The KSE - Overview. Remember Jan - April 2000?

And what a week this was! The market rose by a whopping 144 points to close at 1671 as compared to 1527 the previous week. The upbeat sentiment was sparked off with the dawn of 2002 and since then the market has been progressing towards fantasy levels. Nevertheless, the action at the bourses seem to be quite alluring and probably that explains best the overwhelming increase of 38% in the average daily volume (ADV) to 243mn shares this week from 177mn shares last week. Apart from the larger investors' enthusiasm, the market is very optimistic about the expected demand for cement from Afghanistan.

The stocks, on Monday, showed widespread gains because institutional traders made heavy covering purchases in PSO as reports of its early sell-off were doing the rounds. On Tuesday, the index soared to it 12 month high of 1580 points on the back of bullish buying in PTCL and Hubco. The current market movement bears similarity to the conditions prevalent in January 2000, where the market went on a bull run (a stampede rather) and achieved sky high 2080 level, followed by a painful crash to the 1400 level by April 2000, because the members had to cutoff their exposure as the net off basis measurement replaced the add on basis at the stock exchange. However, the present regulations by the SECP and the KSE should be successful in providing some comfort level to the investors.

In the last three days, the upbeat sentiment continued and the Index crossed the psychological barrier of 1600 points to close at 1671 on Friday. Foreign interest was felt in the market on the buying side, with major news being the investment of US$22.3mn in Shell Pakistan by the Shell Petroleum Ltd. UK. Cement stocks remained in strong demand under the lead of DGK cement and Lucky followed by Maple Leaf and Pioneer cement. As the buying flurry remained unsatisfied in the close of the session, the KSE had to apply the circuit breaker to restore sanity.

Payphone Industry: Change is in the Air

According to the latest available official figures, there are 65,000 installed payphones across the country, as compared to 35,000 payphones by June 30, 2000. In fact card payphones growth has quadrupled over last two years. Of the 65 licensed payphone providers in Pakistan, 43 have commenced operations. 75% of the payphone network is concentrated in the urban areas and major towns.

The recent interest in this segment is apparent from the fact that of the total of 65 licensees, 31 companies have obtained their license during FY01. Although at the moment there are only about eight to ten significant PPOs who account for 90% of the market share, the competition in the segment is expected to become fierier as the new entrants begin flexing their muscles. However, what was most disconcerting for the PPOs during the last 12 months was not competition from among the ranks but from without.

Widening Playing Field = New Problems

Payphones operators have been facing competition from the 3,900 public call offices (PCOs) and 1,800 PTCL customer service centers, which provide access to public telephony. In addition there are three international pre-paid calling card operators, which compete under an O&M contract with PTCL.

Since 1995, the PTA has been allowing payphone operators a maximum mark-up of 100% on PTCL call charges. However, in October 2000, PTCL also launched its own pre-paid calling card at the PSTN rates and installed its own PIN phones at those locations where the card payphones and PCOs were most profitable. Since the payphone operators had to pay interconnect charges to PTCL, their price was at a premium to the competition, and thus penalized them unfairly. Further, some individuals started using the pre-paid calling cards to provide commercial PCO service. At the same time, several PCOs began to use pre-paid calling cars and charging customers, payphone rates and hence making a mark-up. Consequently revenue growth for the industry was negatively affected.

Secondly, there was the royalty issue. The PPOs argued that PTA was charging PTCL royalty on that part of its revenue, which was the PPOs' interconnect charges to PTCL. Consequently they felt it would only be fair that PPOs should calculate royalty on revenue net of interconnect charges. However, the argument was rendered faulty by the PTA on the grounds that PTCL calls were merely the inputs to which PPOs added value. Further, PTCL's subsidiaries Ufone and Paknet also pay royalty on revenue gross of interconnect charges to PTCL, while PTCL itself incidentally does not pay royalty to the PTA. The two-tier royalty structure required for category 1 PPOs 4% of annual gross revenue on the basis of PTCL call charges plus 100% markup. For category 2 PPOs royalty was calculated at 50% of license fee or 4% of annual gross revenue after tax, whichever is higher.

A third problem that the PTA had taken note of was that in spite of the ceiling on card payphone price, in some instances the prices, and particularly local call prices, violated the cap. This was more common in those regions where these payphones had some sort of regional monopoly

The Regulator To The Rescue

At the behest of the PTA, PTCL and PPOs attempted to resolve the conflict of interest over several months, however, the PTA finally had step in when they were unable to arrive at a workable solution. The PTA considered four options, and then finally settled upon one. The final decision has been as follows:

•Ceiling for local call charges by PPOs to remain PkR4.00 per PTCL 5 minute pulse. Ceiling for NWD and ISD call charges reduced to PkR3.00 per PTCL pulse, which is closer to PTCL calling card rates and will hence reduce unfair comport on from the calling card. The PPOs are to be responsible for compliance

•PTCL shall offer 25% discount to PPOS on ISD and NWD call charges. The existing discount on local charges would continue to be negotiated by the parties.

•The license fee was reduced to 1.5% of gross revenue or 50% of initial license fee, whichever is higher, within l20 days of the close of the financial year of the licensee, beyond which a penalty of 10% will be imposed on the outstanding amount

•PTCL would ensure fair competition on PTCL calling card and take every necessary step to avoid its misuse against PPOs

What to expect next?

In the next 12-months we expect the installed capacity to increase to over 100,000. According to GoP estimates the industry is expected to see a CAGR of 30% over the next three or four years.

What is more exciting over the next 12 months in the payphone segment is the roll out of wireless local loops (WLL) payphones. In 1999, PTCL contracted with three companies to install and operate WLL payphones. All three companies, i.e. Telecard, WorldCALL Communications and Pak Datacom are listed on the stock exchange, and have been allowed to set up 125,000, 50,000 and 20,000 wireless payphones across the country, respectively. The initial O&M contract between the PPOs and PTCL is for a period of three years.

Over the next six months Telecard, which made a rights issue to finance 44% of its WLL payphone project, plans to begin the first phase of its commercial operations, i.e. 15,000 payphones. WorldCALL Communications on the other hand is even more explicit about its plans. During 2002, 30% of the wireless payphones it has been allowed to install will be deployed, while 40% and 30% payphones will be installed during the 2003 and 2004 respectively. Pak Datacom, on the other hand is unlikely to diversify into the payphone business, at least over the next year or two.

WLL, in our opinion, is the way to grow for the payphone segment, as it will allow operators to expand their infrastructure into rural areas, where PTCL's fixed wireline network has yet to penetrate. After 2002, when the telecommunication market is deregulated, what these companies start off as wireless payphones may be used to challenge PTCL's current monopoly over the last mile. The upcoming Telecom policy plans to remove the restrictions on the adoption of latest technologies like WLL by the private sector, which will of course open the doors for more competition in the WLL segment. There is nothing restricting PTCL from entering the fixed wireless segment itself, and when it does, it will be a force to reckon with. However, in our opinion, the first few entrants are likely to benefit from early mover advantages.