In the days to come the earnings would be driven by volumes rather than a function of high priced services

Nov 15 - 28, 2004





The telecommunication sector is currently undergoing a transitory phase driven by the new regulatory environment, privatization and corporate restructuring. After the wireless local loop (WLL) frequency auction, Pakistan Telecom Authority (PTA) is now preparing itself for awarding 108 licenses to local loop operators (LLO) in all 14 regions. The regulator has already awarded long distance domestic and international (LDI) licenses to 12 operators. On the other hand new entrants are preparing to launch their network by early 2005, causing existing players' to start working on strategies to take on the upcoming competition. Going forward, the major competition in the telecom sector, earnings would be driven by growth in subscriber base, which in turn is likely to be triggered by availability of cheaper services.


Analysts are of the view that Pakistan's telecom sector is likely to grow at a 19% CAGR over next five years where teledensity is likely to reach 16% (6% fixed line penetration, 9.9% cellular penetration). These numbers are fairly attractive and seem promising for new entrants. However, it is believed that only those players with well-defined marketing plans and financial muscle would be able to survive. The days of extra-ordinary profit margins in the telecom sector have come to an end. In the days to come, the earnings would be driven by volumes rather than a function of high priced services. According to a report, the average revenue per unit (ARPU) of the incumbents is likely to decline by more than 11.7% over the next few years.

Before going further, it is necessary to understand some of the latest development taking place. These are:

1) In an effort to further expand subscriber base, Mobilink, the country's largest cellular operator, has launched its Village Phone Program. Under this project, the company along with Khushali Bank, will offer micro finance facility for the purchase of handsets. Mobilink is already offering its connections along with handsets in urban areas.

2) Under its latest expansion program Ufone, a fully-owned subsidiary of PTCL, has decided to increase its capacity by another 1.5-2 million subscriber base over the next 6 to 8 months. In this regard, the company has awarded a US$ 125 million expansion contract to Canada's Nortel Networks.



3) Telenor, one of the new cellular company, has signed a contract to implement its voice mail system and multimedia messaging service center in Pakistan.

4) Warid Telecom, which is the second new cellular operator, has signed an accord with Ericsson for its mobile network services. It is likely to start operations next year with an investment of Rs 600 million. To finance its license fee and expansion plans, the company has also signed a US$ 347 million contract with 18 local banks.


1) PTCL launched its wireless services in 9 districts with about 61 cities under its first expansion plan. The company will expand its complete network in three phases where in the last phase the entire country would be covered. This year the company plans to bring a capacity of 1.5 million WLL subscriber base for which it has already purchased Rs 4 billion worth of frequency in all the 14 regions. Furthermore, the company has signed an agreement with ZTE for providing CDMA-based technology and is likely to import handsets as well to ensure maximum retention of its subscriber base.

2) Telecard is likely to raise Rs 4 billion capital to finance the cost of frequency it has purchased. Reportedly, the company is likely to raise Rs 2 billion by issuing TFCs and remaining from issuance of right shares.


The fast changing scenario is expected to put pressure on PTCL's earning. However, going forward analysts expect the company to witness growth on the basis of (I) aggressive expansions (II) increase in interconnectivity (III) corporate restructuring, which will result in bringing operating efficiencies and cushion falling margins and (IV) growth in cellular operations.

According to some reports, PTCL is considering further cuts in nationwide dialing (NWD) as well as international calling tariffs. The reduction in tariffs is likely to be made effective early next year and the tariff reduction proposal is currently awaiting approval from the board of directors. On the other hand, the local call tariffs are unlikely to be reduced. Historically, reduction in NWD and ILD rates has resulted in strong volumetric growth for PTCL, which has more than compensated any decline in revenues due to reduced tariffs.

Its recent campaign, offering free land-line and cellular connections seems to have yielded positive results. PTCL may have forgone one-time connection charges but paved way for substantial regular monthly income. However, it must also be kept in mind that retaining the subscribers will not be an easy job, without bringing in further improvement in quality of services being offered.