SIGNS OF DECELERATION EVIDENT IN TELECOM SECTOR

THEME MOVING FORWARD IS GROWTH THROUGH CANNIBALIZATION

SHABBIR KAZMI
Dec 08 - 21, 2008

Telecommunication plays very important role in the development of any economy. The communication capabilities of a country have become a reliable measure of its potential performance in the global context. Growth in telecom industry results in economic growth in term of increased investment, employment, government revenue, GDP, per capita income. Therefore, growth in telecom industry results in a multiplier effect on economic growth.

In recent past telecom sector emerged as the driving engine of Pakistan's economy mainly due to huge foreign direct investment, contributed significantly towards government revenue and privatization of Pakistan Telecommunication Company (PTC) becoming a landmark transaction for Pakistan. Some of the key achievements are:

1) Telecom subscriber growth was being very healthy over the past few years, and record levels of FDI leading to rapid network expansions with coverage of 91% of Pakistan's population.

2) Cellular subscribers continued to grow in FY08, despite at a slower rate and ARPUs declined amidst fierce competition between operators to improve their subscriber base.

3) Fixed line subscribers declined over the year and emphasis seems to be focused on converged services (bundled telephony, broadband and TV offerings) to help establish subscriber loyalty and boost ARPUs.

4) WLL registered healthy growth but is unlikely to compete effectively against mobile operators given their first mover advantage, competitive rates and better quality of service.

5) Broadband will likely to remain a small player within the telecom fabric given low computer penetration in the country and subscribers base to touch 380,000 over the next five years.

6) Given current economic challenges the players will have to reposition themselves to beat the fierce competition and come up with innovative products and services to attain edge over their competitors.

EMERGING SLOWDOWN

Slowdown was witnessed in the telecom sector during FY08 compared to FY07, but overall growth was still encouraging. Tele-density increased from 44% YoY to nearly 59% by the end of FY08 (currently exceeding 60%). This increase was stemmed from the cellular mobile telecom operators (CMTOs), as the fixed line tele-density actually declined.

Imports of the telecom sector, constituting 4% of the total import bill of the country, were over US$1.3 billion, registering a marginal decline of 1.3% YoY in FY08. It is noteworthy that this decline in imports was due to the imports of cellular mobile sets plummeting by 33% YoY to US$444 million. This is an indicator of the looming slowdown in the cellular telephony. However, imports of the sector remained robust due to import of other telecom apparatus that CMTOs need to expand their infrastructure in the face of the cut throat competition.

Though lower than FY07, investment in the telecom sector was substantial and encouraging, exceeding US$3 billion in FY08; 74% of the investment coming from CMTOs, amounting to US$2.3 billion (decline of 11% YoY). The decline can be attributed to the fact that CMTOs have already laid down their infrastructure in the urban areas to be able to compete effectively.

FDI in the telecom sector amounted to US$1.4 billion in FY08, down 21% YoY, but still constituting 28% of the total FDI (FY07: 35.6%), only lagging behind the financial sector amongst recipients of FDI. The privatization proceeds in FY08 amounted to over US$133 million, a decline of 50% YoY. Telenor was the biggest contributor to FDI (34% share), accounting for US$486 million while Warid Telecom and Worldcall reported investment of US$214 million and US$203 million respectively.

CMTOS MAIN REVENUE CONTRIBUTOR

Telecom revenues exceeded Rs278 billion in FY08, a growth of 18% YoY (FY07: 17%). CMTOs, the primary growth contributors increased their contributions in the total revenues by 9pps YoY to 65% in FY08, with cumulative revenue of Rs182 billion, up 35% YoY. On the flip side, fixed local loop registered a decline in revenue, in conjunction with its falling tele-density.

WLL segment has been a positive aspect of local loop, with increase in subscriber base translating into a 32bps increase in tele-density. It comes as no surprise that telecom sector is a primary contributor to the national exchequer in the form of sales tax, activation tax and federal excise duty. Taxes in FY08 amounted to Rs111 billion (FY07: Rs100 billion), with CMTOs paying 80% of the GST collection. The growth primarily declined due to lower tariffs.

OUTLOOK

As expected, growth in telecom has decelerated, and the trend is expected to continue. Declining revenues could only be compensated through diversification into WLL, broadband and VAS, as exemplified by PTCL's newfound offers.

The sector however has now obviously reached with subscriber growth slowing to a crawl across all segments. High inflation and an alarming balance of payments situation are likely to put pressure on the economy and result in GDP growth suppression over the next few years.

Resultantly, some softening is likely to be witnessed in this sector and lower FDI and fewer corporate lending to telecom operators is inevitable. However, given that the bulk of the population is now under coverage and that teledensity is relatively high, the theme moving forward will be growth through cannibalization i.e. operators will seek to steal away subscribers from competitors. This is likely to lead to a further reduction in tariffs and consequently, ARPUs. At the same time, marketing and advertising expenses are also likely to rise, hence putting pressure on overall margins.

The greater part of telecom's growth story in Pakistan is over and FY09 and FY10 are likely to be years of consolidation. Beyond that until interest rates fall and disposable incomes rise one can expect operators' revenues to improve and consequently margins to improve through bundled service offerings thereby bolstering profitability once more.