Customers enjoying the benefit

June 19 - 25, 2006

The telecom sector has been in the throes of cutthroat competition for sometime now. It was the start of FY05, when a plethora of new licenses were issued ranging from Long Distance and International Services (LDI) gateways to Wireless Services. The results were obvious in that within one year the profitability of state monopoly Pakistan Telecommunication had fallen by more than 20 percent. Cellular Tariffs have gone down by an average of more than 70 percent over the last 18 months and two new entrants Telenor and Warid have had to take a large dent in profitability to gain market penetration.

In the current budget with average revenue per user have fallen below USD 3.5, it could have been prudent to give the cellular operators some relief in the form of reduced mobile activation charges which currently stand at Rs 500. These charges had been reduced by 50 percent in the previous two budgets and a further reduction was expected. This expectation was not met.

Usman Farooqi, telecom analyst said that since the two new foreign operators alone, have invested in excess of $ 1.5 billion into the country, it could be a prudent move on the part of the government to give cellular operators some relief soon, in terms of royalty and tax cuts, duty concessions on imports and permission for operators to keep the same prices to cover a certain minimum cost. It has to be noted here that decisions on most of the issues relating to service tariffs are taken by the regulator PTA and it could allow the operators in the future to maintain a certain minimum price to ensure profitability for re-investment.

However the government feels that the sector is still in the growth phase and a 15 percent central excise duty has been maintained on almost all the telephone services. The only relief of some sort is the combined CED and Sales Tax ceiling of Rs 500 on the import of cellular phones. This measure will help reduce the cost of mobile sets but is likely to result in a greater import bill. Many second-hand sets are already available in the market at very low rates and so this measure won't have too much of a contribution in the expansion in cellular penetration.

"Based on our valuations we are POSITIVE on the telecom sector. We recommend a buy on Callmate Telips as it trades at a heavy discount over our DCF based fair value of Rs 119" Usman said. "We are also POSITIVE on the recently privatized state giant PTCL and feel that the new management will take at least six-seven months to get acclimatized to the deregulated environment and introduce. "We could see further hidden upside in terms of gains, which could accrue from real estate sell-offs of the company. Our DCF based fair value of Rs 65.91 does not include the revaluation of assets.






















Jul 05- Mar 06




Source: State Bank of Pakistan

Shahab Farooq, head of research at Alhabib Capital Markets Ltd., said that with the prolonged process of privatization of the country's largest telecom operator, PTCL, the government and other shareholders of the company have suffered in terms of lower dividends from the company. After a healthy dividend payment in December 2004, the company skipped final cash dividend almost eighteen months, paid dividend of Rs 2 per share in April this year. The government has earmarked earnings of Rs 15.478 billion during the next fiscal year against dividend from the telecom giant, which PTCL is expected to pay a cash dividend of 30 percent or 3 rupees a share. The telecommunication of the country is poised for growth. We believe that the growth would mainly be witnessed in the cellular, WLL and calling cards segments of the overall sector. After the recent erosion of the stock prices in the market in May, we like PTCL and Callmate Tellips at current levels.

The overall teledensity in the country has reached 23.1 percent at the end of April 2006, as compared to mere 2.3 percent in 1999-2000. Similarly, foreign investment in the telecom sector crossed $1 billion during first three-quarters of 2005-06. These growth patterns in the telecom sector of Pakistan of great comparison to many South Asian economies. At present, Pakistan's teledensity (23.1 percent) is much higher than India's 12.8 percent. These recent figures are the outcome of spectacular performance especially when India's teledensity, in 2003, was 7.1 percent and Pakistan's a poor 4.4 percent.

In this globalizes world, Foreign Direct Investment (FDI) is considered a panacea for low capital and low productivity of the developing countries. Acknowledging this, the Government has, in fact, awarded licenses to establish investor-friendly environment licenses in a fair and transparent manner.

The award for cellular mobile licenses has also increased Foreign Direct Investment considerably.

During 2004-05, an FDI inflow of US $494.4 million in the telecom sector making it one third of total FDI in the country during the period. A continuation of this trend was seen during July-March 2005-06 when FDI inflows worth $1 billion delivered to the telecom sector, which is 45.3 percent of total FDI in the country during the period. This major jump was due to the privatization proceeds of US $565 million for PTCL and network expansion activities of telecom operators.

The Telecom sector contributed over Rs 45.7 billion to national exchequer through taxes (GST and Activation Tax) and regulatory charges by PTA in 2004-05. In addition, the Telecom sector also contributes through income taxes, and customs duties on the imported telecom equipment. Total GST collected from the telecom sector rose from Rs 8.8 billion in 2001-02 to Rs 20 billion in 2004-05. During the first three quarters of 2005-06, there has been a total collection of Rs 19 billion and it is expected that with the expansion in the sector, these collections will cross Rs 25 billion.

The Cellular Mobile segment is the most thriving and growth oriented sector since liberalization. The introduction of two new mobile companies have created great competition, resulting in the reduction of mobile tariffs, an increase in coverage and better quality of service to mobile users across Pakistan. Approximately 1.6 million subscribers are being added on cellular mobile networks each month in Pakistan, which serves as a great comparison to any Asian country.

In fact, the Total mobile subscribers at the end of April 2006 crossed the 29.6 million mark. In a nutshell, competition and liberalization in the market have changed the market share of major cellular companies on a positive note. The market share of Mobilink, the largest cellular market player, has dropped from 64 percent in 2003-04 to 51 percent in April 2006. In addition, two new mobile companies (Warid and Telenor) grabbed about 22 percent of the market share in short span of time and both of the companies are competing aggressively with market leaders Mobilink and Ufone.