omc: no mention; hence safe - BMA Capital Management

TELECOM
MARKETWEIGHT
Budget Impact
Neutral
Omar Rafiq
Telecom Analyst
28
TELECOM: SILENT TALKS!
June 7, 2010
Following a rapid expansion during the last 4-5 years, telecom sector of
Pakistan has recently seen a stabilizing trend. Growth in the sector has matured
on account of pervasive teledensity being already established, together with low
ARPU (Average revenue per user) decreasing the attractiveness to lure new
investments.
Status-Quo
Rampant growth in the telecom sector and its growing importance in the
services industry have historically allowed the government to consider the
sector for strengthening its revenue base via increased tax collection from
telecom service providers. While teledensity has improved over the period, the
trend has exhibited a decline. Growth rates for teledensity which clocked in at
123% in FY07 tapered off to merely 6% during FY10.
Thus recently slowed growth and an already over-burdened sector (21% GST
applicable compared to 17% for general industries) have led the government to
target other major avenues for boosting its revenue base.
As a result of this, the current year’s budget had little to do with the telecom
sector in general. No additional taxation or concessions were announced for the
sector as it was possibly considered over stretched amidst a declining ARPU
environment.
Falling PSDP on IT development
Although there exists a major consensus that future growth of the sector lies in
value added reselling and IT based industry (rather than pure conventional
telephony), PSDP allocation for the sector is expected to be declining in the
coming fiscal year - as indicated by 35.8% reduction over FY10 to PKR718mn.
As a result, growth can be expected to be potentially slower for telecom on
account of lacklustre importance given to the sector.
Increased tax on loss making entities; Wateen might bear the brunt
It has been proposed that the government intends to increase tax rate for loss
making organizations at a rate of 1% of revenues (compared to 0.5% earlier).
As a result we may expect new entrants (e.g. Wateen) suffering from high
depreciation (non-cash charge) to be adversely hit.
Outlook FY11E
Our pick from the sector continues to be Pak Telecommunication Limited
(PTCL), owing to its natural monopolistic presence, low leverage, rich cash
reserves and ever increasing array of products on offer. At current levels, the
stock currently offers 46% upside to our SoTP based fair value of PKR29/share.