, year).
The process for the divestment of PTCL started with the issuance of one million exchangeable vouchers through the stock exchanges in August 1994 (Choudhary et al., 2008; Kemal, 1999). This issuance was equal to 12% shares value of PTCL. These vouchers were equal to 100 million shares and each had a value of Rs 10. Five million additional vouchers were issued to international investors in September 1994. The proceeds from these vouchers were $900 million from international and Rs.3 billion from domestic issue. The issue of 26% management share was still a controversy, the Government continued its mission by issuing Notes with 150 million US dollar worth to international investor in 1997??. The Notes were convertible to fully paid "A" class ordinary shares of PTCL and these were 3.3 % of the total share capital issued. In August 1997, foreign receivable has been securitized successfully obtaining US$250 million to GOP. In 1995, a new financial advisor was hired by Privatization commission for the implementation of strategic sale (26% management shares) but the new government suspended the services of the financial advisor (Deutsche Morgan Grenfell), and in 1998 hired the M/S Goldman Sachs International to provide advisory services on PTCL privatization (PTCL, Internal Report).The Financial Advisor (Goldman Sachs International) has started working and established a data room at the head quarter of PTCL where all possible information that is related to PTCL were available to facilitate the team. Government approved the proposed policy and decided to complete the Re-regulation by December 2003, major steps has been taken on legal and regulatory measures, PTA granted license to PTML (Ufone) and proposed DSI regulation for tariff and licensing has also been accepted (PTCL, Internal Report).
At last in April 2006 control of the Pakistan Telecommunication corporation was handed
over to Etisalat(UAE based company), Etisalat assume the control of the company by paying 2.6 billion US dollar to buy 26% share with management right in PTCL. With the control of PTCL Etisalat also assume the control of Ufone, one the top class mobile service provider subsidiary of PTCL (PTCL subsidiary)
PTCL also signed a contract with Emaar to provide information and telecommunication
technology services to household in Karachi and Islamabad. After this agreement PTCL is the only services provider that offer ICT to two big project of Emaar Pakistan, every household and office will be connected through fiber optics (PTCL, PTCL signed contract with Emaar).
Impact on Competition
The Re-regulation in telecom sector has positive effects; people now have more
Choices and easy access to value added services at cheaper prices. The intensive competition in all parts of telecom sector has momentous decrease in the tariffs of different telecom services.
With the privatization and Re-regulation of PTCL many Competitors have entered in
Pakistani market. Paktel and Instaphone were entered in Pakistan telecom industry in 1990 and in 1994 Mobilink started its function. In 2001, Ufone, a supplementary part of PTCL entered in the market and in 2005 both Warid and Telenor one by one started their
services (uz Zaman, et al.) From the year 2000 there is tremendous increase in the cellular users. Mobilink is the largest cellular company with the highest number of users, compare to Ufone. Currently 79% population in Punjab has mobile phones, 75% in Sindh, 34% in Baluchistan, 63% in N.W.F.P. and overall 73.3% of population in Pakistan enjoying this facility (uz Zaman, et al.).Zong (previously Paktel) has great share in the cellular market. Latest data from PTA shows that Telenor rise to number two and Warid telecom is becoming more popular and capturing market share with the high pace as compare to other traditional rivals. Within 4 year of time Telenor has reached to the second largest cellular mobile company after Mobilink with subscribers of approx.19 million (PTA, Cellular subscriber).
With the arrival of competitors there is decreasing trend in PTCL landline and WLL subscribers. In 2000 there were 3.05 million fixed line subscribers and till 2005 there is increasing trend in the fixed line subscribers (5 million fixed line subscribers), but after the year 2005 and with the entrance of competitors its fixed land line subscribers decrease and reached at 3.58 million. This is not just PTCL whose subscribers decrease but also Instaphone and Paktel who lost their market. Instaphone is currently operating with bellow 1% market share in some backward area and Paktel was coming down and down when Zong overtake and buy the company (PTA, fixed line subscribers). This was just due to obsolete technology.
A great number of local and foreign companies are competing in Pakistan It includes both
fixed line (wired and WLL) and cellular. Although current operator still has monopoly position in fixed line due to its strong infrastructure, yet major competition has been emerged in Wireless Local Loop (WLL) and this market is directing towards full competition with the entrance of some financially strong companies. The Value-added services market, including Internet and Pay Card phones, is already in full competition (Shahid, Shou-lian, & Liu).
The raise in the number of telecom service subscribers can be linked with the convenience of service and with the growth in the teledensity. Expansion of fixed line subscribers (200,000- 300,000)/year were projected on the bases of construction of new residential dwelling units, new shops for small businesses and registration of new businesses with the Corporate Law Authority (Choudhary, et al., 2008). The subscriber growth and teledensity rate was insufficient before PTC era. Switching T&T into PTC and then to PTCL helped the fixed network development, and increase in teledensity. With the introduction of Competition in fixed and mobile line has major impact on the users and the teledensity. The projection by Choudhary, et.al. pointed towards the teledensity which was continue to increase for the next 10 years and will reach to its peak up to 2018. At the same time, the growth in internet, WLL technologies broadband and investment in telecommunication sector will also increase with the slow pace for the next 10 years. (Choudhary, et al., 2008).But the figure available on PTA website shows that there is a decline in the fixed line services from 2006 to 2009. This is just in wired line connection but the wireless local loop has an increasing trend in its teledensity and also subscribers.
Financial aspects of PTCL
PTCL provides domestic and international telephone services and other communication facilities in Pakistan. PTCL achieved various milestones in 2009.The company is providing the largest broadband services in Pakistan to 200,000 subscribers in 170 cities. PTCL also became the first 3G Wireless broadband service provider in Pakistan as they launched the EVO. Now the company is providing the Bundled Voice Data, Internet and TV services at competitive rates to large number of users.
PTCL has completed ERP implementation this year. Also it became the pioneer in Pakistan for successful implementation of SAP new dimension products like; Supplier Relationship Management (SRM), E-Recruitment, Employee/Manager Self Service (ESS/MSS) and Business Intelligence (BI). Recent results 3Q10
The company's revenue of Rs 73.6 billion for the period under review was 7% higher as compared to the corresponding period last year. The revenue earned by PTML (Ufone), the wholly-owned subsidiary of PTCL, was higher by 22%, while PTCL's revenue decreased by 4%. PTCL's domestic voice revenue declined by 7% whereas International revenue registered an increase of 23%. Net profit of Rs 6.7 billion showed a 12% growth as compared to the same period last year. PTCL's profit after tax at Rs 7.9 billion was 9% higher than the same period last year. Due to better cost controls, there was a decrease in Administrative and General Expenses by 17%. Other operating income increased by 32% due to improved realization of receivables as well as prudent utilization of available funds. Finance cost decreased by 62% because of relative stabilization of rupee during the period. The higher profits translated into higher EPS of Rs 1.54 as compared to 1.42 in 3Q09.
PTCL has gone through organizational transformation during FY08. The Company initiated Voluntary Separation scheme, Enterprise Resource Planning Packages and different innovative services due to which it has to bear loss of Rs 2,825 million.
The reasons for decline in company's profit during FY07 were the structural adjustments which were necessary to gain competitive edge in telecom industry. also there was increase in operating expenses by 11.7% .this increase was due to prudent provisions for doubtful debts and long term systematic improvements in operations and customer services.
The revenues recorded in FY09 were Rs 59,239 million. The overall revenue was decreased by 10.7% as compared to the last year. Decline of revenue in fixed local telephony was because of aggressive price competition, higher taxation and mobile substitution. It declined from a level of Rs 60,704 million in FY08 to Rs 53,093 million in FY09. In comparison the revenues from the international telephony increased from Rs 5,632 million in FY08 to Rs 6,199.5 million in FY09. The total revenues in FY07 were Rs 65.28 billion as compared to Rs 69.09 billion in FY06. the main decline was in domestic segment due to competition and reduction in tariffs. PTCL launched new packages and services in customer care and other areas to boost revenue.
Due to the decline in the profits of the company the gross margin percentage also decreased. In FY09 the gross margin or operating profit margin of the company declined to 18.15% from 24.67% in FY08 and 26.33% in FY07. The reason being the increasing cost of selling and marketing. Campaigns were launched; new services and packages were introduced to create awareness of multimedia and broadband which resulted in increased cost and other expenses. The foreign operators cost and satellite charges increased to a level of Rs 6,053 million in FY09 from Rs 3,541 million in FY08. Vigorous efforts were exerted during the year to collect overdue receivables culminating in reduced level of provision required for doubtful debts and thus decreasing Administrative and General Expenses to Rs 8.935 billion compared to Rs 10.824 billion last year, i.e. a saving of 17.45% on this account. Also, the net margin of PTCL has shown a declining trend over the last 5 years. It declined from 30.46% in FY05 to 15.45% in FY09. The declining income after tax has been the basic reason for the decline in net margin. As a result there was a decrease in the return on operating assets and return on equity over the past 5 years. The return on operating assets stands at 10.96% in FY09 as compared to -3.34% in FY08, 18.76% in FY07, 25.53% in FY06 and 34.83% in FY05.Similarly the return on equity stands at 9.28% in FY09 as compared to -2.71% in FY08, 14.45% in FY07, 20.22% in FY06 and 25.45% in FY05.
The liquidity of PTCL fluctuated over the last 5 year. The current ration declined to 1.5 in FY09 as compared to 1.81 in FY08 and 2.19 in FY07. The current assets increased by 36.9% in FY09 from the FY08 levels of Rs 39.6 billion. The increase was observed in short-term investments, which grew by about 103%. These investments are in the form of short term deposit placements with different banks. The current liabilities grew by 64.7% in FY09 from FY08. The current liabilities stood at Rs 21.9 billion in FY08 as compared to Rs 36.1 billion in FY09. Increase has been in the amount of current portion payable to PTA against the WLL License fee, the amount payable is Rs 1,953 million. Where as trade and other payables have recorded a growth of 20% in FY09 to Rs 26,114 million from FY08 levels of Rs 21,731 million. These payables include the sales tax payable and advances from the customers. Combined these two have grown by 71% in FY09 from FY08 levels. (FY09: Rs 2,918 million, FY08: Rs 1,704 million). Similarly, the quick ratio of the company has shown a fluctuating trend. It declined from 1.58 in FY08 to 1.36 in FY09. There has been little increase in the stores and spares. They increased by Rs 248 million in FY09 from the FY08 levels.
Mixed trend has been shown by The DSO of PTCL. The ratio increased significantly in the FY06, completely nullifying the effect of the decline in FY05, and exacerbating the already long collection period of the company. However, DSO showed a decline in FY07 showing that management of PTCL was consistently putting effort for improvement and enhancement despite tough competition. Again it increased in FY08 due to increases in trade debts and adequate decrease in revenue by almost 6%. The DSO declined in FY09 and this is because of better receivable management that reduced the trade debts from R 13.366 billion in FY08 to Rs 10.761 billion in FY09, a reduction of Rs 2.605 billion.
The total asset turnover of PTCL has recorded a decline in the last 5 years. It declined from 0.56 in FY05 to 0.38 in FY09; the reason was decline in sales and increase in assets. The total assets of the company increased in FY09 to Rs 154 billion from PKR 137 billion in FY08. Also there was increase in capital work in progress,by 25% in FY09 from FY08 levels of Rs 7.8 billion. Long-term investments grew in FY09 by 55% from the FY08 levelsn(FY08: Rs 3,607 million, FY09 Rs 5,607 million) and the long-term loans grew tremendously by 743% in the same period (FY09: Rs 3,332 million, FY08: Rs 394 million). long term investments have increased because of the advance taken by Pakistan
Telecom Mobile Limited for issuance of ordinary shares. Long term loans have increased because of the loan taken by the subsidiary Pakistan Telecom Mobile Limited under a subordinated debt agreement. In FY05 the debt to asset ratio of PTCL had declined adequately but in FY06 the trend reversed, declining again in FY07. The important fact to consider is that the company has an option of leveraging by raising funds through borrowing money from financial institutions. Current liabilities of PTCL declined in the FY05 and increased in FY06. Further more other components of current liabilities especially short term borrowings of the company increased in FY06. Due to higher cash and bank balances, assets have increased and the trend of the debt ratios could not be prevented.
Increase in the liabilities of the company has increased the debt to asset ratio in FY09 to 36% from the previous level of 29% in FY08. The long-term liabilities also increased by 5% in FY09 due to an increase in deferred government grants, these grants were received from Universal Service Fund (a government-formed agency) mainly relating to property, plant and equipment received as assistance.the purpose was to develop the telecommunication infrastructure in rural areas and include telecom infrastructure project for (i) basic telecom access in Pishin, Mansehra, Dadu and Larkana; (ii) Optical fibre extension - Baluchistan Package - 2; (iii) Broadband projects in Faisalabad, Sargodha Civil Division, Multan, Bahawalpur, Dera Ghazi Khan Civil Division and Hyderabad Civil Division. These reason have resulted in fluctuations in the debt equity ratios of PTCL.
PTCL financial performance was satisfactory up to FY07 but the problem aroused in FY08 as the TIE ratio decreased adequately. In FY06 the profits were lower but surprisingly the TIE ratio of the company continued to rise. But in FY07 it declined due to decrease in profits. These facts showed PTCL's little ability to pay off its due liabilities. The TIE ratio became negative in FY08 due to the losses incurred and then it improved in FY09.
The EPS of PTCL has shown a fluctuating trend in accordance with the net profitability of the company. It declined from Rs 5.22 in FY05 to Rs 1.79 in FY09. It was negative 0.55 in FY08 due to the losses suffered. Dividends have also seen the fluctuating trend over the past 5 years. The dividend payout was around 38.34% in FY05 and has now increased to 83.6% in FY09. However in real terms the DPS have declined from Rs 5/share in FY06 to Rs 1.5/share in FY09. The stock price of the company has also seen a fluctuating trend. It stood at Rs 70.25 in FY05 but on June 30, 2009 it has declined to Rs 17.24. Currently the share is being quoted at KSE around Rs 20/share.
Financial Analysis FY05 FY06 FY07 FY08 FY09
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Profitability
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Revenue (PKR Million) 87356 69085 71068 66336 59239
Profit After Tax (PKR Million) 26606 20777 15639 -2825 9151
Gross Margin % 41.63 34.5 26.33 24.67 18.15
Net Margin % 30.46 26.16 22.01 -4.26 15.45
Return on Assets % 34.83 25.53 18.76 -3.34 10.96
Return on Equity % 25.45 20.22 14.45 -2.71 9.28
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Liquidity
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Current Ratio (Times) 1.89 1.66 2.19 1.81 1.5
Quick Ratio (Times) 1.73 1.54 2.03 1.58 1.36
Market Valuation
EPS 5.22 4.07 3.07 -0.55 1.79
DPS 2 5 2 0 1.5
Market Value Per Share
(as on June 30) 70.25 40.6 57 38.64 17.24
Asset Management
Days Sales Outstanding 73.52 83.69 62.93 78.77 66.3
Total Asset Turnover 0.56 0.45 0.43 0.44 0.38
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Debt Management
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Debt/ Equity 36% 44% 38% 43% 55%
Debt/Asset 27% 31% 27% 29% 36%
TIE 86.35 92.07 46.54 -5.26 15.43
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Future outlook
Going forward, the management of PTCL plans to transform the organisation into a more customer friendly and commercially oriented organisation. This will be through improved customer care, better quality of service, and introduction of targeted new products and emerging services. The customer interfaces will be fully empowered to achieve corporate objectives. The future plans of the Company are focused on the growth of revenue by a reversal in the trend of declining fixed line subscriber base through improved customer services and response time, an increase in loyalty to the fixed line through value added services, launch of targeted new services for corporate/ carrier customers and an improved automation of internal processes and external customer interfaces. To reach the Company's traditional profitability hallmark, varied investment options for risk diversification will also be explored. This together may contribute to increasing the profitability of the company in the coming years.
