DECLINING ARPUS OF CELLULAR SERVICE PROVIDERS
Feb 02 - 08, 2009
While telecommunication sector of Pakistan has registered spectacular growth in recent years, mainly thanks to cellular segment the pace of growth has slowed down presently. Nevertheless, this remained in line with the economic downturn and partially attributable to the fact that the sector is on the verge of achieving maturity level.
Total teledensity, covering fixed line, wireless local loop (WLL) and mobile has reached to 60.40% by end November 2008. This suggests that there still remains room available for further growth.
Also, when we compare the overall industry position Pakistan still lags behind the coverage mature economies have achieved. For instance, in USA, telecom and cable sector is showing negative signs with weakening credit profiles of operators. Wireless Voice average revenue per user (ARPU) per month has been eroding at an increasing rate. Profit margins are deteriorating, and some companies within the industry have announced capital spending reductions for 2009 in response to the expected difficult operating environment.
While it is expected that some companies will be able to do this, others may not be able without damaging their competitive positions. Capital spending for the industry measured as a percentage of revenue was already down in 2008 compared to 2007, and many operators may be unable to push it down further in 2009. Growing unemployment, continued home foreclosures, and changing regulatory environment represent some of the challenges to the industry in 2009.
These challenges will result in a changing landscape and difficult operating environment, and the industry debility is very much likely. In Pakistan, slowdown was witnessed in the industry during FY08 as compared to FY07, but the overall growth was still encouraging. The increase in teledensity mainly stemmed from cellular mobile telecom operators (CMTOs), as the fixed line teledensity had actually declined. Imports of the sector, constituting 4% of the total import bill, stood at USD 1.33 billion, declining by a marginal 1.3% YoY in FY08.
It is important to note here that it was the imports of cellular mobile sets that plummeted by 33% year on year to USD 444 million. The table-1 provides some important indicators about the sector.
TABLE-1 FY08 FY07 CHANGE Telecom Revenue (Rs. bln) 278 239 17% CMTO Revenue (Rs. bln) 182 133 37% Investment (USD mln) 3,113 3,975 -22% FDI (USD mln) 1,439 1,824 -21% Imports (USD mln) 1,331 1,348 -1% Fixed Line Teledensity 2.70% 3.04% -34bps Wireless Local Loop Teledensity 1.40% 1.08% 32bps CMTO Teledensity 54.70% 39.94% 1,476bps Total Teledensity 58.80% 44.06% 1,474bps Fixed Line subscribers 4,546,443 4,806,206 -5.40% WLL subscribers 2,260,758 1,850,234 -1.10% Mobile subscribers 88,019,812 63,159,857 39.40% Average ARPU (USD/month) 2.8 2.9 -4.00% Source: Pakistan Telecommunication Authority (PTA)
REVENUE IN THE SECTOR - BULK BEING CONTRIBUTED BY CMTOS
Telecom revenues registered a growth of 18% compared to last year, though remained lower than the previous years. This has primarily been an outcome of lower tariff/ lowers ARPUs. Mobile segment, the main growth contributors, increased contribution in total revenues by 9bps to 65% in FY08. On the flip side, fixed local loop registered a decline in revenue in conjunction with its falling teledensity. WLL segment has been a positive aspect of local loop with increase in subscriber base. No wonder CMTOs outperformed the rest of telecom operators in the sector with increase in subscriber base by 39.40%. It comes as no surprise that telecom sector is a main contributor to national exchequer in form of sales tax, activation tax and federal excise duty. Taxes in FY08 amounted to Rs. 111 billions (FY07: Rs. 100 billion) with CMTOs providing 80% of the GST collections.
CELLULAR - ARPU TAKING DOWNWARD DIRECTION
The cellular segment of Pakistan's telecom industry has been dominated by Mobilink. The factors enabling Mobilink's domination of the market have been (a) it is the first service provider to offer GSM-based services and (b) initiator of pre-paid services. However, entry of new players posed stiff competition to the pioneer, which resulted into declining market share of Mobilink. Cellular sector has turned into the fastest growing segment of telecom industry over recent past, and cellular subscribers have increased manifold. The cumulative revenues for this segment took a hike of 37% compared to the last year in line with increase in subscriber base.
Pre-paid connections provided the main impetus to this growth. The recent run-up in subscriber numbers has been boosted by (i) aggressive marketing campaigns with reduced tariffs and subsidized SIMs reducing upfront cost for the cellular subscribers, (ii) reduction in government taxes on cellular connections and (iii) increased coverage area.
While the addition in subscriber base has been more than impressive, the sheen is taken off a bit as industry experts cry foul over these numbers. The number of subscribers is grossly inflated as these include inactive SIMs in circulation. Lower upfront cost to purchase a SIM led to sale of large number of SIMs, which are never activated or activated for short period of time. Another risk to the industry is constantly declining ARPU (Average Revenue per User) owing to (i) the fact that growth is coming largely through pre-paid connections which yield lower ARPU, (ii) declining tariffs and (iii) inactive SIMs. The table-2 represents the comparison of CMTO's revenues and ARPUs year on year basis.
Table-2 COMTO's Revenues (Rs. Billions) COMTO's ARPUs (USD/month) FY08 FY07 FY08 FY07 Mobilink 79.9 64.7 3.4 3.4 Ufone 27.5 21.9 2.0 2.1 Zong 2.6 2.9 0.9 3.9 Instaphone 0.3 0.5 1.1 1.9 Telenor 45.1 22.8 3.3 2.9 Warid 26.8 20.4 2.3 2.6 Total 182.1 133.1 2.8 2.9 % Change 37% 48% -4% -20% Source: Pakistan Telecommunication Authority (PTA)
Customer satisfaction has been sacrificed over addition in subscribers. In the mean time, as against the previous expectations that the market structure could alter with the implantation of MNP (Mobile Number Portability) owing to quality issues and less awareness this technique could not have significant impact on the overall market.
Going forward, growth in the segment would only be possible if any of the existing operators is able to set-up its quality and establish itself as the quality leader.
INVESTMENT IN THE SECTOR - STILL IN FLOW
Though lower than FY07, investment in the telecom sector still stood at an encouraging level and 74% of investment originated from cellular segment, notwithstanding that has also witnessed decline of 11% year on year basis. The decline in investment is largely attributable to the fact that CMTOs have already laid down their infrastructure in the urban areas to be able to compete effectively. Foreign Direct Investment in the telecom sector, down 21%, still constitutes 28% of the total FDI (FY07: 35.6%), only lagging behind the financial sector.
The privatization proceeds in FY08 amounted to USD 133.2mln, a decline of 50% YoY. Telenor has been the biggest contributor to FDI (34% share), accounted for USD 486mln while Warid Telecom and Worldcall reported a level of USD 214mln and USD 203mln respectively. It is expected that the trend of investment will continue in next five years because a large potential market still exists in Pakistan, and all operators intend to grab their share.
OUTLOOK - DIVERSIFICATION IS MUCH NEEDED
Although telecom sector will keep growing in years to come the pace would be slower than ever and the reason behind that is expected to be declining fixed line subscriber and thus revenue. Average revenue per user is likely to decline further, mainly because of changing mix of subscriber base with increasing proportion of prepaid customers and reducing tariffs in the wake of mounting competition amongst telecom operators to achieve higher volumes. Nevertheless, normalization of growth in the sector is likely to reinforce the importance of quality of service as critical criteria to retain customers. This can only be compensated through diversification into various segments. Further, given the fact that there is lot more untapped avenues, it is still very much a numbers game. Companies that capture the greatest market share during this super-normal growth phase will be in a best position to reap rewards in the long run.
LEASING ACCORDED A PLUS
The Pakistan Credit Rating Agency (PACRA) has assigned a long-term rating of "A+" (A Plus) and a short-term rating of "A1" (A One) to Standard Chartered Leasing Limited (SCLL). These ratings incorporate the liquidity and funding comfort SCLL is enjoying in the form of preferential credit lines from various financial institutions as well as its own parent at relatively better rates in an era where the whole leasing sector is facing a challenging environment with restricted access to funds.
The ratings reflect SCLL's sound financial profile, a leading market position, robust risk management systems, and a quality management team. At the same time, PACRA recognizes the financial strength and international profile of the parent - Standard Chartered Bank (Pakistan) Limited (SCBPL). SCBPL has reaffirmed its support through a recent equity infusion (current ownership: 86.5%) alongwith developing its experienced management team
During FY08 SCLL realigned its organizational structure under focused attention of the Board of Directors to restart its business activities afresh. SCLL's management has devised a comprehensive strategy and intends to further improve its market standing through sustained growth in the targeted segments.
Commenting on the rating Mr. Badar Kazmi, Chairman, Standard Chartered Leasing Limited (SCLL) said, "An accreditation by a recognized body like PACRA is a testimony to our commitment of growing our leasing business in Pakistan making Standard Chartered Leasing Limited a leading player in the leasing industry."