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A Report on

Submitted To:

Mr. Abdul Hafeez Malik

Submitted By:

Arshad Mahmood
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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.

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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 Higher overseas remittances
3 High Public Sector Development Programs
4 Higher foreign investments
5
6 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
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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 composition-
 34% 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 under-
penetration 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.
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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
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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 2006-
07 which was 26% in the year 2005-06. PTA allowed mobile companies
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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
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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.
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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
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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.
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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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Vision

To be the leading Information and Communication Technology Service Provider in the

region by achieving customer satisfaction and maximizing shareholders' value'.
The future is unfolding around us. In times to come, we will be the link that allows global
communication. We are striving towards mobilizing the world for the future. By
becoming partners in innovation, we are ready to shape a future that offers telecom
services that bring us closer.

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.

With an employee strength of 65,000 and 5.7 million customers, PTCL is the largest
telecommunications provider in Pakistan. PTCL also continues to be the largest CDMA
operator in the country with 0.8 million V-fone customers.

The company maintains a leading position in Pakistan as an infrastructure provider to

other telecom operators and corporate customers of the country. It has the potential to be
an instrumental agent in Pakistan’s economic growth. PTCL has laid an Optical Fibre
Access Network in the major metropolitan centres of Pakistan and local loop services
have started to be modernized and upgraded from copper to an optical network.

On the Long Distance and International infrastructure side, the capacity of two SEA-ME-
WE submarine cable is being expanded to meet the increasing demand of International
traffic.
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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
accordance with the instructions of Government of Pakistan and in
exercise of powers conferred by Pakistan Telecommunication (Re-
Organization) 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
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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.

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 multi-
storey 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
 BUY @ PKR 45.40

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.

Mr. Hifz-Ur-Rehman

Chairman PTCL Board

Secretary IT&T, Ministry of
Information Technology
Government of Pakistan,
Islamabad

Mr. Abdulrahim Abdulla Abdulrahim Al

Nooryani

Chairman & Chief Executive

Officer,
Etisalat International Pakistan L.L.C
Executive Vice President Contracts
& Administration
Etisalat, UAE.

Mr. Farrakh Qayyum

Secretary, Ministry of Finance

Government of Pakistan,
Islamabad

Mr. Abdulaziz Ahmed Saleh Ahmed Al

Sawaleh

Chief Human Resource Officer

Etisalat, UAE
 BUY @ PKR 45.40

Mr. Noor-ud-Din Baqai

Member (Telecom), Ministry of

Information Technology
Government of Pakistan,
Islamabad

Mr. Fadhil Mohamed Erhama Al Ansari

Executive Vice President

Engineering
Etisalat, UAE

Mr. Ahsanullah Khan

Ambassador, Embassy of Pakistan

Abu Dhabi, UAE

Mr. Abdulaziz Hamad Omran Taryam

General Manager, Northern Emirates

Etisalat, UAE

Dr. Ahmed Al Jarwan

General Manager
Real Estate
Etisalat, UAE

Ms. Farah Qamar

Company Secretary
PTCL Headquarters,
Islamabad
 BUY @ PKR 45.40

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

• 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.
 BUY @ PKR 45.40

• 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
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
 BUY @ PKR 45.40

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.

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.
 BUY @ PKR 45.40

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

Subsidiaries

Ufone (Pakistan Telecom Mobile Ltd) a wholly-owned subsidiary of PTCL commenced

its operations on 29th January 2001 as a GSM 900 service provider. Since the outset, it
has expanded its coverage and customer base at a rapid pace and established itself as one
of the leading cellular service providers in Pakistan. Ufone is now considered to be one of
the most active, aggressive and innovative players in the mobile sector of Pakistan.
The growth of the cellular industry is a direct result of the successful implementation of
the telecom deregulation and cellular mobile policy by the Ministry of IT and
Telecommunications (MOIT&T) and the support, guidance and timely enforcement of
regulatory process by the Pakistan Telecommunication Authority (PTA).

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.

Ufone’s share
 BUY @ PKR 45.40

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.

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
 BUY @ PKR 45.40

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
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
 BUY @ PKR 45.40

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.

NWD segment

With competitive nation-wide rates being offered by the cellular

companies, PTCL’s NWD (estimated 12.2% of the topline inFY07)
 BUY @ PKR 45.40

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
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.
 BUY @ PKR 45.40

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
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.
 BUY @ PKR 45.40

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. Non-
availability 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 will determine the existence of cross

subsidization.

• 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 anti-
competitive.

• 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 Netprofitmargin
ReturnonEquity Netprofitmargin

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.
 Re
turnona
sse
ts
Returnonassets

20.6 1
9 .58

13.6
5
1
0 .23

2
0 04 2005 2006 2007

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.
 Cur
ren
trat
io Acidte
storQuick
Cu
rren
tra
tio ra
tio
2
.22 AcidtestorQuickratio
1
.89 2.67
1
.66
2.06
1.74
1
.13 1.54

2
004 2
005 2
006 2
007 2004 2005 2006 2007

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.

Debttoasset Debtequityratio
Debt toasset Debt equity ratio

69.4
40.98

30.72
26.54 27.42 44.34
36.06 37.78

2004 2005 2006 2007 2004 2005 2006 2007

 Tim
eIn
tre
ste
arn
ed
T
imeIn
tre
ste
arn
ed

7
9.9 8
1.4
4

6
2.2
3

3
6.6
8

2
004 2
005 2
006 2
007

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.
 Earningpershare Priceearningratio
Earningpershare Priceearningratio
18.57
5.72
5.22
12.63
4.07
9.98
3.07
7.37

2004 2005 2006 2007 2004 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
PS
D
PS

5 5

2 2

ROE DUPONT ANALYSIS 2006

2
004 2
005 2
006 2
007

DUPONT Net Total Sales

ANALYSI Income Assets
S=
Sales SHE Total
Assets
DUPONT 20,777,4 152,240, 69,085,4
ANALYSI 30 022 36
S=
69,085,4 105,475, 152,240,
36 464 022
DUPONT 0.300749 1.443369 0.453792
ANALYSI 785 066 867
S=

ROE = 0.19
 ROE DUPONT ANALYSIS 2007

DUPONT Net Total Sales

ANALYSIS =
Future Income Assets
Sales SHE Total
Assets
DUPONT 1563875 1528208 6527702
ANALYSIS = 3 60 5
6527702 1109132 1528208
5 64 60
DUPONT 0.239575 1.377841 0.427147
ANALYSIS = 149 157 348

ROE = 0.14
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 2004 2005 2006 2007
LIQUID POSITION
Current ratio 1.13 1.89 1.66 2.22
Acid test or Quick ratio 2.67 1.74 1.54 2.06
LEVERAGE POSITION
Debt equity ratio 69.4 36.06 44.34 37.78
Debt to asset 40.98 26.54 30.72 27.42
Time Interest earned 62.23 79.9 81.44 36.68
PROFITABILITY POSITION
Return on assets 20.6 19.58 13.65 10.23
Return on Equity 34.89 26.6 19.7 14.1
Net profit margin 39.35 35.02 30.07 23.96
ASSET MANAGEMENT
Debtors Turnover 4.32 4.9 4.3
MARKET VALUE
Payout ratio 87 38 122 65
DPS 5 2 5 2
Earning per share 5.72 5.22 4.07 3.07
Price earning ratio 7.37 12.63 9.98 18.57
SALES
Sales as % of total assets 58.4 64.5 49 44
Sales growth 11.6 -3.5 -14.4

BALANCESHEET 2003 2004 2005 2006 2007

PKR
1,755,81 1,854,15 3,326,62 3,435,67 387920
stores and spares 1 1 2 9 6
14,597,8 17,147,5 15,515,9 16,059,9 114114
trade debts 25 96 58 83 12
13,395,9 24,023,2 12,280,7 22,598,7 332836
cash and bank 58 52 61 85 60
total current 33,277,4 48,293,5 39,269,1 50,168,1 542028
assets 23 58 86 77 38
130,778, 141,594, 135,884, 152,240, 152820
total assets 875 528 608 022 860
34,311,8 42,895,7 20,805,9 30,275,5 244477
current liabilities 37 84 53 32 41
non current 16,544,2 15,125,8 15,258,0 16,489,0 174598
liabilities 23 42 13 26 55
50,856,0 58,021,6 36,063,9 46,764,5 419075
total debt 60 26 66 58 96
51,000,0 51,000,0 51,000,0 51,000,0 51,000,
paid-up capital 00 00 00 00 000
79,922,8 83,599,9 100,014, 105,475, 110913
total equity 15 63 031 464 264
PKR
INCOME
STATEMENT 2003 2004 2005 2006 2007

67,202,5 74,124,2 75,972,3 69,085,4 652770

revenue 31 29 63 36 25
32,095,0 32,185,9 39,608,6 41,687,9 465643
operating costs 43 72 39 18 38
35,107,4 41,938,2 36,363,7 27,397,5 18,712,6
operating profit 88 57 24 18 87
1,024,71
finance cost 5 673,880 455,099 336,401 510175
non-operating 2,480,70 2,095,49 3,387,49 3,912,93 554120
income 1 1 6 1 3
profit before 36,563,4 43,359,8 39,296,1 30,974,0 237437
taxation 74 68 21 48 15
13,482,4 14,190,2 12,690,4 10,196,6 810496
taxation 44 28 64 18 2
profit after 23,081,0 29,169,6 26,605,6 20,777,4 156387
taxation 30 40 57 30 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 FY07 FY08F FY09F FY10F

Net Sales 65.2 63.8 64.4 66
% Change -2 1 2
Operating Costs 25.5 26.9 23.5 24.3
% Change 5.5 -13 3
EBITDA 32.9 35.1 39.1 39.8
% Change 7 11 18
Depreciation & amort. 13.5 11.4 12.1 12.6
% Change -16 6 4
EBIT 19.4 10.6 21.4 27.2
% Change -5 1.0 30
Other income 5.1 4.3 4.4 6.3
% Change -16 2 4
Net Profit Before Tax 24 14.9 25.8 33.5
% Change -38 73 30
Net Profit After Tax 15.5 9.7 16.8 21.8
% Change -37 73 30

. KEY FINANCIAL RATIOS

FY07 FY08F FY09F FY10F

Per share data
EPS (PKR) 3.07 1.9 3.46 4.27
DPS (PKR) 2 0 2 2
Price ratios
PER (x) 12.8 20.6 11.9 9.1
EV/EBITDA (x) 7.5 7 6.3 6.2
P/BV (x) 1.9 1.9 1.8 1.6
Dividend yield (%) 6.4 5.1 5.1 5.1
Leverage
EBIDTA margin (%) 50.5 55.1 60.8 60.4
EBIT margin (%) 29.8 16.6 33.3 41.2
PAT margin (%) 23.9 15.2 26.1 33
Efficiency
ROE (%) 14.4 9 14.7 17.3
ROA (%) 11 7 11.5 13.9
(A). USING DDM MODEL

VALUATION OF STOCK (PTCL)

Using Growth rate of 4.93%

PTCL
Shareholder's Equity 110,913,264
No of Shares 5,100,000
Dividend Per Share 2.0
ROE = NI / Shareholders 0.14
Equity
Dividend 10165189
Net Income (NI) 15638753
Dividend Payout Ratio = Dividend/ 0.65
Net Income
Growth = (1-DPO) X ROE 0.0493

Last Dividend (D) 2.0

Current Price of Stock (P) 45.40
Expected Growth Rate (g) 4.93%
Expected Return (ke) =(D/P)+g 0.093
Valuation of Stock = D(1+g)/(Ke - 47.64
g)
Under Priced

VALUATION OF STOCK (PTCL)

Using Growth rate of 3%

PTCL
Shareholder's Equity 110,913,264
No of Shares 5,100,000
Dividend Per Share 2.0
ROE = NI / Shareholders Equity 0.14
Dividend 10165189
Net Income (NI) 15638753
Dividend Payout Ratio = Dividend/ Net Income 0.65
0.0300

Last Dividend (D) 2.0

Current Price of Stock (P) 45.40
Expected Growth Rate (g) 0.0300
Expected Return (ke) =(D/P)+g 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 = 2.00
g= 4.9% for four years
Payout Ratio = 65% =1-b b =
retention
ratio
Trailing P/E = 14.79
Req. Return = 9.3%
EPS(2012) = 3.73
2008 2009 2010 2011 2012
Time 1 2 3 4
Dividend 2.10 2.20 2.31 2.42
Terminal Value 55.17 (trailing P/E
Model)
Total Cash Flow 2.10 2.20 2.31 57.59
Present Value 1.92 1.84 1.77 40.35
Intrinsic Value 46.1
8
Current Price 45.4
0
Under Priced

(C). FCFF

VALUATION OF STOCK (PTCL)

Using Growth rate of 4.93%

Cash Flow from Operating activities 35,540,472
Add Interest Expense(1-T) 341,817
Less Investment in fixed capital 10,109,953
FCFF 25,772,336
Ke 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 5100000
Growth rate 0.049
Firm Value 338024265.1
Debt 30448004.4
Total Firm Value 307576260.7
Value per share 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) 341,817
Less Investment in fixed capital 10,109,953
FCFF 25,772,336
Ke 0.14
Frisk 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 5100000
Growth rate 0.03
Firm Value 268190607.6
Debt 30448004.4
Total Firm Value 237742603.2
Value per share 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 35,540,472
Add Interest Expense(1-T) 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 25,859,641
Ke 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 5100000
Growth rate 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 35,540,472
Add Interest Expense(1-T) 341,817
Less Investment in fixed capital 10,109,953
FCFF 25,772,336
Less Interest Expense(1-T) 341,817
Add Net borrowings 429,122
FCFE 25,859,641
Ke 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 5100000
Growth rate 0.03
Firm Value 236129700.6
Value per share 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 NETSOL TRG TELECAR
CALL D

Mean - - 0.018914 - -
0.027887 0.0077077 669 0.02192 0.0332205
734 79 878 16
Standard 0.028998 0.0295901 0.038245 0.03024 0.0324034
Error 969 83 266 237 76
Median 0.001267 0 0 - -
902 0.00380 0.0333420
278 89
Mode #N/A 0 0 0.005 #N/A
Standard 0.183405 0.1871447 0.241884 0.19126 0.2049375
Deviation 586 49 302 954 76
Sample 0.033637 0.0350231 0.058508 0.03658 0.0419994
Variance 609 57 015 404 1
Kurtosis 20.64748 20.859097 7.499466 17.8060 12.442892
164 93 823 727 85
Skew ness - - - - -
3.885029 3.7676544 1.519729 3.30596 2.4810716
471 21 838 979 6
Range 1.247178 1.3333333 1.475409 1.33 1.3402985
33 33 836 07
Minimum -1 -1 -1 -1 -1
Maximum 0.247178 0.3333333 0.475409 0.33 0.3402985
33 33 836 07
Sum - - 0.756586 - -
1.115509 0.3083111 753 0.87715 1.3288206
367 41 111 45
Count 40 40 40 40 40
 CORRELATION
Teleca
KSE PTCL WorldCall Netsol TRG rd
KSE 1
0.3229022
PTCL 23 1
WorldC 0.1823109 0.8168529
all 35 37 1
0.2893354 0.7718680 0.7034166
Netsol 17 52 66 1
0.2626117 0.8145966 0.8262242 0.7163602
TRG 77 43 64 92 1
Telecar 0.2773940 0.7657070 0.8325665 0.7677721 0.8194028
d 56 46 18 77 97 1

BETA CALCULATION
RETURNS
DATE KSE 100 PTCL World Netso TRG Telecar
Index Call l d
Jan-05 0.09 0.00 0.00 0.00 0.01 0.00
Feb-05 0.22 0.12 0.00 0.00 0.10 -0.06
Mar- -0.06 0.03 0.00 0.00 0.01 -0.07
05
Apr-05 -0.09 -0.12 0.00 0.00 -0.17 -0.12
May- -0.03 0.08 0.00 0.00 -0.12 -0.15
05
Jun-05 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
Aug- 0.09 0.11 0.00 0.00 0.00 -0.04
05
Sep- 0.05 -0.08 0.00 0.07 0.08 0.06
05
Oct-05 0.00 -0.07 -0.08 -0.11 -0.08 -0.11
Nov- 0.09 0.09 0.15 0.24 0.33 0.17
05
Dec- 0.06 0.05 -0.07 0.13 0.00 0.30
05
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
Mar- 0.00 0.02 -0.08 0.00 -0.07 -0.11
06
Apr-06 -0.01 -0.17 -0.09 -0.03 -0.05 -0.12
May- -0.14 -0.19 -0.16 -0.23 -0.11 -0.09
06
Jun-06 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
Aug- -0.04 0.02 0.00 -0.13 -0.03 -0.09
06
Sep- 0.04 -0.03 0.09 -0.01 -0.02 -0.03
06
Oct-06 0.08 0.08 -0.03 0.12 -0.07 -0.06
Nov- -0.06 0.04 -0.05 -0.06 0.05 -0.17
06
Dec- -0.05 -0.05 0.02 -0.06 -0.08 0.03
06
Jan-07 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
Mar- 0.01 -0.12 0.15 0.05 0.04 -0.05
07
Apr-07 0.10 0.08 0.17 0.44 0.15 0.04
May- 0.05 0.05 0.33 0.10 0.08 0.27
07
Jun-07 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
Aug- -0.11 -0.17 -0.09 -0.10 -0.08 -0.30
07
Sep- 0.09 0.08 0.13 0.20 0.14 0.08
07
Oct-07 0.07 -0.04 -0.08 0.30 -0.04 0.01
Nov- -0.02 -0.12 -0.04 -0.13 -0.08 -0.09
07
Dec- 0.01 -0.05 -0.09 -0.08 0.09 0.03
07
Jan-08 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- 0.01 0.00 -0.01 -0.16 -0.12 -0.10
08
Apr-08 0.03 -1.00 -1.00 -1.00 -1.00 -1.00

BETA
KSE 100 PTCL World Netso TRG Telecar
Index Call l d
1.00 0.8 0. 0.9 0. 0.
4 48 9 71 81
P T C L C h arac te ris tic L in e
y = 0 . 8 3 9 1 x - 0 .0 4 9 3
R2 = 0 .1 0 4 3
0 .4 0
0 .3 0
0 .2 0
Pak Datacom Returns

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 .3 0 0 .4 0
K S E 1 0 0 R e tu rn s

Telecard Characteristic Line

y =0.8055x - 0.0538
World Call Characteristic Line R 2 =0.0769
y =0.4834x - 0.0201
0.40
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 -0.30 -0.10 0.10 0.30
-0.30 -0.10 0.10 0.30 KSE 100 R eturns
KSE 100 R eturns
 Netsol CharacteristicyLine
= 0.9916x - 0.0064
T R G C h a r a c te r is tic L in e R2 = 0.0837
y = 0 .7 1 1 7 x - 0 .0 4 0 1
0.40
R2 = 0 . 0 6 9
0 .4 0 0.30
0 .3 0
0.20
0 .2 0
0 .1 0 0.10

0 .0 0 0.00
-0 .1 0
Pak Datacom Returns

-0.10
-0 .2 0
-0.20
-0 .3 0
-0.30
- 0 .3 0 - 0 . 2 0 - 0 . 1 0 0 .0 0 0 . 1 0 0 . 2 0 0 .3 0 0 . 4 0
-0.30 -0.10 0.10 0.30
K S E 10 0 R e tu rn s KSE 100 Returns
 List of Cellular Mobile Operators
Sr. No. Operator Name Country
1 Pakistan Mobile Communication Egypt
(Pvt.) Ltd. (Mobilink)
2 PTML (U-fone) Pakistan
3 M/s PakCom (Pvt) Ltd. (Instaphone) Luxembourg
4 M/s Paktel (Pvt) Ltd. (Paktel) Luxembourg
5 Telenor Mobile Communications Norway
6 Warid Telecom UAE

List of Licenses issued for Long Distance

International (LDI)
Foreign Companies
Sr. No. Name Country
1 M/s. Wateen Telecom. UAE
2 M/s. Dancom Malaysia
3 M/s Redtone Telecommunications Malaysia
(Pvt) Ltd
4 M/s Link Direct Int’l Egypt
5 M/s Telenor Norway

Local Companies
Sr. No. Name Country
1 M/s. Burraq Telecom. Pakistan
2 M/s. Callmate Telips Telecom Ltd. Pakistan
3 M/s. DV Com. Pakistan
4 M/s. Telecard. Pakistan
5 M/s. WorldCall Telecom. Pakistan
6 M/s. Circle Net Communication Pakistan
7 M/s. Wise Communication Systems Pakistan
(Pvt) Ltd.
8 M/s Multinet Pakistan (Pvt) Ltd 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 Out- Telecom Telecom Telecom Intern Intern PCs Interne

going municat municati municati et et Total t Sub-
Intern ion Staff on on Host Users scriber
ational Revenue Investm s
Traffic ent

Total Staff Total Total Total (Millio (000s)

n)
M Min. (000s) M RS M US$ (Millio
n)
Banglade 39.3 19.8 523.9 80.1 1 243 1050 81
sh
Bhutan 6.2 0.4 9.2 2.8 985 15 10 2.1
India 660 416.6 7959.2 3511.5 86871 18481 7500 4140
Indonesia 289.4 39.8 2167.1 1703.3 62036 8080 2519 865.7
Nepal 33.3 4.8 84.2 20.9 917 80 85 20
Pakistan 128.3 74 192, 2606.6 15124 12 600 2.4*
626
China 1005. - 55527.1 26782. 16042 79500 35500 67746
 7 5 1 .5
Iran 329.9 46.2 1715.1 1263.7 5052 4800 6000 816.2
Maldives 7 0.5 65.2 8 532 15 20 1.1
Philippine 171 21.4 2952 696.7 27996 3500 2200 800
s
Sri Lanka 56.5 10.9 334.5 82.2 1882 225 250 85.5
Thailand 342.4 29.3 4140.5 400.9 10370 6972 2461 2403
0
Malaysia 982 20.7 4791.8 1009.2 10797 8661 4200 2997.
1 4
Hong 4400 17.8 6255 1065 59199 3213 2864 2327
Kong, 3
China
Japan 2811. 114.4 168914 19997. 12962 61600 48700 33883
4 4 065 .9
Korea 1041. 53.3 21737.2 6506.6 25324 29220 26741 1178.
(Rep) 8 2 5
Singapor 1965 8.8 3348.6 433 48482 2135 2590 2020.
e 5 8
Taiwan, 3076. 38.3 10300.2 3551.7 27770 8830 10665 7822.
China 7 85 1
Vietnam 67.2 90 1611.7 - 340 3500 800 917.1