The Financial Performance Of PTCL Accounting Essay

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Islamabad: Pakistan Telecommunication Company Limited (PTCL) has projected over Rs9 billion profit for the next financial year without a single penny of investment for facilitating its over 4.5 million subscribers, according to a budget document of the company made available to The News on Monday.

The PTCL, privatized in 2006 and handed over to the UAE ís Etisalat, will heavily dependant on its revenues from the PSTN service with budget estimates of Rs22.77 billion during the FY2010/11, the document said.

Despite increase in its revenue, interestingly the company's allocation for the provision of taxes will nearly remained unchanged at Rs4.913 billion against last year's payment of Rs4.970 billion.

Of the total net revenue of Rs60.39 billion for FY2010/11 against last year's collection of Rs54.15 billion, the company will have billions of rupees under its services, including MM & BB, international business, wireless (WLL), Evo, carrier and wholesale and corporate services.

Further break up of net revenue includes Rs8.086 billion from MM & BB, Rs7.241 billion of international business, Rs2.284 of WLL, Rs1.230 billion of Evo, Rs11.412 billion of carrier and wholesale and Rs7.368 billion from corporate services, it said.

Besides, the company is also receiving non-operating income, including Rs2.685 billion under the head of return on deposits and investments, Rs182 million of late payment and Rs176 million under the head of miscellaneous.

The operating expenses of the PTCL also amounts to Rs49.014 billion for FY2010/11 against last year's expenses of Rs44.382 billion, an increase of 10 per cent, while there is no mention of any investment for improving the quality of the service and introduction of new technologies, the document said.

Of the total operating expenses, Rs12.351 billion has been allocated for depreciation and amortisation, Rs11.132 billion for employment costs, Rs5.799 billion for foreign operator's cost, Rs2.429 billion for cable and satellite charges, Rs4.062 billion for fuel and power, Rs1.8 billion for doubtful debts, Rs2.705 billion for repairs and maintenance, Rs1.701 billion for subscriber's acquisition cost, Rs3.014 billion for licenses and regulatory charges, Rs1.317 billion for marketing expenses, Rs469 million for rent, rates and taxes, Rs771 million for USF and Rs1.464 billion under the head of other expenses.

Of the medical expenses, it said that the company has earmarked only Rs400 million under the head of medical expenses for 29,381 employees of the company and only Rs134 million as productivity incentive for the employees.

The PTCL also continues its downsizing policy of employees, including senior management to mid and junior managers and it will lay off another 83 employees during the financial year 2010/11.

The total lay off employees include two posts of executive vice presidents, five posts of general managers, five posts of senior managers and mangers each, 17 posts of assistant mangers, management trainees and 49 posts of non-management trainees, it added. payment of Rs 4.970 billion.(Newspaper "International THE NEWS")

7.2 FINACIAL ANALYSIS PREVIOUS RECORD 2005-2009 [2] 

During FY09 PTCL faced a two-fold challenge of price attrition and escalating costs. Due to the increasing competition in the telecom sector and shift in customer preferences PTCL did not only provide more value to its customers by introducing unified tariff for on-net calls but also introduced new services specially focusing on areas of Wireless Broadband and Corporate services for customer retention and enhancing its revenue stream. The following paragraphs discuss in detail the financial performance of the company during the last 5 years.

7.3 Lost 2008 [3] 

During FY09 the profit after tax of PTCL was Rs 9,151 million as compared to the loss in FY08 of Rs 2,825 million. The loss during the year FY08 was because of the organizational transformation measures taken by the company.

7. 4 The revenues 2005 to 2009

The revenues in FY09 stood at Rs 59,239 million, which were 10.7% lower than the last year. Revenues from voice continued to decelerate with an increasing rate of decline in fixed telephony due to aggressive price competition, higher taxation and mobile substitution. The revenues from the local telephony declined from a level of Rs 60,704 million in FY08 to Rs 53,093 million in FY09.

However, the revenues from the international telephony increased from Rs 5,632 million in FY08 to Rs 6,199.5 million in FY09. The total revenues in FY07 were Rs 65.28 billion as compared to Rs 69.09 billion in FY06. This decline was mainly in the domestic segment due to competition and reduction in tariffs. However the management is making efforts to boost revenues by improving customer care in addition to launching new packages and services.

7.5 The decline in the profits 2005 to 2009 [4] 

The decline in the profits of the company due to the above-cited reason has led to a decrease in the gross margin percentage also. The gross margin or operating profit margin of PTCL declined in FY09 to 18.15% from 24.67% in FY08 and 26.33% in FY07. The reason for the decline in the operating profits has been increasing in the cost of selling, and marketing and selling expenses. This increase is attributable to the introduction of new services and packages and launching of campaigns to increase awareness of multimedia and broadband. The foreign operators cost and satellite charges increased to a level of Rs 6,053 million in FY09 from Rs 3,541 million in FY08. Vigorous efforts were exerted during the year to collect overdue receivables culminating in reduced level of provision required for doubtful debts and thus decreasing Administrative and General Expenses to Rs 8.935 billion compared to Rs 10.824 billion last year, ie a saving of 17.45% on this account. Also the net margin of PTCL has shown a declining trend over the last 5 years. It declined from 30.46% in FY05 to 15.45% in FY09.

The declining income after tax has been the prime reason for the decline in net margin. Moreover, the declining net income has also led a decline in the return on operating assets and return on equity over the past years. The return on operating assets stands at 10.96% in FY09 as compared to -3.34% in FY08, 18.76% in FY07, 25.53% in FY06 and 34.83% in FY05. Similarly the return on equity stands at 9.28% in FY09 as compared to -2.71% in FY08, 14.45% in FY07, 20.22% in FY06 and 25.45% in FY05.

76 The liquidity position 2005 to 2009 [5] 

The liquidity position of PTCL has shown a fluctuating trend over the last 5 years. The current ration declined to 1.5 in FY09 as compared to 1.81 in FY08 and 2.19 in FY07. The current assets increased by 36.9% in FY09 from the FY08 levels of Rs 39.6 billion. The increase was noted in short-term investments, which grew by about 103%. These investments are in the form of short-term deposit placements with different banks. The current liabilities grew by 64.7% in FY09 from FY08. The current liabilities stood at Rs 21.9 billion in FY08 as compared to Rs 36.1 billion in FY09. Increase has been in the amount of current portion payable to PTA against the WLL licence fee, the amount payable is Rs 1,953 million. Also trade and other payables have registered a growth of 20% in FY09 to Rs 26,114 million from the FY08 levels of Rs 21,731 million. These payables include the sales tax payable and advances from the customers. Combined these two have grown by 71% in FY09 from FY08 levels. (FY09: Rs 2,918 million, FY08: Rs 1,704 million). Similarly, the quick ratio of the company has shown a fluctuating trend. It declined from 1.58 in FY08 to 1.36 in FY09. There has been a slight increase in the stores and spares. They increased by Rs 248 million in FY09 from the FY08 levels.

7.7 The total asset turnover 2005 to 2009 [6] 

The total asset turnover of PTCL has also been showing a decline in the last 5 years. It declined from 0.56 in FY05 to 0.38 in FY09. The reason for this is the decline in sales and increase in assets. The total assets of the company increased in FY09 to Rs 154 billion from Rs 137 billion in FY08. A major shift was seen in capital work in progress, which increased by 25% in FY09 from the FY08 levels of Rs 7.8 billion. Long-term investments have also shown a growth. They grew in FY09 by 55% from the FY08 levels (FY08: Rs 3,607 million, FY09 Rs 5,607 million) and the long-term loans grew tremendously by 743% in the same period (FY09: Rs 3,332 million, FY08: Rs 394 million). The increase in long-term investments was due to the advance given to Pakistan Telecom Mobile Limited for issuance of ordinary shares. The increase in long-term loans was due to the loan given to the subsidiary Pakistan Telecom Mobile Limited under a subordinated debt agreement.

7.8 The debt to asset ratio 2005 to 2009 [7] 

The debt to asset ratio the company had declined considerably in the FY05 but the trend reversed in the FY06, declining again in FY07. It is important to notice that the company has a provision of leveraging by raising funds through borrowing money from financial institutions. The change in current liabilities was brought about mostly due to a decline in current liabilities of the company in the FY05 and an increase in the same in the 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. Furthermore, 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 debt to asset ratio has again increased in FY09 to 36% from the previous level of 29% in FY08 due to an increase in the liabilities of the company.

There has been a major jump in the current liabilities due to the reasons cited in the previous paragraphs. The long-term liabilities also increased by 5% in FY09 due to an increase in deferred government grants, these represent grants received from Universal Service Fund (a government formed agency) mainly relating to property, plant and equipment received as assistance towards development of the telecommunication infrastructure in rural areas and include telecom infrastructure project for (i) basic telecom access in Pishin, Mansehra, Dadu and Larkana; (ii) Optical fibre extension - Balochistan Package - 2; (iii) Broadband projects in Faisalabad, Sargodha Civil Division, Multan, Bahawalpur, Dera Ghazi Khan Civil Division and Hyderabad Civil Division. These reasons have also caused fluctuations in the debt equity ratios of PTCL.

7.9 The financial strength 2005 to 2009 [8] 

The PTCL was satisfactory till the year FY07 but it was alarming in FY08, as the TIE ratio had fallen considerably. The TIE ratio of the company continued to rise in the FY06 despite lower profits during the period. However, it declined in FY07, as a result of decrease in profits. 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. The TIE ratio became negative in FY08 due to the losses suffered but then it improved in FY09.

7.10 The EPS (Earning per share) 2005 to 2009 [9] 

PTCL has shown a fluctuating trend in accordance with the net profitability of the company. It declined from Rs 5.22 in FY05 to Rs 1.79 in FY09. It was negative 0.55 in FY08 due to the losses suffered. Dividends have also seen the fluctuating trend over the past 5 years. The dividend payout was around 38.34% in FY05 and has now increased to 83.6% in FY09. However in real terms the DPS have declined from PKR 5/share in FY06 to Rs 1.5/share in FY09. The stock price of the company has also seen a fluctuating trend. It stood at Rs 70.25 in FY05 but on June 30, 2009 it has declined to Rs 17.24. Currently the share is being quoted at KSE around Rs 20/share.

The graph above shows the trend in the variation of stock price of PTCL and the KSE 100 Index over the last year. The stock has a beta of 1.06, which means that the returns on the stock are positively correlated with the market. The maximum price reached by the stock during the period starting 1 January 2008 and ending 24 February 2010 was Rs 50.80/share on April 18, 2008; and the minimum level during the same period was Rs 12/share on 26 January 2009. The current stock price is around Rs 20/share.

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