The Pakistan Credit Rating Agency Limited 1. SECTOR OVERVIEW Tremendous growth in early years Cut throat competition in the cellular industry WLL gradually replacing FLL Investments slowing down due to global financial crisis 1-2% contribution in GDP 1.1 The telecom sector of Pakistan is normally divided into following segments 1) Mobile Cellular Services, 2) Basic Services, and 3) Broadband & Value Added Services. Mobile cellular services include the entire cellular industry, while basic services include Fixed Local Loop (FLL), Wireless Local Loop (WLL), and Long Distance & International (LDI). Broadband and value added services include the entire internet services and value added services such as prepaid card phone. SECTOR REVIEW Percentage (%) 7 6 5 4 3 2 1 Teledensity in Pakistan as on June 29 1.6 1.4 1.8.66 54.7 58.22 4.9.17 22.2 8.3 3.43 3.37 3.4 2.7 2.17 FY5 FY6 FY7 FY8 FY9 FLL Cellular Mobile WLL 1.2 Lately telecom sector has witnessed intense competition. With the entrance of new companies in last few years, the competition further intensified and induced market players to expand their network coverage to attract additional subscriber base. This has led to a decline in Average Revenue Per User (ARPU) across the sector. Despite slow down in economy in FY9, telecom sector continued to grow positively in terms of subscription, revenue and teledensity. However most of the operators took cost cutting measures including optimization of human resources, cut in employee s perks and freezing employment temporarily to avoid negative impact of economic slowdown on the sector. Teledensity of the country jumped to 62% in FY9, exhibiting a growth of over The Telecom Industry February 21 Page 1 of 7 Tel: 92 (42) 3586954 Fax: 92 (42) 3583425 www.pacra.com
5% over the previous year. The sector s financial health could not be improved in accordance with the expectations owing to heavy taxes and falling exchange rates, which placed unprecedented burden on the operator s import bills. Despite these difficulties, the sector s revenue grew by 19% in FY9. 1.5 Owing to economic slowdown, saturation in the market and global financial crisis, the total 6, 5, Foreign Direct Investment 54% 6% 5% Revenue in PKR mln 4, 35, 3, 25, 2, 15, 1, 5, FY4 Telecom Revenues as on June 29 FY5 23.5% FY6 34.9% 21.1% 19.8% 25% 2% 18.2% 15% 1.3 A dismal situation in fixed line penetration is the major area of concern for the policy makers and the regulator in Pakistan. It was also expected that a rapid roll out by WLL would compensate the declining fixed line penetration, which too did not happen due to lack of investment by WLL operators. A huge investment is required to roll out new generation of fiber networks in Pakistan. This gives a major opportunity to large scale investors to secure their investments in Pakistan in this segment of the industry. 1.4 The telecom sector revenue showed a 19.8% growth in FY9 compared to 18.2% in FY8. During FY9, the telecom sector generated revenue to the tune of PKR 333.9bln (FY8: PKR 278.5bln). The cellular mobile sector continued to be the leader in telecom revenue, whose share came out to be 64% in the total telecom revenues. The cellular mobile sector showed about 17% positive growth during the FY9. While the cellular industry may remain stagnant in the short-term due to the financial crunch, there remain ample opportunities for growth in the medium and long term with the advent of new Value Added Services (VAS). FY7 FY8 Total Revenue Growth (%) FY9 4% 35% 3% 1% 5% % investment in the telecom sector during FY9 reduced by nearly 47%. Despite the fact that the operators have speedily rolled out to most of the population, there still remains huge areas like broadband, WLL and manufacturing etc, where investment opportunities exist. During FY9, a total of USD 1.6bln worth of investment has been made by all the operators, of which the cellular mobile share is about 75%. The WLL has marginally increased investment to USD 82.11mln in FY9 (FY8: USD 52.8mln). However the rest of all the sectors have reduced the level of their investment. Pakistan s telecom sector remained the largest recipient of the FDI during the last few years capturing more than one fourth of the total FDI. During the last 5 years, Pakistan attracted over USD 19bln FDI, of which 34% was in telecom sector. In the current year, the telecom sector received over USD 815mln FDI, which amounts to 22 % of the total FDI in Pakistan. Going forward, untapped segments of the cellular will still see the inflow of FDI, although developed segments such as the cellular will see some consolidation before the arrival of any significant FDI. 1.6 The telecom sector contributes 1-2% in the total GDP, making its share in total tax revenue as 6-7% per annum. During FY9, the sector continued to contribute handsome amount in national kitty through various taxes and regulatory charges. Telecom sector s contribution to national exchequer rose to PKR 112bln in FY9 (FY8: PKR 111bln). PTA made hectic efforts to reduce the taxes in the cellular sector, subsequent to which GST/ FED rate on telecom sector The Telecom Industry February 21 Page 2 of 7 Tel: 92 (42) 3586954 Fax: 92 (42) 3583425 www.pacra.com US$ 4, 3, 2, 1, 32% 36% 27% FY5 FY6 FY7 FY8 F9 4% 3% 22% 2% FDI in telecom Total FDI Telecom (%) share 1% %
was brought down from 21% to 19.5%, Activation tax rate was reduced from PKR 5 to PKR 25 per new connection and Custom duty on import of Mobile handset was decreased from PKR 5 to PKR 25 per set while the Regulatory duty on import of handsets was withdrawn. In addition, the proposed PKR.2. tax per SMS was also withdrawn. Going forward, the above mentioned reduction in taxes will have a positive effect on the growth of the industry. 1.7 Role of regulator: PTA has taken several initiatives to boost the growth in the sector as well as to protect consumer interests. These include implementation of Mobile Number Portability (MNP), introduction of International Mobile Equipment Identity (IMEI) system to reduce mobile theft, establishing interconnect clearing house, Consumer and Anti-Spam regulations, Subscriber verification regulation and reduction in annual license fee of card payphone operators. Universal Service Fund (USF) was established in collaboration with ministry of information technology to promote telecom services in unserved rural areas of the country. Moreover, rural telephony project was launched during the year, under which 4 Rabta Ghar (Telecentres) have been established to provide basic telephony services in rural areas. All these measures taken by PTA, besides socially appreciative are expected to improve customer confidence and to further increase overall teledensity in the country. 12 Telecom Contribution to Exchequer 2. MOBILE CELLULAR SERVICES Cellular penetration is one of the highest in South Asia Saturation of the urban market and international financial crises affecting growth of the segment PMCL loosing market share to other new operators PTML is the only operator in profits at end- FY9 Falling ARPUs 2.1 Over the last few years, cellular segment has experienced exponential growth and since 25 around 82mln new subscribers have been added. Historically, the cellular industry has been dominated by PMCL. However, with almost half a decade of successful operations by the new operators Warid and Telenor Pakistan Limited (TPL) the landscape has changed, with Mobilink s market share being reduced to 3% as against above 5% in the beginning of 25. Moreover, the recent entry of one of the world s largest mobile companies China Mobile Pakistan (CMPAK) in Pakistani telecom sector has further intensified the competition and the sector is observing changes in market shares of existing operators. Cognizant of intense competition, cellular operators are trying to provide their customers wide-area coverage with good service quality and advanced telecommunication services, which are expected to help in differentiating, in turn, enhancing the customer and revenue base. PKR bln 1 8 6 4 2 36.28 44.61 49.35 2.5 26.8 17.6 19.2 14.13 7.53 11.4 21.38 21.55 36.95 36.96 39.37 17.71 17.38 9.72 1.86 9.15 FY5 FY6 FY7 FY8 FY9 Countries 26-7 27-8 28-9 Pakistan 4.1 55.6 58.2 Sri Lanka 21.5-55.2 India 11.3 2.7 37 Bangladesh 19.8 24.9 27.9 Nepal 5.26-15.4 PTA deposits Others Activation Tax GST The Telecom Industry February 21 Page 3 of 7 Tel: 92 (42) 3586954 Fax: 92 (42) 3583425 www.pacra.com
2.2 Mobile Penetration: With the addition of new cellular operators and lately CMPAK, the mobile penetration has reached 58.2% showing a growth of 6.4% in FY9. As the companies had been aggressively expanding their networks and offering attractive packages during the past two years, the average growth remained more than 5%. In the current year however, due to saturation in the urban areas and international financial turmoil affecting the investments, caused less increase in the penetration. However, Pakistan is still the leader in terms of Mobile penetration if compared to its South Asian counterparts, which is evident from the following table: 2.3 Overall in FY9, the cellular mobile companies in Pakistan added over 6.3mln subscribers, while the previous year, the addition was about 25mln, suggesting that the subscription grew by 7% this year, but it was over 39% in FY8. Saturation in the market, Economic slowdown, and heavy taxes could be major reason for this slow growth along with the added mobile acquisition costs. Meanwhile, the trend in subscription remained to be heavily tilted towards prepaid subscription, as there are only 2% postpaid subscribers against 98% prepaid subscribers and this trend is more or less similar in all the telecom companies. 2.4 Mobile Cellular segment has a major share of 64% in the total revenue of telecom industry. Currently the total revenue of mobile segment stands at PKR 212bln. Although there was an increase in the revenues in mln 1 9 8 7 6 5 4 3 2 1 4.3 3.6 1 7.5 17.2 Cellular by Company 1.6 1.7 1 14 15.5 17.9 18.5 18.1 2.9 21.7 4 6.4 6.6 18.1 2 19.1 26.5 32 29.1 3 FY6 FY7 FY8 FY9 1HFY1 PMCL PTML CMPAK Instaphone TPL Warid by 16.6% in FY9, there was a growth of over 4% in the previous year. During FY9, all the companies lost their share in total revenue of the industry except PTML and CMPAK, as their shares appreciated from 15% to 19% and 1% to 4% respectively. PTML was the only company that reported profit during the Market Share as at end-dec'9 22.15 18.96.4 6.77 3.88 21.2 PMCL PTML CMPAK Instaphone TPL Warid period, while the rest of the companies posted losses. Double digit inflation, taxes, higher advertising cost and price war among the operators out considerable burden on the financial health of the companies. Consequently, mobile telecom sector that used to historically attract FDI and other investments in the sector remained rather muted in FY9 due to the worsening financial health of the operators. Most the investments made during the year were for maintenance purpose rather than expansions. However, going forward, once the financial crisis is overcome, there remain many untapped areas that the incumbent operators could focus upon for growth. Company 25-6 26-7 27-8 28-9 Mobilink 54,65 64,654 79,936 83,271 Ufone 16,98 21,867 27,455 4,6 Zong 3,329 2,897 2,585 8,274 Instaphone 1,539 472 26 24 Telenor 6,338 22,837 45,81 51,561 Warid 8,527 2,45 26,85 29,233 Total 89,896 133,132 182,122 212,423 2.5 ARPU is composed of two parts Data and Voice ARPUs. Except for the last couple of years, the The Telecom Industry February 21 Page 4 of 7 Tel: 92 (42) 3586954 Fax: 92 (42) 3583425 www.pacra.com
Pakistani industry has only been competing for the voice segment. However, due to falling ARPU in the industry for the past couple of years, the operators have been forced to focus on the data side in order to stop ARPUs from falling due to the price war in the voice segment. Currently, the average ARPU for the mobile telecom sector stands at USD 2.48, which is considerably less than most mature markets. PMCL is the leader in terms of the ARPUs (USD 3.4) while TPL and PTML follow with ARPUs of USD 2.8 and USD2.2 respectively. PMCL and PTML are market leaders in Data ARPUs as they are considered to be offering more value added services and better SMS packages. With the introduction of more non-voice services like mobile banking, mobile music and culture based services like Quran recitation, the ARPU can be increased. Going forward, the companies will have to focus on Data ARPU s to increase their revenues. The is grappling with inherent issues and WLL growth had not been very significant during the reported period as compared to the last year s growth patterns. Local Loop market has been going through tough times during the past few years due to number of issues including restructuring and revitalization of network. Although WLL has been steadily growing over the Basic Services Revenue Share as at June 29 39% 2% 7% 52% US$ 9 8 7 6 5 4 3 2 1 Cellular Mobile Average Revenue Per User FY5 FY6 FY7 FY8 FY9 ARPU adjacent line graph exhibits the falling ARPUs over the years. 3. BASIC SERVICES FLL subscribers decreasing slowly with PTCL as market leader WLL growing rapidly and has growth potentials in rural areas LDI showing growth since grey traffic decreased 3.1 During FY9, basic services showed a healthy revenue growth rate of 26%, contributing PKR 121bln to the total telecom sector revenue which is around 36% of the total telecom sector revenue. In 28, this share was around 34%, thus showing a 6% increase. This growth is mainly attributed to growth in LDI segment of the telecom services, as Fixed Local Loop FLL LDI WLL VAS years, FLL services could not keep up with the increasing demands of quality and coverage. 3.2 Wireless Local Loop: It is an important part of Pakistan s telecom sector as it provides a feasible last mile solution for rural telephony due to relatively low cost of deployment and maintenance. Pakistan opened the WLL market in 23. The emergence of new operators has proved as an important factor for development of WLL sector as they are pushing the existing giants like PTCL, Worldcall Telecom Limited (WTL) and Telecard to improve their coverage and service standards. The falling quality of FLL services is also paving the way for wireless solutions to capture the FLL market. WLL is a big hit, especially in rural areas where PCO is the easiest and cheapest way to start a business. Companies like PTCL, Telecard, and WTL have established their mark as major players in WLL market with Wateen, GreatBear, Link Direct and MyTel gearing up to stage a tough competition in the coming years. Wateen has launched its wireless business with strong marketing campaigns and attractive tariffs for triple play services. The Telecom Industry February 21 Page 5 of 7 Tel: 92 (42) 3586954 Fax: 92 (42) 3583425 www.pacra.com
3.3 Long Distance & International: LDI is an essential component of Pakistan s telecom structure as it has the responsibility of providing affordable and reliable media for worldwide telecom access. Currently there are nine companies providing LDI services via 189 Points of Presence all across Pakistan. 3.4 LDI operator s revenue have reached PKR 47.9bln in FY9 (FY8: PKR 21.9bln) showing a remarkable growth of 119%. This remarkable increase is mainly attributed to reduction in gray traffic due to the regulators persistent efforts. The increasing trend of revenue growth finally reached its apex and consequently raised the share of LDI in basic services revenue. Link direct and Wateen are the leaders in the LDI segment with revenue of PKR 1bln and PKR 6bln respectively for FY9.Worldcall and Telecard also reported extraordinary increase in revenue worth Revenue in PKR mln 6, 5, 4, 3, 2, 1, 21 Market Share 24 3 2 5 PTCL Telecard WTL Wateen Others Revenues by New LDI Operators 15,567 21,983 47,969 FY7 FY8 FY9 Revenue PKR 4bln and PKR 2bln respectively. Such an unprecedented growth in revenues is highly beneficial for LDI market as it attracts new investors and discourages illegal trafficking. 3.5 The LDI operators carried a record amount of international traffic to and from Pakistan during FY9. Total international traffic (incoming and outgoing) reached 8.9bln minutes in the year, which is 25% more than that of the last year. International Outgoing traffic increased by 73% from last year and a total of 2.9bln minutes were originated from local networks. With the current operators competing for the market share and introduction of attractive call packages offering low tariffs and long talk times coupled with the support of the regulator, this trend is like to continue, going forward. 4. BROADBAND AND VALUE ADDED SERVICES Broadband growth picking pace Lack of local content, low literacy rate affecting growth PTCL maintains the majority market share VAS growth potential available Card Payphone segment decreasing due to cellular mobile penetration 4.1 Internet had been available in Pakistan for over a decade now mainly through dial up connections. Demand for speed and bandwidth kept on increasing day by day as the population was becoming aware of advantages of internet. Broadband made its entry in Pakistan during early 2, followed by National Broadband Policy in 24. PTA under its role of a regulator has been facilitating broadband entrant by Broadband as at June 29 45, 4, 35, 3, 25, 2, 15, 1, 5, 26,611 7 45,153 272 168,82 413,89 FY6 FY7 FY8 FY9 Growth 146 45 4 35 3 25 2 15 1 5 Growth in Percentage The Telecom Industry February 21 Page 6 of 7 Tel: 92 (42) 3586954 Fax: 92 (42) 3583425 www.pacra.com
devising lenient license terms and conditions giving freedom to the operators in terms of selecting appropriate business model, technological choices and easy roll out plans. Though in parallel with global trends, DSL and Cable modem capture a prevailing market share, however, the recent growing trend of shifting to wireless solutions is paving way for a new dimension which will help in declining the dependency on wire line infrastructure. PTA also being a member of Universal Service Fund (USF) board is working closely with USF authorities to devise revolutionary projects for broadband development especially in rural areas. compared to 168,82 at June 28. PTCL, Wateen and Worldcall are major players in the Broadband market of Pakistan having a combined share of over 79%. 5.1 Telecom industry has experienced significant transformation in current decade. This transformation has brought improvement in overall teledensity of the country. Due to continuous changing technology and innovation, the sector remains capital intensive. As a result of intense competition in all telecom services, particularly cellular segment, profitability remains an important concern. Nevertheless, telecom industry remains an important segment of Pakistan s economy. ge P ercenta.3.25.2.15.1.5 Broadband Penetration.2.3.11 FY6 FY7 FY8 FY9 Broadband Penetration.26 4.2 Pakistan has been experiencing astounding proliferation of broadband in the past two years. Broadband subscriber base grew by 146% adding 245,727 subscribers during FY9. There are currently 413,89 broadband subscribers in Pakistan as Broadband as at June 29 45, 4, 35, 3, 25, 2, 15, 1, 5, 26,611 7 45,153 272 168,82 413,89 FY6 FY7 FY8 FY9 146 45 4 35 3 25 2 15 1 5 Growth in Percentage Growth The Telecom Industry February 21 Page 7 of 7 Tel: 92 (42) 3586954 Fax: 92 (42) 3583425 www.pacra.com