Telecom Sector And Ptcl Valuation

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A Report on

Submitted To: Mr. Shoaib Abdullah

Submitted By: M Faisal Ch Waqas Hassan Pasha Munir Hussain

DEPARTMENT OF BUSINESS ADMINISTRATION

International Islamic University Islamabad

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Acknowledgment

This project “Analysis of Telecom sector in Pakistan & valuation of PTCL” is assigned to us by our highly regarded

teacher of SAPM Mr.

Shoaib Abdullah. We have made our best efforts and had not left even one stone unturned to complete this Report as proper and neat as we can. This informative outcome is the result of hardworking of all members in a group formation. All members have utilized their skills up to their optimal level, which result in such outcome. Nevertheless it was

a bit

challenging

task

demanding

a

lot

of

commitment,

hardworking and expertise. We have faced so many obstacles while obtaining required information. We have completed it by best of our expertise. There may be some flaws in this project but we have utilized our expertise to their optimal level to generate something valuable for us and to share with others.

BUY @ PKR 45.40 In short all this is due to love, affection, care, and help of our parents and teachers who had make us from scrap, a something valuable and to whom we are going to dedicate our project.

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The basic facts

POPULATION:

161MN

POPULATION GROWTH:

1.8%

RURAL POPULATION:

66%

PER CAPITA INCOME:

US$925

BELOW POVERTY LINE:

23%

MEDIAN AGE:

20 YEARS

LITERACY RATE:

53%

UNEMPLOYMENT RATE:

6.3%

Pakistan is the gateway to the energy rich Central Asian states, the financial liquid Gulf States and the economical advanced far eastern countries. This strategic advantage alone makes Pakistan a market place teeming with possibilities. With three international airports and thirty eight domestic airports Pakistan is accessible via fifty international airlines. Pakistan’s geographical location, a rapidly expanding transportation and communications infrastructure and environment conductive to business makes it an attractive destination for investors. With predominantly young population of 160 mn, a large portion speaks English. The central Board of Revenue has facilitated structural reforms in tax and tariffs and the SBP of Pakistan has invigorated the banking sector in to high return on investment. Pakistan provides relatively strong protection to foreign investors and stands 19th worldwide on protecting investors (World Bank Report). The capital markets are being modernized and reforms have resulted in development of infrastructure in the stock exchanges of the country. The SEC has improved the regulatory environment of the stock exchanges, corporate bond market and leasing sector. Current investment policies have been tailored to meet investor needs. A concerted policy and planning have been consistent with liberalization, deregulation, privitatization and facilitation being its foremost corner stone. With a consistent GDP and supportive fiscal and regulatory infrastructure the growth in investment has been quite rapid in the last few years.

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Pakistan economy Economic outlook • • • • •

FY08-09E growth outlook is strong (6% on average) on the back of higher public investment and overseas remittances. FDI and US support likely to pick up owing to peaceful conclusion of general elections. C/A deficit is expected to remain higher due to strong public investment on infrastructure deficit. SBP will continue to purport tight policy due to robust domestic economy. We expect focus on quantity rather than price of money. The upside risk to portfolio investment is largely driven by higher interest rates spread b/w local bond and US bond.

GDP growth over the years

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• • • •

GDP growth well above the trend in the past five years. This has been the strongest period for the economy in nearly two decades. Expected to decline to 6.6% in FY08 Near term, expect robust domestic consumption, supported by:

1 2 3 4 5

Higher overseas remittances High Public Sector Development Programs Higher foreign investments

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Challenges facing the economy • • • • • • •

Pakistan displayed economic resilience to political instability and commodity price shocks. But at the same time, the twin deficit has widened primarily due to robust domestic economy and higher subsidy for oil and food. We believe, twin deficit and inflation will be the foremost challenge for the upcoming government. Inflation which surged double digit in the last two months We believe risks are rising on the back of oil prices and unfavorable international economy. Domestic demand: A young population, rising urbanization levels and relative under-penetration in most sectors. Key sectors that stand out are: Banks, Fertilizer, and Telecom. Energy shortages: PSO via higher furnace oil sales to IPPs, Hubco, Banks –credit growth from upcoming power projects.

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Political factor Market’s reaction to political developments has generally been muted since peaceful General Elections 2008.

Reasons attribute to it: • •

Expectations of a smooth transition during 2008, with or without President Musharraf. Focus on structural attractiveness and reasonable confidence over policy direction.

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• •

With a 4-year track record set as a benchmark combined with increased media accountability, it will be difficult for any government to not perform or to twist policy direction significantly. It has come to notice that think tanks of different political parties are not opposed to the reforms initiated in the last five years. International support will be crucial as the market has viewed US support favorably to date. Any change of heart by the international community especially US could serve as a downside trigger and President Musharraf future could depend on that. Longer term, we believe economics will continue to show strong resilience to political events. However the short term formation of new government, their initial policies and relationship with President Musharraf could sway market sentiment either way.

Economic growth –sectoral distribution Growth outlook -Remains stable Manufacturing -Losing momentum owing to high utilization rates

Services

–likely to perform strongly. The country’s service sector has witnessed massive growth and has contributed tremendously towards the economic expansion during the past few years. The sector continues to surpass the agriculture and manufacturing sectors with requirements for such services on the rise. With a strong population base of more than 165mn people and growing business environment, basic financial, communications and transport services have witnessed enhanced need for such services. The services sector has witnessed

BUY @ PKR 45.40 robust growth of 8 percent during FY07, while contributing about 60 percent towards the country’s total GDP growth and anticipated to remain vibrant in coming years depicting growth, however at a slower pace of 7 percent when compared to the preceding year.

Key indicators

KSE -low correlation, liquid and easy to trade Snapshot of Karachi Stock Exchange •

653 listed companies

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US$73bn market cap (48% of GDP) Benchmark KSE-100 represents 86% of market Foreign ownership still below 10%

1 What sets it apart from the rest of the region? • • • • •     

Has a relatively low correlation with regional markets, as it is a predominantly domestic demand-driven economy. Exports are just 12% of GDP. Actively promotes foreign investments with no restrictions or discrimination. Liquidity and regulations facilitate entry and exit. KSE-100 does not track GDP composition which makes it necessary that attractive themes have to be tapped through quasi beneficiaries as well. KSE composition34% Banks, 21% Exploration, 5% Fertilizers, 3% cement, 29% others

KSE- History at a glance

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The Bull Run and recent upsurge KSE-100 is up 895% since Jan 2001… • • • • • •

Improved economic fundamentals Easy liquidity post 9/11 Index composition skewed towards oil and banks Improved corporate earnings Improved utilization rates Privatization-led excitement

…and 40%in 2007

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Excitement regarding GDRs leading to visibility benefits Sound economic performance despite political noise in the country. Skewed index composition has worked both ways as bank’s bull run has been somewhat offset by dull phase for oil stocks

Key sectors and top picks TELECOM SECTOR • Under-penetration in fixed line (4%) • Privatization/acquisitions, deregulation

Reason for Selecting

Privatized incumbent Telecom sector to benefit from underpenetration and turn around initiatives.

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Introduction Since the independence of Pakistan, basic telecom services were being provided by a monopolist, previously called as Telephone and Telegraph department (T&T). The department was being run by the government and played multiple roles as regulator, policy maker, operator and service provider in the country. The T& T department was later converted into a corporation. Although the corporation was earning huge profits from the services, it was re-investing the same profits into the sector for the provision of more telecom service but the investment was not enough. Further, with the technological advancement, more and more telecom services were becoming available but there was not enough money available with the corporation to install new telecom systems for the provision of modern services. Resultantly, a digital divide prevailed in Pakistan keeping it behind its neighbors and other comparable countries in terms of telecom access. Cellular mobile services in Pakistan commenced in 90s when two cellular mobile telephone licenses were awarded to Paktel and PakCom (Instaphone) for provision of cellular mobile telephony in Pakistan. Currently there are six cellular players in the market. The Telecom Sector has contributed 2 percent towards the overall GDP growth with revenues of over PKR 235bn.

Telecom Industry after Deregulation Pakistan followed a gradual approach to liberalize its telecom market. During 1990s, as a first step, market was opened for value added services and competition was introduced in cellular mobile sector as four licenses were issued (Mobilink, PTML, Paktel and Instaphone). The government monopoly was retained in fixed line services, however, PTCL legal monopoly ended w.e.f 31 December 2002. The government announced Telecom Deregulation Policy and Cellular Mobile Policy in 2003 and 2004 respectively. The telecom regulatory, issued new licenses for Long distance International (LDI) and Local Loop Fixed (LL Fixed), Wire Local Loop (WLL) and Cellular Mobile. With the issuance of new licenses the market is now open for full competition in all segments of the sector.

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Pakistan’s telecom sector has finally begun moving and looked set for an era of phenomenal growth. The sector has witnessed tremendous growth in recent years with Teledensity depicting major expansion after deregulation. The primary purpose of deregulation of the sector was to encourage healthy competition while providing better quality products and services to customers on lower prices as well providing best technology available worldwide. Current Teledensity in Pakistan has expanded exponentially from 4.3 percent in 2002-03 to stand at 48.4 percent in 2006-07 with currently standing at over 52 percent, with better services and competitive rates. Also, increasing inflow of foreign investment in the telecomm sector has resulted in the introduction of new cut throat technologies for provision of various telecom services including cellular, wireless and internet services. In recent times, the focus has increasingly shifted from Fixed Lines to Cellular and Wireless Fixed Lines (WLL), with better portability and convenience. WLL has shown an improvement from 0.7 percent to 1.1 percent in 2006- 07 from last year with subscribers of 2 mn. Cellular segment remained the vital player with increase in total Teledensity contributing 48 percent. In the urban markets introduction of Broadband internet services by various Telecomm giants such as PTCL, WorldCall and Wateen has further benefited the consumers to access timely information over the internet with competitive rates. The broadband penetration however has not depicted as much growth as expected growing with 3.5mn subscribers in 2007 against 2.4mn subscribers in 2006. PTA estimates broadband subscribers to grow to over 5mn by 2010. WorldCall has initiated cable television services with PTCL expected to follow suite by providing IPTV services through its Triple Play services, ensuring diversification of products and services. Recent conducive environment provide by PTA has resulted in increased FDIs in the sector with investments of USD2.7 bn during the last five years making it the largest recipient of highest FDI during the past few years. The future for telephony lies amongst unexplored rural regions of Pakistan with all major telecom operators looking forward to tap these markets with a major contribution by WLL and Cellular segments due to cheaper installation costs. With healthy competition instigating lower local and international tariffs and availability of alternative services has progressively benefited the consumers overall.

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Substitute products and services Low switching costs from fixed line to cellular and WLL has made prices competitive in the telecom sector. Fixed Line subscribers have the options to make international and local calls from cellular line with Cheaper/Decreasing trends of Tariffs across the board.

New Competitors Deregulation of Telecomm Sector has resulted in increased competition amongst various telecom operators. High Capital Requirements due to high investment in telecommunications equipment requirements has been enormous. Interest of global investors in the telecomm sector is on the rise with China Mobile being the latest entrant with purchase of Paktel while Warid and Telenor started operations during the last few years. Recently, Omantel acquired further stake in WorldCall Telecom after Etisalat won the bidding for a 26 percent share in PTCL in April 2006.

BUY @ PKR 45.40 Competitive Rivalry Deregulation of the telecom industry has increased rivalry amongst competitors. High number of operators/competitors have emerged post deregulation backed by high growth rate owing of lower prices. Diversity of Competitors has increased as various telecomm companies have started providing various telecomm services thinking beyond the basic telephony and cellular services concentrating more on broadband and value added services.

Growth of Telecom Sector in Pakistan after Deregulation Although tremendous growth has taken place in the Pakistan telecom sector but most of it can be attributed to the cellular growth. Fixed line is still awaiting a take off. Similarly Value Added Services have grown but are still a drop in the bucket. Now that the competition has been introduced in the telecom sector some very positive impact have been observed on the growth of the sector in a short span of time which is expected to continue to grow for at least next years. A brief account of the growth after deregulation in telecom sector is given below. Impact of Deregulation on Mobile Sector Driven by lowest tariffs, maximum coverage, and relatively better quality the Pakistan mobile market maintained rapid growth during 2007. The newly deregulated mobile market is now working on sustaining the mobile boom that hit Pakistan 2 years back and on the brink of adding Value Added along with customer satisfactions. Steady growth saw addition of more than two million mobile subscribers every month throughout the last year. Network coverage of almost 90% of the total population of Pakistan has made mobile industry even more attractive for foreign investment. Pakistan has emerged as one of the fastest growing mobile markets among the developing nations. This year the sector grew by 80% whereas average growth rate in last 4 years has been more than 100%. Today total subscribers have reached 76.9 million (Dec 2007) whereas it was 34.5million in 2006 and 12.7million in 2005. Figure-1 shows the subscribers growth of different Cellular Mobile Operators.

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In Pakistan’s competitive and heated mobile market operator’s survival lies in getting into new areas exploring new Value Added products, and providing better quality of services. This is only possible by rolling out networks and be the first to reach untapped population of the country. Out of 376 tehsils across Pakistan, almost 77 % are covered with mobile networks, bringing the figure to 290.

In 2004 there were less than 2000 cell sites erected by all mobile operators all together for provision of mobile services. Today total cell sites of all mobile operators are more than 17,500. In 2007 the share of each company in mobile market exhibited a change, except for Ufone whose subscriber share remained more or less the same. Mobilink kept on loosing its share for another year in favors of Telenor and Warid despite its secure subscriber base, whereas Paktel and Instaphone share in the market also dropped as both companies are struggling with transitional phase. Figure-4 depicts the Cellular mobile operators share in the telecommunication market.

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Impact of Deregulation on Fixed Line Sector The growth pattern followed by fixed line subscribers has been discouraging and disappointing over the last couple of years. There was increasing trend in fixed line connection from 2001 to 2006 but dropped in 2007 bringing the ALIS to a mere 4.8 million across Pakistan.Figure-5 depicts the fixed line Subscribers position

During 2007 fixed Teledensity dropped from 3.04% to 2.99%. WLL and Cellular Teledensity is increasing which can be seen in Fig-6

BUY @ PKR 45.40 Wireless Local Loop (WLL) Sector Wireless Local Loop services were introduced in Pakistan after deregulation of local loop sector in 2004.17 WLL licenses were issued out of which PTCL, World call, Telecard, Great Bear, Burraq, Mytel and Wateen are operational. WLL customer base has shone rapid growth since 2003. There are 2.1 million subscribers of WLL services which can be seen in Fig-7.

Payphone Services Card payphone services in Pakistan were deregulated in 1990s. Telecard is the first to introduce this service in Pakistan. Growth of fixed line PCOs remained impressive till 2004-05 where it was going at an outstanding pace. PTA allowed mobile companies to establish their PCOs. After 2004-05 growth trend of fixed line PCO declined but wireless PCO services flourished in Pakistan.

PCO service is functional in all four provinces and majority of them are wireless. Overall growth of the PCOs remained 10% in the year 200607 which was 26% in the year 2005-06. PTA allowed mobile companies

BUY @ PKR 45.40 to establish their PCOs. Mobilink was the first to start its PCO service and has about 57,936 PCOs.

Internet Services Internet service is becoming an integral part of life in Pakistan particularly in urban areas where large portion of the businesses are using it for different purposes. Most of the domestic Air Lines including PIA and Air Blue have started e-ticketing through internet to provide better and efficient services to its customers. According to estimates of ISPAK (Association of Pakistani ISPs), currently there are about 3.5 million internet subscribers all across in Pakistan whereas total users crossed 17 million mark. Currently around 3,002 cities are connected to internet.

Pakistan’s Broadband market has been slow despite the fact that services have been available since almost five years. Broadband services can be offered with the help of various technologies such as DSL, Cable Modem, and Fiber to the Home (FTTH), Wimax (worldwide interoperability for microwave access). Cost of service is the major reason behind this slow growth. PTA is striving hard to bring down the cost of providing Broadband service in order to facilitate low income groups. The new E1 bandwidth rates for Karachi areUS$1000 (reduction of 37%). PTCL has also dropped copper loop charges for DSL

BUY @ PKR 45.40 service providers from Rs. 217 to Rs. 150 per month. It is believed that this reduction will help in proliferation of the broadband market. A major development for broadband market is the introduction of broadband services by the incumbent (PTCL) itself. PTCL has started offering its DSL services since June 2007 in major cities for home users with free installation services. It is expected that steps taken by PTA in collaboration with Industry will ensure better and economical broadband services in Pakistan. As of the writing of this report a Broadband connection is available in Pakistan for as low as Rs. 1200 for a 512Kbps connection with unlimited download.

Telecom Imports Government of Pakistan is striving hard to decelerate total imports of Paksitan.Imports for 2006-07 were targeted to decline by 2.1%, however the total imports registered at the end of 2007 were 667.8 million USD.The exponential growth in the telecom sector is burdening the overall imports of Pakistan where sector requires spending of about US$ 1 billion just on the import of Cellular mobile handsets annually, which puts burden on our foreign reserves and increases the trade gap.

BUY @ PKR 45.40 Government of Pakistan is offering incentives to manufacturers of telecom network and CPE equipment to consider manufacturing of cellular mobile handsets and other CPE in Pakistan where cheap skilled and unskilled labor is available along with a huge population base for consumption. According to an estimate cellular mobile companies have access to only 61% of the target market in Pakistan and they can still access the remaining 39%.

Employment in Telecom Sector The telecommunication sector in Pakistan has undergone considerable transformations following the award of two new mobile licenses, FLL & WLL licenses and privatization of PTCL, the incumbent. Stiff competition among operators to grab the market share has compelled operators to roll out their infrastructure rapidly, which has created huge employment opportunities (direct and indirect). The telecom sector has vast linkages with all other sectors where it is producing large employment opportunities such as civil work for installation of towers, support service providers, SIM and handset retailers etc

It has estimated that so far about 212,000 employment opportunities have been generated countrywide by the mobile sector Mobile sector has generated about 743,025 employment opportunities which include direct, indirect and induced employment in linked sectors of the economy 260,000 employment opportunities have been generated by

BUY @ PKR 45.40 other segments of telecom sector including WLL,LDI and card payphones. Taxes on Telecom Sector Telecom sector is a major contributor in generating revenues for the Government in the form of taxes, duties and regulatory charges. To generate adequate level of revenues government is undergoing large tax reforms which include broad based tax policy and tax administrative reforms which aimed to reduce indirect taxes that are considered regressive taxes.

During 2006-07 total revenue collected by the Government in the form of taxes and Regulatory fee was more than Rs. 100 billion which is about 30% higher than the last year. Indirect tax in the form of GST/CED has the major share in total government collection from telecom sector which was Rs. 26 billion in 2005-06 and its share in total was 34%. In 2006-07 Government collected Rs. 36.3 billion GST from the telecom sector and its share in total telecom taxes has increased to 36%. The increase in these government revenues are attributed to increased Teledensity and increase in the usage of telephony for voice & data.

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Impact of Deregulation on Economy The impact of telecom deregulation on overall economy is quite obvious. A total of Rs 235,613 million revenue was generated by telecom industry in 2007. This contribution has major impact on economy of Pakistan. The sector is currently contributing 2% GDP out of 7% to the Government of Pakistan. Foreign Direct Investment (FDI). Foreign Direct Investment is considered an important source of economic growth in this globalize world. PTA has created a conducive and investor friendly environment in the telecom sector by awarding licenses in a fair and transparent manner. In the last 2-3 years the telecom sector has attracted record inflows of FDI. During 2005-06, telecom sector received over US$ 1.8 billion FDI and emerged as the only sector of the economy to attract such huge investment where its share in total FDI crossed 54%. During 2006-07, telecom sector has received above US$ 1,824 million FDI, which was about 35% of total FDI in the country.

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It is expected that the trend of investment may continue in the next 5 years because large potential market still exists in Pakistan and all operators intend to grab their share. China Mobile acquired Paktel which has contracted out US$ 500 million worth of project to renowned companies like Ericsson, ZTE and Alcatel to roll out their networks. Similarly Mobilink also plan to invest US$ 500 million in 2007-08 for improving and expanding its quality of service.

FDI Continues flowing in… The first two quarter of FY08 has already witnessed an investment of USD1.1bn by Telecom operators. Major Cellular Service providers have committed at investments of over the next few years. Record inflows of FDI have been witnessed in the last couple of years with the sector contributing 35.6 percent in the 2006-07, with the sector requiring high investments in the telecom equipment and network infrastructure with other players reducing dependency on the incumbent, PTCL by laying their own OFANs (Optical Fiber Access Networks) requiring huge financial support from the foreign entities. Recent, global telecom players have entered the local market recently with Omantel being the newest entrant through the purchase of stake in World Call. Recent additions include the cellular operators, Warid from Abu Dhabi and Telenor Group from Norway.

BUY @ PKR 45.40 Still room for more Furthermore, investment opportunities exist with the current Teledensity standing at 52 percent with the country’s population statistics predicting a 100 million people below the age of 25 out of the total population of 165 mn people. With substantial reduction in tariffs has consistently attracted large urban markets, with majority of Pakistan’s population living in the rural areas the telecom sector has the potential to focus on this untapped market both in cellular and rural segments. A Whole New Ball Game Through diversification and provision of innovative products and services at cheaper rates, will further expand the telecom sector. With Pakistan’s economy on the path towards growth, per capita income is on the rise with industries and services sectors contributing highly towards the GDP, the country is expected to perform increasing well amongst the developing nations. The expected need for information, communication and technological services in the country is anticipated to witness phenomenal growth in near future. As demand for these services are expanding, the telecom sector is deemed to be a necessity for business and commercial performance and has transitioned to become a integral part of a successful business ventures, irrespective of the size. Telecom Sector has performed immensely well in the past view years with the introduction of novel technologies and new products and services. With deregulation, the telecom sector has revealed growth with cutthroat technologies introduced by various telecom companies to provide better services to customers all across. The country’s telecom sector has witnessed aggressive competition post deregulation with major companies seeing testing times. Only strong market leadership, product diversification, focus on customer services will enable various providers to survive the fierce competition. Varied opportunities exist in the telecom sector in Pakistan especially in the cellular segment of the sector, with recently two players namely Warid and Telenor recently entered the market and have gained considerable share with the recent induction of China Mobile, having the world largest customer base.

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Looking Forward •

Cellular to remain juggernaut:

We expect cellular to achieve remain juggernaut in FY08. Although subscriber addition seems to have slowed down marginally from 2.4mn subs/mo in FY07 to 2.3mn subs/mo in FY08, overall growth will remain robust.

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Fixed line attrition:

In line with the global telecom scenario, fixed to mobile substitution is expected to continue in 2008, leading to further attrition in the fixed line subscriber base. We expect a decline for FY08, reducing industry subs to 4.3mn. At this point a fixed line revival is possible only through more attractive call packages and an improvement in VAS. However, we expect fixed line to be unsuccessful in making any significant headway in the market moving forward. •

WLL to grow rapidly but remain niche:

While WLL’s low base has enabled it to grow quickly in the past few years, we believe the trend will slow down this year. WLL operators face significant challenges in increasing penetration as they move to capture subscribers from rural areas where cellular mobile companies are already entrenched. By our estimates, WLL lines should outstrip fixed lines in the coming years. •

Broadband next big growth area:

PTA remains focused on pushing for greater broadband proliferation but the numbers remain low. In the broadband arena, DSL and cable comprise 57% and 37% market share, respectively. Cable is largely provided by WorldCall but is limited to Lahore and Karachi. However, with PTCL now offering DSL services and having access to the entire country, we expect broadband penetration to pick up moving forward.

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Profile: The PTCL Group is the largest telecom provider in Pakistan with services that include fixed line telephony, cellular and broadband. The company’s subsidiary PTML is its cellular arm. PTC is majority owned by the government which currently owns 62%. As part of the government privatization program, 26% of PTC was sold to Etisalat in April 2006 for USD 2.6bn.

Overview Pakistan Telecommunications Company Limited (PTCL) is the largest converged services carrier providing all telecommunications services from basic voice telephony to data, internet, video-conferencing and carrier services to consumers and businesses all over Pakistan. PTCL also continues to be the largest CDMA operator in the country with 0.8 million V-fone customers. The company has a leading position in Pakistan as an infrastructure provider to other telecom operators and corporate customers of the country. PTCL has laid an Optical Fibre Access Network in the major metropolitan centers of Pakistan and local loop services have started to be modernized and upgraded from copper to an optical network. With the promulgation of Telecommunication (Re-Organization) Act 1996, the Pakistan Telecommunication Authority was established as the Telecom Regulatory body. Following the open licensing policy in

BUY @ PKR 45.40 accordance with the instructions of Government of Pakistan and in exercise of powers conferred by Pakistan Telecommunication (ReOrganization) Act 1996, the basic telephony was put under exclusivity and PTCL was given a seven years monopoly over basic telephony which ended by December 31, 2002. The year 2006-07 in the telecom sector witnessed a phenomenal growth in the mobile phone sector in Pakistan, which doubled its subscriber base to 60 million. The Teledensity increased from 26% to 40%, helping to spread the benefits of communication technology across the country. PTCL's mobile phone subsidiary Ufone's subscriber base grew by more than 87%, from 7.49 million to 14 million. The year also witnessed the entry of major telecom companies, most notably China Telecom and Singtel, into the market. Restructuring and re-engineering are in their final stages along with the implementation of ERP system. From the end customer's perspective, a major initiative was put in place in the shape of 'Broadband Pakistan' service launch as a first step towards providing its customer with more value added service and convenience. With this offering, the PTCL not only bringing the benefit of high speed Internet access to subscribers in major cities but will also generate new revenue streams for future growth. The company also continued to invest in infrastructure development and addition of network capacity with a view to enhance services and to expand its reach across the country. The privatization was completed in FY06; following the purchase of 26% 'B' class ordinary shares by Etisalat International Pakistan L.L.C. (EIP) on April 12, 2006. EIP took over management control on 12 April 2006. Since then, the EIP has engaged the services of various technical and management advisors to improve the performance of PTCL. On the Long Distance and International infrastructure side, the capacity of two SEA-ME-WE submarine cables is being expanded to meet the increasing demand of International traffic. The company has a customer base of 5.7 million customers and employee strength of 65,000 workers. PTCL has a 60% market share in WLL sector and has managed to maintain its stance. A sharp growth was witnessed in this sector during 2006. PTCL strives to offer leading edge technology to its customers and in this regard, it has introduced Next Generation Network (NGN) Soft Switches at Islamabad and Karachi in addition to 20 Media Gateways in other cities. Telex and Telegraph services were ceased during the year as they were replaced by fax and e-mail and Internet technologies.

BUY @ PKR 45.40 Moreover, the expansion of switching and transmission network across the country, as made it possible to connect 189 new towns on NWD and the addition of 180 new stations to the nearest Point of Presence (PoP) has enhanced the Internet service of the company. As a result of this, customers can now benefit from Internet service via a local call. The company also invested in Preventive Maintenance programmes related to Outside Plant (OSP) of identified cabinet areas and multistorey buildings. Through this project, the company seeks to boost its network reliability. Other projects approved during the year include the expansion of 2.5 GB DWDM system and 10 GB DWDM system. Additionally, 50 Fiber Optic Links were upgraded to ST-4 and STM-16. 3200 KM Fiber Optic Cable was laid on subsidiary routes during the year. The company also launched an Optical Fiber Access Network (OFAN) project, which provides 542,000 lines in 13 major cities for which 2,340 K Fiber Optic Cable was laid in the Access/Junction network. This project provides 100,000 ADSL ports for Broadband Services to corporate customers. The fixed line access has been modernized and upgraded in Karachi, Islamabad and Lahore from copper to optic fiber network.

PTCL-Post deregulation The local telecom market has altered significantly since the creation of PTA as an independent regulatory agency and had enjoyed sizeable success to open up the local market to competing operators. With the governments deregulation policies, Etisalat, the UAE based telecom player being the highest bidder emerged as the buyer of the 26 percent share in PTCL in April 2006. PTCL, despite being a giant, had to face many bottlenecks in its operations with such large network. PTCL with its recent initiative to right size itself by introduction of VSS for its employees where about 28000 employees are accepted under the scheme. Introduction of various diversified products and services to sustain its market share, Implementation of ERP solutions to provide integration of various departments through acquisition of SAP software and state of the art billing and customer service software, translates PTCL’s long term goals of operational effectiveness into practice. The telecom giant PTCL has observed cutthroat competition from various service providers after the implementation of the deregulation policies by the PTA. However, through the vast infrastructure and being the carriers’ carrier, PTCL with diversification of its various services has enjoyed well-built position and posses immense potential for growth, while need for telecom services is on rise as economy continues to grow on the right track. Segments

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Fixed Line Telephony PTCL’s fixed line segment has witnessed decline in numbers in 2006-07 as against last year with a decrease of 452K lines during the past year. The market for the FLL segment has least amount of penetration primarily due to the major inclination towards cellular and wireless segments by users. PTCL’s fixed line potential is anticipated to remain stable with its having the largest network, coverage and better quality service as compared to WLL and cellular networks. The fixed line segment is anticipated to cater the needs of the business community at large and as expected is to be driven by the country’s future economic growth.

•

Wireless Local Loop PTCL’s WLL segment has depicted immense amount of growth, nevertheless at a slower pace than expected. It started its service from the northern regions slowly moving towards the metro cities using its CDMA wireless technology. WorldCall and Telecard were the other major operators that introduced the WLL services using CDMA2000 and CDMA technology to cater the needs of its customers. Telecard started its operations from Karachi, flowing into Baluchistan region while WorldCall initiated its operation in Lahore in Jun 2005 with aim of rollout its network to update its capacity to 1.5 mn subscribers in the years to come. PTCL has been facing stiff competition however with vast presence and infrastructural

BUY @ PKR 45.40 facilities across Pakistan, has the potential to outrun its competitors in the segment. •

Broadband and Value Added Services PTCL through diversification and assorted products and services could retain its fundamental presence in the Telecom Sector. Introduction of DSL Broadband services across major cities with plans to include more cities in times to come will enhance the revenue base of PTCL. Stiff competition from other cable based broadband service providers and local cable operators still persists. PTCL’s broadband services were introduced in Jun 2007 with free installation service with an initial capacity of 100,000 subscribers by providing services in the five largest cities and had a decent start by adding over 10,000 subscribers within the first few months of its operations depicting PTCL’s brand recognition. Furthermore, with the introduction of WLL segment, Phone N Net, IPTV, VMS and Carrier Services is expected to bring product leadership in the sector.

Voluntary Separation Scheme (VSS)

PTCL’s commitment to improve its operations is evident from its introduction of VSS (Voluntary Separation Scheme) to incorporate employee productivity and competency with an objective to regain its operational efficiency while retaining its key HR. The VSS has received overwhelming response as the number of applications received under scheme touched over 33,000 applications of which 29,893 are approved out of the total strength of over 60,000 employees. With downsizing of around half of its employees, decline in the Salaries and Benefits expense will be restricted to 20-25 percent in upcoming years while new skilled individuals are expected to be hired and outsourcing key functions of the company will be in the offering.

BUY @ PKR 45.40 The government’s commitment to contribute to half of the cost of the scheme with an upper cap of PKR17bn has impacted PTCL by over PKR23bn in FY08 under operating costs. PTCL has posted a LPS of PKR1.87 with a LAT of PKR9.45bn for the 1HY08, due to the one time impact of VSS. According to our expectations the total cost of VSS stands at around PKR40bn, out of which PKR17bn would be contributed by the Govt. as a maximum contribution, putting a onetime negative impact of PKR23 bn on PTCL, all of which has been booked in HY08 Operating Costs. The impact of VSS reflecting a decrease in EPS of PKR4.51 translating into an EPS of PKR0.12 FY08 based on our expectations. Looking forward the VSS will reduce the burden of Costs of Salaries on PTCL starting FY09 onwards translating into positive numbers. Number of Employees 29893 Cost of Vss on PTCL (PKR in mn) 23163 Receivable from Govt of Pakistan(PKR in mn) 17429 Impact on EPS 3.46 Employee cost, even after 15% salary hike for existing staff will reduce by 37% from average PkR15.1bn to approximately PkR9.5bn. EBITDA margins will increase from 58% in FY07 to 61% in FY09 FY09 EPS is forecasted at PkR3.46, which represents 51% growth over normalized (ex VSS) FY08 EPS

Ufone - the cellular subsidiary Pakistan has emerged as one of the fastest growing mobile market amongst the developing nations. With cellular Teledensity touching 50 percent, tremendous upside exist in the cellular segment while about half of the population remaining untapped. Regional countries has showed tremendous growth in the cellular segment with India and China, emerging as major players owing mainly due to their population density and upbeat economic growth in recent times. China Mobile has emerged as China largest provider of cellular service with 60 percent of local share and has become world’s largest in terms of subscriber number touching over 300mn people by 2006. Recently China mobile has entered the Pakistan market with the acquisition of Paktel. With such regional developments, Pakistan’s cellular segment remains at attractive levels with Ufone closely following behind Mobilink, has emerged as a major cellular player.

BUY @ PKR 45.40 Ufone’s share Ufone, the wholly owned subsidiary of PTCL, with a major coverage reaching over 750 towns across the country, has emerged as a cellular giant amongst the major cellular service providers. Ufone has grown its market share substantially with a current subscriber base of 16.4mn users allover Pakistan with a market share reaching 25 percent. However in recent times Ufone has witnessed fierce competition from two international entrants, Telenor and Warid with former moving leaps and bounds in capturing the cellular market and dislodging Mobilink, the market leader of its share. Nevertheless, its forward looking plans for newer network rollouts in unexploited areas and providing quality services with a focus on improved customer services will help retain its share and help enhance its customer base.

Ufone’s contribution Ufone currently contributes about 7-8 percent towards the total consolidated revenues of PTCL while the bottom-line draws around 3-5 percent from the Ufone. The financial performance of Ufone has shown phenomenal growth with revenue growth of 87 percent while the bottom line has grown by 54 percent in FY07 when compared the to the preceding year. With current HY08 operating profits standing at PKPR2.2bn, Ufone’s contribution towards PTCL will remain prominent in longer term perspective.

BUY @ PKR 45.40 Ufone has sustained its market share while remaining amongst the market leaders, and has future plans of network rollout into 2,200 towns and cities across the country, with a GSM expansion plan of over USD550mn for increase in its capacity. These efforts to invest and expand in unexplored cellular market will enable Ufone to further enhance its market share in near future while there is major potential for growth in voice and data on mobile devices largely supported by its network rehabilitation and optimization plans.

What’s next? As the one time charge of VSS has been booked in the 1HY08, PTCL’s major concern for the increasing operating costs coming from salaries and benefits seem to be over. Costs of Salaries are to translate into

BUY @ PKR 45.40 positive numbers however major concerns will flow from the revenue side. With international incoming and outgoing segments having already bottomed out, in our opinion, broadband and upcoming IPTV should provide relief to the falling revenues. However, the contribution from these segments is likely to remain Modest.

PTCL’s ongoing efforts to become a market leader by providing newer services and value added products to enhance its customer base with newer brand image. Recent introduction of Broadband services, brand revival of WLL, Pakistan Package, Phone N Net services, PTCL has shown its efforts towards promoting product leadership. Expected introduction of IPTV and Triple Play service by proving Voice, Data and Video service through a single connection in FY08 and Other Carrier services depicts PTCL’s interest in new product developments. Also, the aim of PTCL provides data redundancy by proportional investment in the deployment of a third submarine cable, I-ME-WE, will further add to the depth of its already strong backbone. With PTCL’s cellular subsidiary's Ufone increasing its subscriber base to over 16.2mn users, and with its plans of enhancement of network in coming years will further enhance the company's earnings by further adding by 5- 7 percent to group’s bottom line.

BUY @ PKR 45.40 NWD segment With competitive nation-wide rates being offered by the cellular companies, PTCL’s NWD (estimated 12.2% of the topline inFY07) received the greatest brunt during FY07. During 1HFY08, we expect the NWDdialing to have received most battering and we estimate 40%YoY decline. However, the recently launched Pakistan Package offering NWD at a flat rate of PkR199/monthis likely to curtail the decline in this particular segment from 2HFY08 onwards. In order to combat extremely competitive rates offered by Cellular operators as well as WLLoperators, Pakistan Telecommunication Company Limited announced fixedPkR199 monthly package for nationwide calls to all PTCL numbers from Nov ‘07onwards. According to the new package, launched under thebrandname"PakistanPackage",NWD calls from fixed line to fixed line and wireless (WLL service under thename Vfone) are free of charge. Subscribers exceeding 5,000 nationwide minutes in any month will be charged PkR2 for each subsequent minute. At the moment, we estimate the company's ARPUs (Average Revenue per User) in this segment to be at PkR114/month, which is PkR84.75/month lower than the PkR199/monthfixed revenue that the company is likely to earn from its customers subscribing to the recently launched Pakistan Package. As a result, any degree of shift from the current package to the new one is likely to add to the company's overall revenues.

Local Call Revenue Like other revenue segments, local calls segment has also borne the brunt of mobile cannibalization. With greater mobile to mobile calls, not only has the usage per subscriber fallen but decline in subscribers has further added to the company's grief, resulting in a decline in overall local revenues. We expect this trend to continue and estimate local call revenues to fall by 25% in FY08, followed by negative 4-year revenue CAGR of 6%.

International incoming With surging mobile penetration resulting in larger number of calls terminating on mobile networks, the share of PTCL in the incoming minutes declined from 73% in FY05 to 55% in FY06. As a result,Internationalincoming revenues saw a massive estimated fall of 60% YoY in 2006. PTCL's share is estimated to have fallen by another 3%ppt in FY07, with international incoming revenues following suit, declining by 4% in FY07. The share of PTCL in the incoming minutes is

BUY @ PKR 45.40 likely to decrease by another 5ppt on average during FY08. However, higher overall incoming calls into Pakistan should result in a 4-year (FY08 to FY12) revenue CAGR of 5% in this segment.

International outgoing In order to combat competitive calling rates offered by LDIoperators including local cellular companies, PTCL was forced to reduce its rates on international outgoing calls from an average of PkR10 /minute to PkR8/minute inFY07. Furthermore, the company introduced ISD facility resulting in an estimated15%YoY increase in outgoing minutes in FY07. After the provision of direct dialing facility combined with further reduction in call rates, during 1HFY08, PTCL is estimated to have shown 148%YoY increase in the international outgoing minutes. However, since international outgoing just accounts for 3% of the overall fixed line revenues; the impact is likely to remain subdued.

Interconnect - Benefiting from cellular growth Interconnect, which accounts for 12.7% of PTCL's revenues, is likely to act as one of the few promising segments, thanks to the massive growth in the country's cellular subscriber base. With 140%growth seen in the cellular subscribers over the past three years, the benefits have poured to PTCL's revenue stream where interconnect revenues have seen 3-yearCAGR of 46% from FY04 to FY07. With expectations of 4-year CAGR of 24% in cellular subscribers, number of mobile calls originating from cellular networksandterminating on PTCL's networks are likely to increase enabling the company to report average 6% growth over the next four years

Broadband: Can it counter falling fixed line revenues? As of December 07, there were 3.5mn internet connections which included 115kusers in the country, while the remaining used dialup internet connections. For DSL has increased by 28xYoY, from 26k subscribers in FY06 to 700k in December 07, according to data from Pakistan Telecommunication Authority. Ptcl Broadband DSL services in June 2007 and as of December 2007, the company has been able to add 35k subscribers out of a total of 115k Broadband subscribers in the country. With recent announcement to launch DSL Broadband in all major cities of Pakistan, although the company should be able to add subscriber sat a much faster pace than it has in the past six months, however, tough competition faced by

BUY @ PKR 45.40 PTCL from nine major DSL operators through cost cutting and improvement of service quality is likely to result in 50k subscriber addition by the end of June FY08. Broad band’s contribution to the company's topline is likely to remain as low as 1.3%FY08. Furthermore an additional cost of modem and connection setup is likely to subdue the margins earned on this segment. As a result, the benefit to the bottom-line likely to remain minimal in FY08. We expect PTCL to add on an average 75ksubscribers every year, resulting in the segment's contribution increasing to 7% byFY13.

PTCL’S PRICE PERFORMANCE Since the announcement of its half year results on February 27, 2008, PTCL's stock has risen by 3.4%, outperforming the KSE-100 index by 3.0%. This is a significant change from the past where, for the past six months period PTCL underperformed the index by a massive 29.3%. It is clear that investors are now beginning to factor in the potential efficiency gains expected to accrue to the company from the recently implemented VSS plan wherein its work force will reduce by 48% by June 2008. We are forecasting FY09 earnings per share at PkR3.46, which would represent 13% growth over normalized (excluding one time VSS cost) fixed line FY0 EPS of PkR3.07.

BUY @ PKR 45.40

Issues after Deregulation/Privatization of PTCL PTCL Obligation Issues

The telecom De-regulation and Cellular Mobile Policies announced by the Federal Government place certain obligations on Pakistan Telecommunication Company Limited (PTCL) to facilitate market liberalization. PTCL is bound to comply with these obligations within a stipulated time frame. These obligations are of paramount importance for successful implementation of the policy and failure or any deviation thereof may result in substantial damage to the deregulation process/liberalization program. Similarly Defense, NTC and SCO also depend on PTCL for many facilities. Therefore, PTCL has important obligations towards Defense of the country and other existing operators. In addition, PTCL has been declared SMP operator. Under the status of SMP also, PTCL has certain obligations. PTA, as regulator, has to ensure that new management of PTCL fulfils all these obligations. •

PTCL Obligations towards Defense Forces Tri-Services strategic communication is established on PTCL fiber optic backbone. Operation, maintenance and security of these facilities as well as the main fiber route are with PTCL. The present arrangements will continue in post-privatized environment. Once PTCL is handed over to a private owner,

BUY @ PKR 45.40 security of this network could be become an issue. PTCL presently is providing all services to the defense forces on non commercial PTCL rates. •

PTCL Dominance on Essential Bottleneck Facilities PTCL has complete dominance on all essential bottleneck facilities. By definition, essential facilities are those (1) that are required by competitors in order to compete for the business of end customers (2) predominantly supplied by the incumbent (3) technically or economically difficult to substitute, at least on a widespread basis. A telecommunications operator that controls an essential facility often has both the incentive and the means to limit access to the facility by competitors. The Government should ensure that essential facilities are available to competitors on reasonable terms. Without such access, competition will suffer, and the sector will operate less efficiently than it could. The network facilities for which other operators will depend on PTCL, which can not be substituted in immediate future and implications/ connected problems are mentioned here under. • International Private Leased Circuits (IPLCs) IPLCs (E1/E3s/STMI) are leased for international tariff by LDI operators. These circuits are leased from under sea cable (SEMEWE-III) which PTCL has monopoly on, for selling to private customers in Pakistan. Similarly for satellite circuits, access through PTCL earth station is another essential requirement of LDI operators. IPLC rate are specified in the RIO, however, PTCL is offering IPLCs against security advance. The amount of security advance is not fixed and may be burdensome for some operators. PTCL has Reserved the FLAG cable for IP Connections; however, IP rates are not covered in the RIO. LDI operators have been prohibited not to establish hubs in foreign countries. However, enforcement of this particular restriction is not easy and there is a strong possibility of violation of this restriction. Moreover, PTCL itself is not entering into agreements with other carriers who have hubbing facilities. Therefore, restrictions on hubbing need to be reviewed. •

Digital Interface Unit (DIUs) DIUs (EIs) are interfaces installed between PTCL Transit switches and LDI Transit Switches/Micro Gateways for which rates are covered in the RIO. DIUs are also required for LL and CMTs operators. Availability of DIUs has been a problem even for existing CMTs operators and PTA has to intervene and direct PTCL to meet their requirement. Nonavailability of DIUs as per demand will create severe problems for LDI, LL and CMT operators.

BUY @ PKR 45.40 •

Copper Local Loop Fixed Line Local Loop operators (new entrants) may require leasing Copper Local Loop from PTCL for extending service (Voice and DSL etc.) from their network to the customers. New management of PTCL may exploit its dominance on copper pairs to its advantage by offering substandard pairs to other competitors thus making their service in-efficient and poor from quality point of view. This facility could have been availed by new operators on competitive rates if the incumbent had unbundled local loop. Since unbundling of local loop has not been done, therefore, rates for copper pairs have not been fixed/specified in the RIO. The unbundling can be (1) Full unbundling (2) Shared use of the Copper Line of Provision of DSL etc. (3) High speed bit stream access by the incumbent. The purpose of unbundling is that new entrants need not pay for network components or facilities which are not required for services to be provided. In Pakistan shared use of copper line of DSL and other is already being done, however, full unbundling of local loop has not been done, as some is not required under Telecom De-Regulation Policy. The purpose of this policy decision seems to be forcing new fixed line operators to develop their own local loop network instead of depending on PTCL. However, fixed line local loop operators can / will still utilize PTCL copper pair in required basis through commercial agreements in different telecom regions.

•

Other Facilities Other essential facilities may include right way and support structure (poles and conduits) etc. The policy and regulations are silent regarding these aspects and new entrants are expected to deal with PTCL as individual clients.

•

Abuse of Dominant Position The concept of abuse of dominance includes a broad range of anti-competitive conduct recognized in the laws and policies of many countries. It is similar to, but broader than the concept of monopolization that is found in some laws. While there are different definitions of abuse of dominance, there are common themes in the definitions. The essential characteristics of abuse of dominance include:-

1 • A firm has a dominance market position in the relevant market; and 2 • The firm uses that position to engage in “abusive” conduct which is or likely to be harmful to competition. With liberalization of telecom markets in Pakistan, PTA is now increasingly concerned to monitor progress of the sector and watch for the impediments that may hinder the growth of new entrants and thus

BUY @ PKR 45.40 the growth of sector. Among other difficulties, likely abuse of dominance by PTCL, the incumbent operator, cannot be overlooked. 1 • The dominance abuse of incumbent in Pakistan may be manifested in more pronounced manner in future as government is planning to transfer management control of PTCL to a strategic investor through privatization process. 2 • It is extremely difficult to enumerate and codify all forms of anticompetitive behavior which PTCL, a market dominant entity may use to hinder the development of competition and growth of new entrants. 3 • In addition to the classic forms of abuse of dominant position, PTCL has many subtle ways in which massive network dominance can be exploited to create unmatchable advantage. It is this nature of advantages that PTA needs to asses very carefully and take appropriate regulatory initiatives for ensuring fair competition. Analysis of telecom market, around the globe reveals that there are number of anticompetitive practices, being practiced by the incumbent operators. These practices are almost same in every country. However, certain new forms of abusive conduct are also being recognized today. •

Cross Subsidization PTCL is providing range of services i.e. Fixed Line, Cellular Mobile and Internet etc. As the world experience shows, incumbent can engage in cross subsidization which means that price of one market may be increased above the cost and use the surplus revenue obtained from this market to subsidize the lower prices in other markets where more competition is faced. Analyzing PTCL position against this experience and seeing the prevailing competition environments of Pakistan, it can be safely concluded and seeing the prevailing competition environments of Pakistan, it can be safely concluded that cross subsidization is not possible in Cellular Mobile and ISP markets. However, in Fixed Line segment, there is a real possibility of cross subsidization. PTCL can lower rates of line rent, installation charges and local calls and correspondingly increase rates of NWD and International out bound traffic/maintain present level/ lower the prices but still remain on the higher profit margin side. Alternatively as part of overall business strategy, it can offer different packages i.e. residential and corporate customers, rural and urban and economy groups etc. within each package the prices can be cross subsidized. This practice can have adverse effects on the growth of other licenses particularly those not having vertical integration. This abuse can be controlled through license conditions and accounting

BUY @ PKR 45.40 separation which subsidization.

will

determine

the

existence

of

cross

•

Price Discrimination In order to retain and even expand the market share, PTCL can resort to price discrimination. This can be between users of own network and other operators networks. For example PTCL may fix different rates for intra-network calls and inter-network calls. Lower rates of intra-network calls will be strong temptation for customers to remain stuck of PTCL instead of switching over to other choice operators. This practice will be a restraint for other operators, hence will be considered anticompetitive.

•

Vertical Price Squeeze PTCL can increase the price of upstream input (local access). It monopolizes, and keep the downstream services (ISPs, DSL and Payphones etc.) price same. The effect would be reduction or elimination of the profit of downstream service providers because their margins would be squeezed. To increase the squeezing effects, PTCL can also reduce downstream price of its own services. To control price discrimination, the regulator can impose wholesale cost imputation requirements.

Conclusion The above mentioned issues, like dominant positions, IPLC PTCL obligation, and states should be taken care of; otherwise PTCL will become a wild animal, unleashed.

FINANCIAL ANALYSIS Profitability Position PTCL posted a net profit of Rs 15.64 billion (EPS Rs 3.07) in FY07 against last year's figure of Rs 20.78 billion. The declining trend in profitability continued during the financial year ended June 30, 2007 due to structural adjustments brought about in the telecom sector by competition. Although PTCL maintained its leading market share in the fixed line, there was a decrease in revenues by 5.5% mainly due to substitution impact of mobile expansion. There was also an increase in operating expenses by 11.7% mainly due to prudent provisions for doubtful debts and long term systematic improvements in operations and customer services. In spite of decline in profit, the PTCL managed to increase its operating cash flows to Rs 35.54 billion compared to Rs 35.19 billion last year. Considering the cash requirements for restructuring and development plan, the company declared a final dividend of Rs 2.00 per share for the financial year ended June 30, 2007. The total revenue for FY 2006-07 stood at Rs 65.28 billion against Rs 69.09 billion of FY 2005-06. The decrease in revenue was mainly in the domestic segment due to competition and reduction in tariffs. ReturnonEquity

N e tprofitm a rgin

ReturnonEquity

Netprofitm argin

34.89

39.35 26.6

35.02 30.07

19.7

23.96 14.1

2004

2005

2006

2007

2004

2005

2006

2007

However, PTCL is making all efforts to boost revenue by improving customer service and launching new services to turn around the situation.

R e tu rno na sse ts Re tu rnonasse ts 2 0 .6

1 9 .5 8 1 3 .6 5 1 0 .2 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

RECENT RESULTS - 1Q'08 & Trend analysis: The structural adjustments undertaken by the company in response to the increased competition and substitution impact of mobile expansion has adversely hit the profitability of PTCL in the short run. The first quarter of FY'08 recorded a drop in profitability of PTCL, as the company's profit after taxation declined 41.5% over the three months period to September 2007, as compared to the same period last year. Sales revenue dwindled during three months period, reaching Rs 14.4 billion, compared to Rs 16.9 billion last year, depicting a decline of 15%. A 6% rise in operating expenses as a result of high provisioning against doubtful debts and infrastructure development for high speed DSL connections, combined with a 32% increase in financial charges, provided a further blow to the bottom line. Consequently, operating profit declined 46%. However the effect on net profit was somewhat diluted by a 14% increase in non-operating income of the company so that the company posted profit after tax of Rs 3.01billion, compared to Rs 5.15 billion in1Q'07. At the end of first quarter, the company stock was trading at a P/E ratio of 18.20. As illustrated by the graph, the stock has performed remarkably well relative to the market. The stock has shown consistent performance over the three months, dropping only slightly as the rest of the market dipped sharply during August. As a consequence of the fading sales revenue for the period, the profit after tax of the company in FY06 declined by 21.91% over FY05. The net profit margin has also been declining since the FY'04 and the trend persisted in FY06. The decline in profit margin may be attributed to a 5.25% increase in operating expenses for the year.

This was mainly due to an increase in salaries, marketing costs and rents. This led to a 24.66% decline in operating profit during the year, compared to FY05. However, a 15.53% boost in other income helped ease the pressure on profits. The higher income was brought about by a higher return on surplus funds and an increased dividend income from the subsidiary 'Ufone'. It may be noted that PTCL's EPS of Rs 1.07 in 4Q'06 (Apr'06-Jun'06) surged by 21.5% over the lowest 4 years quarterly EPS of Rs 0.88 in 3Q'06 (Jan'06-Mar'06), demonstrating a sharp recovery because an improvement in revenue and reduction in the effective tax rate in the 3Q'04. This turn, if events may be attributed to the acquisition of control by the new management of the company and the subsequent lowering of tariffs, in response to increasing competition. The lower profits for FY06 and FY07 have resulted in a decline in the Return on Assets and Return on Equity of the company. Increases in equity and assets also contributed to the trend. Owing to change in management, introduction of reengineering and enhancement programs, liquidity position of the company considerably improved in FY07. Now PTCL enjoys above average liquidity position. However, the idle cash and bank balances that PTCL has incurred might be a great opportunity cost for PTCL in the long run. Liquidity Position The liquidity position of the company suffered a setback in FY06. This trend has been witnessed despite increasing current assets, as current liabilities grew more sharply. The short term borrowings of the company have been mounting for the last few years and this has contributed to the current trend of the current ratio. It may be noted that the company holds large amounts of cash and bank balances compared to the other companies in the business. This may provide an edge to the company over its competitors. Although the liquidity stance of the company is fairly satisfactory at the moment, but a continuation of the current negative trend may spell trouble for the company.

A cidte storQ u ick ra tio

C u r r e n tr a t io C u rre n tra tio

AcidtestorQ u ickratio

2 .2 2 1 .8 9

2 .6 7

1 .6 6

2 0 0 4

2 .0 6

1 .7 4

1 .1 3

2 0 0 5

2 0 0 6

2 0 0 7

20 0 4

1 .5 4

2 0 0 5

2 0 0 6

2 0 07

Leverage Position The debt ratios showed a decreasing trend in the FY07. The debt to asset ratio of the company had declined considerably in FY05 but the trend reversed in FY06, declining again in FY07. It is important to note that the company maintains a largely unleveraged capital structure, with the current trend in debt ratios bought about largely by changes in current liabilities of the company. This was brought about mostly due to a decline in current liabilities of the company in FY05 and an increase in the same in FY06. The absence of the dividends payable portion of current liabilities in FY05 and its coming back online in FY06 was an important contributor to the trend. Further, the FY06 also saw an increase in short term borrowings of the company, complemented by increases in other components of current liabilities. Increases in assets, mainly arising from higher cash and bank balances, could not prevent the trend of the debt ratios. The financial strength of PTCL is evident from the healthy TIE ratio of the company. The TIE ratio of the company continued to rise in FY06 despite lower profits during the period. However, it declined in FY07, as a result of decrease in profits as discussed before. This reflects the little ability of the company to pay off its liabilities as they become due. The major portion of debt arises from current liabilities.

Debtequityratio

Debttoasset

Debt equity ratio

Debt toasset 69.4

40.98 26.54

2004

2005

30.72

2006

44.34

27.42

2007

36.06

2004

2005

2006

37.78

2007

T im eIn t re s te a rn e d T im eIn tre ste a rn e d 7 9 .9

8 1 .4 4

6 2 .2 3 3 6 .6 8

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

Activity Position The DSO of PTCL witnessed an upward trend throughout the period under analysis, except in FY05 when an improvement was marked. The ratio jumped up considerably in FY06, completely nullifying the effect of the decline in FY05, and exacerbating the already long collection period of the company. However, DSO showed a decline in FY07 showing that management of PTCL is constantly striving for improvement and enhancement despite stiff competition. As a result, the operating cycle has also decreased in FY07. The total assets turnover and sales to equity ratio of the company also declined in the FY'06 as revenues shrunk during the period. Sales/equity declined with the increase in equity of the company.

Marketability The lower net profit in FY06 has resulted in a considerable decline in the EPS of the company. The EPS mirrored the 21.9 % decline in the net profit of the company. However, despite the dwindling EPS, the company declared a dividend of Rs 5 per share. This represents a 150% increase over the dividend declared in theFY'05. This has also increased the dividend yield by 12.32%. The book value of the company continued to increase in FY06 as assets increased with no change in the number of shares issued by the company. The P/E ratio, however, registered a decline in FY06. The shareholders' equity has also shown a growth of 5.2% in FY07 as the net worth of the company rose to Rs 110.91 billion. This positive growth was also reflected in the market capitalization of the company which increased by Rs 83.01 billion. Hence book value of the company rose in FY07 along with a rise in price earnings multiple.

Priceearningratio

Earningpershare

Priceearningratio

Earningpershare

18.57 5.72

5.22

12.63

4.07

9.98

3.07

2004

2005

2006

7.37

2004

2007

2005

2006

2007

Dividends: PTCL has had a history of paying out significant portion of its earnings to its shareholders. However, with huge cash requirement for Voluntary Separation Scheme, PTCL is unlikely to announce any cash payout during FY08. Therefore, once the ongoing process of VSS is through, which requires a cash outflow of PkR23.2bn, dividend payout is likely to resume to its initial levels. D P S D PS 5

5

2

2

ROE DUPONT ANALYSIS 2006 2 0 0 4

DUPONT ANALYSI S=

2 0 0 5

Net Income Sales

DUPONT ANALYSI S=

20,777,4 30 69,085,4 36 DUPONT 0.300749 ANALYSI 785 S=

ROE =

0.19

2 0 0 6

2 0 0 7

Total Assets SHE 152,240, 022 105,475, 464 1.443369 066

Sales Total Assets 69,085,4 36 152,240, 022 0.453792 867

ROE DUPONT ANALYSIS 2007

Future

DUPONT ANALYSIS =

Net Income Sales

Total Assets SHE

DUPONT ANALYSIS =

1563875 3 6527702 5 0.239575 149

1528208 60 1109132 64 1.377841 157

ROE =

0.14

DUPONT ANALYSIS =

Sales Total Assets 6527702 5 1528208 60 0.427147 348

outlook: The privatization of PTCL and the transfer of control to the new owner, Etisalat carries important implications for the company. Etisalat has announced an aggressive 5-year expansion plan for the company and is viewing options to restructure the organization, improve customer care, increase revenue, enhance cost control and change the mindset of employees to bring about a positive change in the operations and running of the company. As a result of the expansion plans of the company, revenues are expected to grow at a rate of 8%-9%. The management is also striving for improvement in the field of asset management, with special focus towards revenue assurance and timely collection of overdue receivables and effective utilization of the assets of the company. A new Enterprise Resource Planning system along with a new Billing and Customer Care system is also being implemented. Through these, measures, the company hopes to improve its profitability and productivity. Since deregulation of the telecom sector, PTCL is learning to survive in a more competent environment and respond effectively to these changes. Despite the deregulation, however, the PTCL effectively remains a monopoly, as it is the only fixed line service provider in the country. Moreover, the company has a fibre-optic network connecting over 700 cities, which can be used for data transmission and most broadband companies will require the use of this network, hence adding to the strength of the company. PTCL realizes the commercial importance of the WLL or Wireless Local Loop technology and has therefore been increasing its capacity for WLL connections over the years. PTCL has also subsidized the costs of

wireless telephone sets to gain maximum capacity utilization of its WLL connections but is facing competition from another large player in the sector. Moreover, with the tremendous attention towards and demand of mobile phone connections, increased focus on the subsidiary Ufone will be beneficial for the company. The increased competition from deregulation has hit the profitability of the company as it is forced to reduce its calling rates to maintain its market position. In addition, NWD and International call revenues may decline further in the future due to new phone cards being available in the market. Since these cards are based on VoIP and charge lower rates than PTCL, they pose a threat to the company's profitability in future. Although the current infrastructural developments undertaken by the company, such as increasing of bandwidth from kbps (kilo bytes per second) to mbps (Mega bytes per second) and new additions to its product line are currently resulting in a drain on profits, but they are expected to generate considerable returns in the future. The company is also working on adopting new strategies to improve revenues. The company's decision to extend ISD facility to all customers has had a positive impact on international traffic. Incoming and outgoing traffic have by 27% and 148% respectively, a 10% growth in domestic leased lines revenue has also been recorded for the three month period. Moreover, the company is developing strategies to reduce operating costs and increase productivity. This includes the VSS (Voluntary separation scheme) provided to its employees, which the majority of the 65,000 employees of the company are eligible to avail. In addition, Etisalat the management company plans to increase its share in the company from 26% to 51% in the near future. With the large number of new entrants and large sums of Foreign Direct Investment flowing into the industry, the telecom sector has considerable potential for growth. The steps being taken by PTCL to improve cost efficiency and network capacity and service capability will enable the company to face the intense competition in the industry more effectively. In light of the dynamic nature of the telecom sector of Pakistan, the future of the company looks promising.

PAST TREND PTCL OPERATING HIGHLIGHTS LIQUID POSITION Current ratio

2004

2005

2006

2007

1.13

1.89

1.66

2.22

Acid test or Quick ratio LEVERAGE POSITION Debt equity ratio Debt to asset Time Interest earned PROFITABILITY POSITION Return on assets Return on Equity Net profit margin ASSET MANAGEMENT Debtors Turnover MARKET VALUE Payout ratio DPS Earning per share Price earning ratio SALES Sales as % of total assets Sales growth

BALANCESHEET PKR stores and spares trade debts cash and bank total current assets total assets current liabilities non current liabilities total debt paid-up capital total equity

2.67

1.74

1.54

2.06

69.4 36.06 44.34 37.78 40.98 26.54 30.72 27.42 62.23 79.9 81.44 36.68 20.6 19.58 13.65 10.23 34.89 26.6 19.7 14.1 39.35 35.02 30.07 23.96 4.32

4.9

4.3

87 5 5.72 7.37

38 2 5.22 12.63

122 5 4.07 9.98

65 2 3.07 18.57

58.4 11.6

64.5 -3.5

49 -14.4

44

2003

2004

2005

2006

2007

1,755,81 1 14,597,8 25 13,395,9 58 33,277,4 23 130,778, 875 34,311,8 37 16,544,2 23 50,856,0 60 51,000,0 00 79,922,8 15

1,854,15 1 17,147,5 96 24,023,2 52 48,293,5 58 141,594, 528 42,895,7 84 15,125,8 42 58,021,6 26 51,000,0 00 83,599,9 63

3,326,62 2 15,515,9 58 12,280,7 61 39,269,1 86 135,884, 608 20,805,9 53 15,258,0 13 36,063,9 66 51,000,0 00 100,014, 031

3,435,67 9 16,059,9 83 22,598,7 85 50,168,1 77 152,240, 022 30,275,5 32 16,489,0 26 46,764,5 58 51,000,0 00 105,475, 464

387920 6 114114 12 332836 60 542028 38 152820 860 244477 41 174598 55 419075 96 51,000, 000 110913 264

PKR INCOME STATEMENT

revenue operating costs operating profit finance cost non-operating income profit before taxation taxation profit after taxation

2003 67,202,5 31 32,095,0 43 35,107,4 88 1,024,71 5 2,480,70 1 36,563,4 74 13,482,4 44 23,081,0 30

2004

2005

2006

2007

74,124,2 75,972,3 69,085,4 652770 29 63 36 25 32,185,9 39,608,6 41,687,9 465643 72 39 18 38 41,938,2 36,363,7 27,397,5 18,712,6 57 24 18 87 673,880 2,095,49 1 43,359,8 68 14,190,2 28 29,169,6 40

455,099 3,387,49 6 39,296,1 21 12,690,4 64 26,605,6 57

336,401 3,912,93 1 30,974,0 48 10,196,6 18 20,777,4 30

510175 554120 3 237437 15 810496 2 156387 53

FUTURE TREND (Based on horizontal analysis) Assumptions •

Net sales decreases in FY08 by -2.2% and after that expected to increase in sales due PTCL's earnings growth will be driven by Ufone, its cellular subsidiary which has a 21% market share. With an estimated 2.2 million potential subscribers being added due to population demographics alone, WIRELESS is the key growth driver, where we project that the cellular contribution to total revenue will rise from 29% in 2008 to 44% in 2011. Moreover the topline still remains a source of concern where growth is constrained due to declining fixed line revenues taking a hit on the NWD side from poaching by cellular competitors and on the leased line business due to competing fiber optic networks from Wateen, Mobilink and Telenor. However, fixed line revenue should stabilize in FY09 as PTCL's new tariff regime gets traction.

•

EBITDA margins remain strong The past two years have been difficult for PTC with rising competition and falling tariffs eating into its profitable fixed line business. However, EBITDA margins remain strong and are expected to improve moving forward. While EBITDA margins dropped to 50.5% in FY07 from 57.3% in FY06, this is primarily attributed to higher bad debt provisioning

of PKR 6.3bn. Looking ahead, provisioning is expected to normalize and remain about PKR 1.3bn/yr, as a result of which we expect EBITDA margins to improve to 6%and 12% in FY08E and FY09E, respectively. •

Net profit in FY08 is expected to decline due to the impact of VSS, but infY09, it is expected to increase at 8.40% from base year of 2007.

•

Operating cost is expected to increase by 5.5% in the FY08 due to VSS.But onwards from it, is expecting to decrease due to low employee cost.

•

PTCL has developed a 5-year master plan after a detailed organization transformation strategy conducted by international consultants, McKinsey & Co. This envisages comprehensive organizational restructuring, formulation of IPTV, Triple Play & convergence services and migration to an end-to-end IP based network along with potential acquisitions to diversify risk. We believe PTCL is still a long way from actualizing this vision. However, the VSS implementation and launch of Broadband services in 2007 indicates that the process of change has begun.

Profit and Loss Account PKR billions Net Sales

FY07

FY08F

FY09F

FY10F

65.2

63.8

64.4

66

-2

1

2

26.9

23.5

24.3

5.5

-13

3

35.1

39.1

39.8

7

11

18

11.4

12.1

12.6

-16

6

4

10.6

21.4

27.2

-5

1.0

30

4.3

4.4

6.3

-16

2

4

14.9

25.8

33.5

-38

73

30

9.7

16.8

21.8

-37

73

30

% Change Operating Costs

25.5

% Change EBITDA

32.9

% Change Depreciation & amort.

13.5

% Change EBIT

19.4

% Change Other income

5.1

% Change Net Profit Before Tax

24

% Change Net Profit After Tax

15.5

% Change .

KEY FINANCIAL RATIOS

Per share data EPS (PKR) DPS (PKR) Price ratios PER (x) EV/EBITDA (x) P/BV (x) Dividend yield (%) Leverage EBIDTA margin (%) EBIT margin (%) PAT margin (%) Efficiency ROE (%) ROA (%)

FY07

FY08F

FY09F

FY10F

3.07 2

1.9 0

3.46 2

4.27 2

12.8 7.5 1.9 6.4

20.6 7 1.9 5.1

11.9 6.3 1.8 5.1

9.1 6.2 1.6 5.1

50.5 29.8 23.9

55.1 16.6 15.2

60.8 33.3 26.1

60.4 41.2 33

14.4 11

9 7

14.7 11.5

17.3 13.9

(A).

USING DDM MODEL VALUATION OF STOCK (PTCL) Using Growth rate of 4.93%

PTCL Shareholder's Equity No of Shares Dividend Per Share ROE = NI / Shareholders Equity Dividend Net Income (NI) Dividend Payout Ratio = Dividend/ Net Income Growth = (1-DPO) X ROE Last Dividend (D) Current Price of Stock

110,913,264 5,100,000 2.0 0.14 10165189 15638753 0.65 0.0493 2.0

(P)

Expected Growth Rate (g) Expected Return (ke) =(D/P)+g Valuation of Stock = D(1+g)/(Ke g)

45.40 4.93% 0.093

47.64

Under Priced

VALUATION OF STOCK (PTCL) Using Growth rate of 3%

PTCL Shareholder's Equity

110,913,264

No of Shares Dividend Per Share ROE = NI / Shareholders Equity Dividend Net Income (NI) Dividend Payout Ratio = Dividend/ Net Income

Last Dividend (D) Current Price of Stock (P) Expected Growth Rate (g) Expected Return (ke) =(D/P)+g

5,100,000 2.0 0.14 10165189 15638753 0.65 0.0300

2.0

45.40 0.0300 0.074

Valuation of Stock = D(1+g)/(Ke - g)

46.76

Under Priced

(B).

USING DDM MODEL and P/E ratio VALUATION OF STOCK (PTCL) Dividend Discount Model and P/E Ratio

D0 = g= Payout Ratio =

2.00 4.9% 65%

Trailing P/E = Req. Return = EPS(2012) =

14.79 9.3% 3.73 2008

Time Dividend Terminal Value Total Cash Flow Present Value

for four years =1-b b = retention ratio

2009 1 2.10 2.10 1.92

2010 2011 2012 2 3 4 2.20 2.31 2.42 55.17 (trailing P/E Model) 2.20 2.31 57.59 1.84 1.77 40.35

Intrinsic Value Current Price

46.1 8 45.4 0 Under Priced

(C).

FCFF VALUATION OF STOCK (PTCL) Using Growth rate of 4.93%

Cash Flow from Operating activities Add Interest Expense(1-T) Less Investment in fixed capital FCFF Ke risk free rate market return Risk premium beta Cost of Debt Tax rate Cost of Debt after tax Debt Equity WACC No. of shares Growth rate Firm Value Debt Total Firm Value Value per share

35,540,472 341,817 10,109,953 25,772,336 0.14 0.1050 0.15 0.045 0.840 0.11 0.33 0.074 0.20 0.80 0.1290 5100000 0.049 338024265.1 30448004.4 307576260.7 60.30

Under Priced with current price of Rs.45.40

VALUATION OF STOCK (PTCL) Using Growth rate of 3% Cash Flow from Operating activities

35,540,472

Add Interest Expense(1-T) Less Investment in fixed capital FCFF Ke Frisk free rate market return Risk premium beta Cost of Debt Tax rate Cost of Debt after tax Debt Equity WACC No. of shares Growth rate Firm Value Debt Total Firm Value Value per share

341,817 10,109,953 25,772,336 0.14 0.1050 0.15 0.045 0.840 0.11 0.33 0.074 0.20 0.80 0.1290 5100000 0.03 268190607.6 30448004.4 237742603.2

46.61

Under Priced with current price of Rs.45.40 (D).

FCFE VALUATION OF STOCK (PTCL) Using Growth rate of 4.93%

Cash Flow from Operating activities Add Interest Expense(1-T)

35,540,472 341,817

Less Investment in fixed capital

10,109,953

FCFF

25,772,336

Less Interest Expenses(1-T)

341,817

Add Net borrowings

429,122

FCFE Ke

25,859,641 0.14

risk free rate

0.1050

market return

0.15

Risk premium

0.045

beta

0.840

Cost of Debt

0.11

Tax rate

0.33

Cost of Debt after tax

0.074

Debt

0.20

Equity

0.80

WACC

0.1290

No. of shares Growth rate

5100000 0.049

Firm Value

289197904.1

Value per share

56.70

Under Priced with current price of Rs.45.40

VALUATION OF STOCK (PTCL) Using Growth rate of 3% Cash Flow from Operating activities Add Interest Expense(1-T) Less Investment in fixed capital FCFF Less Interest Expense(1-T) Add Net borrowings FCFE Ke risk free rate market return Risk premium beta Cost of Debt Tax rate Cost of Debt after tax Debt Equity WACC No. of shares Growth rate Firm Value Value per share

35,540,472 341,817 10,109,953 25,772,336 341,817 429,122 25,859,641 0.14 0.1050 0.15 0.045 0.840 0.11 0.33 0.074 0.20 0.80 0.1290 5100000 0.03 236129700.6

46.29

Under Priced with current price of Rs.45.40

RECOMMENDATIONS •

We hold positive stance on the telecom sector of Pakistan. Increase in Teledensity levels, network rollouts of cellular and wireless services in rural areas, induction and expansion of broadband services, continuous increase in inflows of foreign investments and deployment of newer technologies are some of the reasons upon which we are positive on this sector.

•

The sector has attracted enormous amount of Foreign Direct Investment (FDI) owing to increasing foreign interest cultivated by the recent deregulation by the Pakistan Telecom Authority (PTA), now contributing around 35 percent of total FDIs in the country.

•

We are also positive on local telecom giant PTCL.

 Our value of stock is PKR47.60 based on DCF method. Though we do not expect any dividend in FY08 due to one time impact of VSS costs, the stock anyhow hold a reasonable dividend yield of 4-5 percent on a longer term horizon. Based on our rationales, we recommend “BUY” at current level of PKR45.40  Our value of stock is PKR 60 based on FCFF method. Based on our rationales, we recommend “BUY” at current level of PKR45.40  Our value of stock is PKR 56.70 Based on our rationales, we recommend “BUY” at current level of PKR45.40 •

•

Our rationales are supported by enormous and continuous increase in Pakistan’s Teledensity, which has surged beyond 52 percent. Even with this massive improvement, most of rural population still remains unsnapped, giving the operators vast room for further growth. Trading at a discount but troubled year ahead:. PTC launched its Voluntary Separation Scheme (VSS) in November 2007 with the intention of scaling back 40% of its workforce or about 25,000 employees. A recent press release by the company revealed that this target had been achieved. Consequently, we believe that FY08

•

is likely to be a difficult year for PTC in terms of earnings growth as the company will book a major portion of the VSS charge. EBITDA margins remain strong: The past two years have been difficult for PTC with rising competition and falling tariffs eating into its profitable fixed line business. However, EBITDA margins remain strong and are expected to improve moving forward. While EBITDA margins dropped to 50.5% in FY07 from 57.3% in FY06, this is primarily attributed to higher bad debt provisioning of PKR 6.3bn. Looking ahead, provisioning is expected to normalize and remain about PKR 1.3bn/yr, as a result of which we expect EBITDA margins to improve in FY08E and FY09E, respectively. • Cellular and broadband growth remain key for future profitability: We believe that the future of PTC remains as a consolidated story with cellular and broadband segments driving growth. Consolidated earnings growth is expected to occur at a 4yr CAGR of 13.4%. Ufone currently commands the cellular market’s second largest share of 21.1% or 16.2mn subscribers although its market share of net additional subscribers has fallen over the last few months in part due to a selective strategy of pursuing only high ARPU subscribers. Ufone’s ARPU of USD 2.8 which is lower that the industry average of USD 3.1 remains a concern; however the company is launching several initiatives to deal with the issue, including the introduction of Blackberry services and upgrade of its GPRS network to EDGE. Also, the company has launched an aggressive marketing strategy for broadband but we await official statistics before incorporating broadband into our valuation. • Looking to land holdings for a valuation upgrade: We foresee significant upside in our valuation from the sale or development of PTCL’s numerous property assets. Currently, 480 properties out of an estimated 3,400 are awaiting a transfer of title from the government to the company. Management has indicated that it plans to pursue the development route although a time line on the project is yet to be established.

LIMITATIONS • •

Higher/ lower than expected decline in the company's fixed line voice telephony business should pose risk to our existing valuations. During FY07, the company posted bad debt provisioning worth PkR6.3bn, significantly higher than its historical average of PkR1.5bn. The provisioning continued during 1HFY08 as well when the company booked provisioning of PkR2.6bn. Any

•

•

•

possible reversal in the provisioning in case of recovery of debts should result in a one time gain. Impact of IPTV is not measurable at the moment and continuous delay in the launch has kept us away from including it in our base case valuations. Significant development on this front should warrant a rating. Lower than expected growth in Ufone's subscriber base owing to overall slowdown in the economy or any other regulatory changes will compel us to reassess our existing growth assumptions Revaluation of land is immeasurable at the moment. Therefore, it is not included in our base case valuations. However, revaluation, which is on the cards, should increase the company's book value. Further, development of land resulting in revenue generation should potentially increase our existing fair value.

Disclaimer: This disclaimer forms an integral part of this report. This report is for information purpose only and does not constitute an offer, or invitation to make an offer, to buy or sell any securities. All facts and figures have been taken from the sources that are considered reliable.

Bibliography For successful completion of this project we have utilize different available resources, from which we have obtain required data. These resources lie in both digital and analog form. Most of the information is obtain from Internet, while a visit to company is also made to get further information. We are thankful to company management who had welcome and cooperate with us. Resources which are consulted discussed below: Digital Resources 

Company website (ptcl.com.pk)



Magazine Business Economist



Google.com



Economic survey of Pakistan



Businessrecorder.com



Security and Exchange Commission of Pakistan



Kse.com



Yahoofinance.com



PTA

Analog Resources 

Company Annual Reports



Class Lectures



Material provided in the class

APPENDIX

DESCRIPTIVE ANALYSIS PTCL

WORLD CALL

NETSOL

0.027887 734 0.028998 969 0.001267 902

0.0077077 79 0.0295901 83 0

Mode

#N/A

0

0.018914 669 0.02192 878 0.038245 0.03024 266 237 0 0.00380 278 0 0.005

0.0332205 16 0.0324034 76 0.0333420 89 #N/A

Standard Deviation Sample Variance Kurtosis

0.183405 586 0.033637 609 20.64748 164 3.885029 471 1.247178 33 -1

0.1871447 49 0.0350231 57 20.859097 93 3.7676544 21 1.3333333 33 -1

0.241884 302 0.058508 015 7.499466 823 1.519729 838 1.475409 836 -1

0.2049375 76 0.0419994 1 12.442892 85 2.4810716 6 1.3402985 07 -1

0.247178 33 1.115509 367 40

0.3333333 33 0.3083111 41 40

0.475409 0.33 836 0.756586 753 0.87715 111 40 40

Mean Standard Error Median

Skew ness Range Minimum Maximum Sum Count

TRG

0.19126 954 0.03658 404 17.8060 727 3.30596 979 1.33 -1

TELECAR D

0.3402985 07 1.3288206 45 40

CORRELATION

KSE PTCL WorldC all Netsol TRG Telecar d

KSE 1 0.3229022 23 0.1823109 35 0.2893354 17 0.2626117 77 0.2773940 56

PTCL

WorldCall

Netsol

TRG

Teleca rd

1 0.8168529 37 0.7718680 52 0.8145966 43 0.7657070 46

1 0.7034166 66 0.8262242 64 0.8325665 18

1 0.7163602 92 0.7677721 77

1 0.8194028 97

1

BETA CALCULATION RETURNS DATE

Netso l 0.00

TRG

0.00

World Call 0.00

0.01

Telecar d 0.00

Feb-05 0.22

0.12

0.00

0.00

0.10

-0.06

Mar05 Apr-05

-0.06

0.03

0.00

0.00

0.01

-0.07

-0.09

-0.12

0.00

0.00

-0.17

-0.12

May05 Jun-05

-0.03

0.08

0.00

0.00

-0.12

-0.15

0.09

-0.01

0.00

0.00

-0.01

0.05

Jul-05

-0.04

-0.08

0.00

0.00

0.01

0.00

Aug05 Sep05 Oct-05

0.09

0.11

0.00

0.00

0.00

-0.04

0.05

-0.08

0.00

0.07

0.08

0.06

0.00

-0.07

-0.08

-0.11

-0.08

-0.11

Nov05 Dec05

0.09

0.09

0.15

0.24

0.33

0.17

0.06

0.05

-0.07

0.13

0.00

0.30

Jan-05

KSE 100 Index 0.09

PTCL

Jan-06

0.10

0.00

0.14

0.11

0.11

0.34

Feb-06 0.09

-0.02

0.03

-0.21

-0.14

-0.19

Mar06 Apr-06

0.00

0.02

-0.08

0.00

-0.07

-0.11

-0.01

-0.17

-0.09

-0.03

-0.05

-0.12

May06 Jun-06

-0.14

-0.19

-0.16

-0.23

-0.11

-0.09

0.02

-0.08

0.10

-0.28

0.01

-0.12

Jul-06

0.05

0.03

0.18

0.11

0.01

0.13

Aug06 Sep06 Oct-06

-0.04

0.02

0.00

-0.13

-0.03

-0.09

0.04

-0.03

0.09

-0.01

-0.02

-0.03

0.08

0.08

-0.03

0.12

-0.07

-0.06

Nov06 Dec06 Jan-07

-0.06

0.04

-0.05

-0.06

0.05

-0.17

-0.05

-0.05

0.02

-0.06

-0.08

0.03

0.12

0.25

-0.04

0.48

0.02

-0.01

Feb-07 -0.01

-0.02

-0.03

0.33

0.12

0.04

Mar07 Apr-07

0.01

-0.12

0.15

0.05

0.04

-0.05

0.10

0.08

0.17

0.44

0.15

0.04

May07 Jun-07

0.05

0.05

0.33

0.10

0.08

0.27

0.06

0.06

0.02

0.09

0.27

0.11

Jul-07

0.00

0.03

0.11

0.47

-0.15

0.16

Aug07 Sep07 Oct-07

-0.11

-0.17

-0.09

-0.10

-0.08

-0.30

0.09

0.08

0.13

0.20

0.14

0.08

0.07

-0.04

-0.08

0.30

-0.04

0.01

Nov07 Dec07 Jan-08

-0.02

-0.12

-0.04

-0.13

-0.08

-0.09

0.01

-0.05

-0.09

-0.08

0.09

0.03

0.00

-0.08

-0.01

0.10

-0.07

-0.07

Feb-08 0.07

0.17

0.03

0.01

0.00

-0.01

Mar-

0.00

-0.01

-0.16

-0.12

-0.10

0.01

08 Apr-08

0.03

-1.00

-1.00

-1.00

-1.00

-1.00

Netso l

TRG

Telecar d

BETA KSE 100 Index

PTCL

1.00

4

0.8

World Call

48

Pak Datacom Returns

P T C L C h arac te ris tic L in e 0 .4 0 0 .3 0 0 .2 0 0 .1 0 0 .0 0 - 0 .1 0 - 0 .2 0 - 0 .3 0 - 0 .3 0

- 0 .2 0

- 0 .1 0

0 .0 0

0 .1 0

0 .2 0

0.

0.9 0. 9 71

y = 0 . 8 3 9 1 x - 0 .0 4 9 3 R2 = 0 .1 0 4 3

0 .3 0

0 .4 0

K S E 1 0 0 R e tu rn s

y =0.8055x - 0.0538 Telecard Characteristic Line R 2 =0.0769

World Call Characteristic Line

y =0.4834x - 0.0201 R 2 =0.0332

0.40

0.30

0.30

0.20

0.20

0.10

0.10

0.00

0.00

-0.10

-0.10

-0.20

-0.20 -0.30 -0.30

0.40

-0.30 -0.30 -0.10

0.10

KSE 100 R eturns

0.30

-0.10

0.10

KSE 100 R eturns

0.30

0. 81

= 0.9916x - 0.0064 Netsol CharacteristicyLine

T R G C h a r a c te r is tic L in e 0 0 0 0 0

Pak Datacom Returns

.4 0 .3 0 .2 0 .1 0 .0 0 -0 .1 0 -0 .2 0 -0 .3 0 - 0 .3 0 - 0 . 2 0 - 0 . 1 0 0 .0 0

y = 0 .7 1 1 7 x - 0 .0 4 0 1 R2 = 0 . 0 6 9

R2 = 0.0837

0.40 0.30 0.20 0.10 0.00 -0.10 -0.20

0 . 1 0 0 . 2 0 0 .3 0 0 . 4 0

K S E 10 0 R e tu rn s

-0.30 -0.30

-0.10

0.10

KSE 100 Returns

0.30

List of Cellular Mobile Operators Sr. No. 1 2 3 4 5 6

Operator Name Pakistan Mobile Communication (Pvt.) Ltd. (Mobilink) PTML (U-fone) M/s PakCom (Pvt) Ltd. (Instaphone) M/s Paktel (Pvt) Ltd. (Paktel) Telenor Mobile Communications Warid Telecom

Country Egypt Pakistan Luxembourg Luxembourg Norway UAE

List of Licenses issued for Long Distance International (LDI) Foreign Companies Sr. No. Name 1 M/s. Wateen Telecom. 2 M/s. Dancom 3 M/s Redtone Telecommunications (Pvt) Ltd 4 M/s Link Direct Int’l 5 M/s Telenor

Country UAE Malaysia Malaysia Egypt Norway

Local Companies Sr. No. 1 2 3 4 5 6 7 8

Name M/s. Burraq Telecom. M/s. Callmate Telips Telecom Ltd. M/s. DV Com. M/s. Telecard. M/s. WorldCall Telecom. M/s. Circle Net Communication M/s. Wise Communication Systems (Pvt) Ltd. M/s Multinet Pakistan (Pvt) Ltd

Country Pakistan Pakistan Pakistan Pakistan Pakistan Pakistan Pakistan Pakistan

List of IT & Telecom Companies quoted on Stock Exchanges Sr. No.

Name Pakistan Telecommunication Company Limited. 1. Callmate Telips 2. Pak Datacom Limited 3. The Resource Group (TRG) Pakistan. 4. Telecard Ltd. 5. WorldCall Broad 6. WorldCall Communication 7. WorldCall Multimedia Ltd. 8. Southern Network 9.

Country

OutTelecom Telecom Telecom Intern Intern PCs going municat municati municati et et Total Intern ion Staff on on Host Users ational Revenue Investm Traffic ent

Total

Staff

Total

Interne t Subscriber s

Total

Total

(Millio (000s) n)

M Min. (000s)

M RS

M US$

Banglade sh Bhutan India Indonesia Nepal Pakistan

39.3

19.8

523.9

80.1

1

243

1050

81

6.2 660 289.4 33.3 128.3

0.4 416.6 39.8 4.8 74

2.8 3511.5 1703.3 20.9 2606.6

985 86871 62036 917 15124

15 18481 8080 80 12

10 7500 2519 85 600

2.1 4140 865.7 20 2.4*

China

1005. -

9.2 7959.2 2167.1 84.2 192, 626 55527.1

(Millio n)

26782. 16042 79500 35500 67746

7 329.9 46.2 7 0.5 171 21.4

1715.1 65.2 2952

5 1263.7 8 696.7

56.5 10.9 342.4 29.3

334.5 4140.5

82.2 400.9

Malaysia

982

20.7

4791.8

Hong Kong, China Japan

4400

17.8

6255

Iran Maldives Philippine s Sri Lanka Thailand

2811. 114.4 4 Korea 1041. 53.3 (Rep) 8 Singapor 1965 8.8 e Taiwan, 3076. 38.3 China 7 Vietnam 67.2 90

1 5052 4800 532 15 27996 3500

1882 10370 0 1009.2 10797 1 1065 59199 3

6000 20 2200

.5 816.2 1.1 800

225 6972

250 2461

85.5 2403

8661

4200

3213

2864

2997. 4 2327

168914 19997. 12962 61600 4 065 21737.2 6506.6 25324 29220 2 3348.6 433 48482 2135 5 10300.2 3551.7 27770 8830 85 1611.7 340 3500

48700 33883 .9 26741 1178. 5 2590 2020. 8 10665 7822. 1 800 917.1