A consideration of the budget's impact on the telecom sector

Jun 22 - 28, 1996

Amidst a range of drastic revenue earning measures in the federal budget, the telecommunications sector was not spared either. The biggest blow came from not only increasing the Central Excise Duty on local calls from 35% to 40% but the widening of the base to include international calls, line rent and cellular phone services as well. An already depleted consumer will now have to spend much more on calls with the total benefit going to the government in the form of duty instead of to PTCL itself.

This is likely to result in a fall in demand for telecom services and analysts at Global Securities have revised downwards, their estimates for international outgoing and nationwide dialing call volume by 2.5% and 4% respectively, to forecast the impact on PTCL's earnings.

PTCL was one of the worst hit by the budget especially in terms of the stock market reaction as it shed Rs 4 in just a few hours of trading. Although analysts at Global Securities recommend a buy for PTC on account of its strong fundamentals, including its seven year monopoly, income tax exemption, and its proposed privatisation, they have revised their estimates of EPS for 1996-97 from Rs 4.05 to Rs 3.94 and from Rs 4.76 in the year after that to Rs 4.58. The Price Earnings Ratio is expected to drop from 11.1 to 9.6 in 1996-97 and to 8.2 in 1997-98.

A dividend of Rs 2.79 bn was budgeted for 1996-97 compared to Rs 1.5 bn received in 1995-96, and Rs 4.5 bn received in miscellaneous receipts in 1995-96 were reduced to zero in the current year. It was initially announced that interest receipts have to be paid to the government in 1996-97 to the tune of Rs 5.6 bn as compared to Rs 2 bn in 1995-96. However, the management of PTCL clarified the position later in the week; out of Rs 5.6 bn, the interest element is Rs 3.9 bn while loan repayment accounts for Rs 958 million. The balannce of Rs 700 million is attributable to interest payments from the newly formed NTC.

Although the absence of miscellaneous transfers is a plus this year, (down from Rs 4.5 billion in 1995-96) financial charges are higher, as capital costs of the fixed line expansion programme are also higher. AKD Securities' earnings forecasts predicted a 21% fall in 1996-97; with EPS will dropping from Rs 4.2 to Rs 3.3, and shareholders expected dividend falling from Rs 1.50 per share to Rs 0.55. After the clarification, they increased their EPS estimates by Rs 0.32 and dividend per share by 60% to Rs 0.88. PTCL also confirmed that the voucher / shareholders will receive pro-rata dividend in the current year. As a result of the clarification and a higher dividend expectation, the impact on the stoack is also likely to be favourable. Further, the prompt response of the company will also enhance investor confidence in the future of the company; AKD recommends a buy on the share.

There were strong expectations before the budgt that there would be a 15% increase in tariff rates on local calls, which would have increased EPS by Rs 0.15 and a doubling of the line rent from Rs 50 to Rs 100 per month, which would have added Rs 0.3 to the EPS. Neither of these measures were announced; so, not only will PTC not gain at all from the increase in CED, there was no mention of the progress of the privatisation programme either, which might have maintained, or boosted foreign investor interest. PTCL will, in fact, stand to lose as call volumes decline. Foreign calls are an increasingly important contribution to PTC's revenue (approx. 12%) and foreign call volume will decline. According to AKD estimates, foreign outgoing and incoming call rates are negotiated with foreign telecom companies based on the frequency of calls to and from Pakistan. The lower volume of outgoing calls would disturb the current equilibrium (5 incoming calls for every outgoing one) and lead to a rate increase and a fall in the value of incoming calls. Revenue for PTC from incoming calls is 41% of total revenue and the net result would be a 7% decline in earnings, or Rs 0.29 for 1996-97.

In the last pre-budget trading session at the Karachi Stock Exchange, the market was generally dull and PTCL lost 30 paisa in anticipation of an announcement of an increase in tariffs. In the first post-budget session, PTCL fell 75 paisas on the announcement of the increase in CED. The next trading day saw some speculation in the PTCL scrip as the share price fell Rs 3.60 to close at Rs 37.75; the share gained Rs 0.75 and Rs 1.10 in the next two sessions to close at Rs 39.60.