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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.
29 Top Investment Ideas June 7, 2010
Page 1 and 2: 65 Federal Budget 2010-11 Cautious
Page 3 and 4: 3 TABLE OF CONTENTS Budget FY11: No
Page 5 and 6: 5 June 7, 2010 package will have li
Page 7 and 8: 7 June 7, 2010 against an average o
Page 9 and 10: 9 Sector wise Budget Impact and BMA
Page 11 and 12: ECONOMY Budget Impact Positive Abdu
Page 13 and 14: 13 June 7, 2010 announced in the bu
Page 15 and 16: 15 KEY MEASURES Income tax June 7,
Page 17 and 18: E&P MARKETWEIGHT Budget Impact Neut
Page 19 and 20: OMC OVERWEIGHT Budget Impact Neutra
Page 21 and 22: 21 June 7, 2010 Moreover, seemingly
Page 23 and 24: CEMENTS OVERWEIGHT Budget Impact Ne
Page 25 and 26: CHEMICALS MARKETWEIGHT Budget Impac
Page 27: 27 Outlook FY11E June 7, 2010 Incre
Page 31 and 32: BUY Fair Value: PKR 282 Current Pri

omc: no mention; hence safe - BMA Capital Management

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