Tough year for telcos

Published November 23, 2020
Irfan Wahab Khan
Irfan Wahab Khan

Early this year, many an economist and Captain Obvious came up with a list of sectors that stood to gain from the pandemic. The telecom sector, along with health care–related businesses, was at the top of that list because of the expected rise in the use of mobile phones during the lockdowns.

Like most weather and economic forecasts, that turned out to be wide of the mark.

Financials of the telecoms show their revenues and pre-tax profitability declined in the first nine months of 2020.

Revenues of Jazz Pakistan, the largest network with 38 per cent market share, decreased 8.9pc year-on-year to $908 million in the first nine months of 2020. Thanks to the exchange rate movement, the decline in rupee terms was 0.1pc as the company’s top line clocked in at Rs147 billion. Its pre-tax earnings in dollar terms dropped 8pc to $468m (Rs76bn) over the same period.

Telenor Pakistan, which is the second largest cellular network with a 27pc market share, posted a year-on-year decline of 21.2pc in operating profit for the nine-month period. Its total revenue dropped 7pc. In rupee terms, its top line for Jan-Sept was Rs75bn.

In a recent interview with Dawn, Telenor Pakistan CEO Irfan Wahab Khan attributed the drop in profitability to a host of reasons. “There was Covid-19 but macroeconomic indicators also played a role. Overall GDP wasn’t growing. We are part of the same ecosystem,” he said.

Both Jazz and Telenor are owned by foreign holding companies. As such, they don’t publish figures for net profit for Pakistan operations.

A market like Pakistan should not have more than three cellular networks, says Telenor Pakistan CEO Irfan Wahab Khan

There are four cellular networks in Pakistan with a total of 169m subscribers. Zong and Ufone are the other two players with 22pc and 13pc market share, respectively.

A key indicator of performance, average revenue per user (ARPU), declined 9pc year-on-year for Telenor Pakistan in Jan-Sept. “ARPU is stagnant. In fact, it has declined if you look at the longer trend. It’s linked with our overall economic situation. If our customers have disposable money to spend, they spend more. But when they feel uncertain, they try to hold back. This is what we are seeing,” he said.

Mr Khan emphasised that growing the number of phone subscribers will remain challenging as long as taxes stay high and discriminatory. He insists that half the population is still without a phone. The official 79pc tele-density figure is misleading because many phone users carry multiple SIMs.

“More than 90pc of our customers do not fall under tax brackets. They include drivers, security guards and daily-wage workers. They all use cell phones and pay withholding tax at 12.5pc. We have been asking the government that it should rationalise it,” he said.

Accounting for sales tax that’s in the range of 17-19pc in different provinces, the consumer gets a balance in low Rs70s for every Rs100 recharge, he said.

State of competition

According to Mr Khan, another reason for reduced profitability is intense competition. He claims telecom services, including voice and data, are the cheapest in Pakistan compared to the rest of the world.

“Consumers have benefitted in a super-competitive environment. But the cost of doing business for operators is going up. If you look at electricity prices, security, inflation in general, it’s going up. So that is (contributing) to reduced profitability.”

He says a market like Pakistan should not have more than three networks. “That’s the optimum size,” he says. Pakistan is a large country and ensuring geographical coverage takes resources. A telecom player must invest back a lot of money every year because technology is changing rapidly, he says.

Ufone, the smallest of the four players, is reportedly up for grabs along with its 22m subscriber base. It is reported to have issued a request for proposals in September to financial institutions that could advise it on a possible merger with another telecom operator.

Telenor will get almost 50pc market share should it decide to acquire Ufone. In case Zong buys Ufone, the resulting entity will have a 35pc market share, making Telenor the smallest of the three players. Four years ago, Warid ceased to exist after its shareholders signed a share swap agreement with Mobilink, which got them a 15pc stake in the new entity called Jazz Pakistan.

“I can’t comment on it. We will evaluate each opportunity as it becomes available,” the Telenor Pakistan CEO said about the possible acquisition of Ufone.

“You can’t rule out anything. You have seen that we saw the opportunity and entered into financial services space almost 10 years ago. It started inorganically where we saw an opportunity, got into a partnership with a small microfinance bank, and we built it over. So one cannot rule out any of those things,” Mr Khan said.

The current level of 4G penetration in the country is 40pc only. This means six in every 10 customers are using a non-internet phone. “We see a lot of growth opportunity if we have the right policy framework and right incentives,” he added.

Licence renewal saga

Three of the four international investors in the telecom sector are still in court on the issue of the license renewal fee.

The renewal of Telenor Pakistan’s licence, which expired in May 2019, is still not finalised. The Pakistan Telecommunication Authority (PTA) demanded a fee of $449m. The company wants it to be $291m, equal to the amount paid by another operator. The company has paid a deposit of $225m “under protest” as the superior judiciary has not yet ruled on the matter.

“The industry has been clear that a level playing field must exist. One operator’s licence was renewed on specific terms. All we are asking is that it should renew others’ licences on the same terms to ensure a level playing field. A figure was quoted from thin air without any rationale and we were asked to abide by that,” he said.

Published in Dawn, The Business and Finance Weekly, November 23rd, 2020

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