Telecommunications: WORLDCALL TELECOM - Analysis of Financial Statements - Financial Year 2005 - Financial Year 2008
OVERVIEW (November 20 2009): Worldcall Telecom Limited (WTL), an Oman Telecommunications Company (Omantel), is the most reliable and unique telecom and multimedia service provider in Pakistan. Worldcall launched its business in June 1996 with payphone operations. Amid fundamental shifts in technology and industry, innovation and dedication led WTL to growth in diversified businesses with a range of services designed to serve the needs of the local market.
From Cable Broadband to Wireless Broadband, from Cable TV to Video on Demand, from LDI services and fiber optic network to wireless local loop telephony, WTL has crossed a number of milestones. WTL offers an array of services under three major service categories ie Data, Entertainment and Voice. Worldcall Telecom Ltd became an associate company of Omantel after acquisition of major share holding by Omantel in 2008.
With a total population of 170 million, Pakistan is being considered as one of the favourite markets around the globe to attract investment in telecommunication services. However the market condition for telecom services, after investments by large players, has become price sensitive. On the other hand, for data services, there is still a significant room available for penetration.
Pakistan's economy is showing increasing signs of stress by the end of fiscal year 2007-2008; real GDP growth for FY-08 has dropped below 6% level for the first time in last 5 years, annual inflation has reached 12%. However despite the deterioration, it is also pertinent to note that as a result of structural reforms and liberalization measures over the last 15 years the economy has fundamentally gained resilience. This suggests that a policy focus on regaining macroeconomic stability through further reforms and corrective measures could quickly reinvigorate the growth momentum of the economy.
Revenue for the year ended June 30, 2008 rose by 4.5% to Rs 4,508 million compared to Rs 4,313 million for the last year. The operating expenses increased by Rs 152 million (14.4%) compared to the last year. Earning per share (EPS) as of June 30, 2008 was Rs 0.10, which is 88% lower than the corresponding period of last year. The major reason for decline in EPS is increase in financial and operating costs coupled with a decline in the gain accrued from re-measurement of investments. Also other operating income showed a decline of 32.6%, due a decline in profits on sale of investments.
The current ratio has shown a varied performance. In June 2005, it was 1.01. It increased to nearly 2 in FY06 and then decreased again to 1.23 (FY07). The jump in the ratio in FY06 was due to a large increase in current assets (228% YoY) as compared to a small increase in current liabilities (76% YoY). The subsequent year saw current assets decrease by around 25% YoY (FY07). This decrease in current assets was due to decreases in cash and bank balances (-61% YoY), short-term investments (-27% YoY) and other receivables (-25% YoY).
The current liabilities continued their upward decline (15% YoY). In FY08, the assets again increased while the current liabilities decreased. The marginal increase in current assets (13% YoY) was not in line with the change in current liabilities (decreased 37% YoY). This led to an increase in the current ratio as it reached 2.19. The current ratio is used to check the liquidity position of a company. A current ratio of 2 means the company has two rupees to fulfil its short-term liabilities of one rupee.
ASSET MANAGEMENT RATIOS
The inventory turnover ratio has shown a steady increase over time. It increased from 0.23 in FY05 to 11.84 in FY08. The increase has come over the back of large increases in stock in trade and stores and spares amid a stagnant net revenue figure. Net revenue decreased in FY07 (-1% YoY) and increased in FY08 (4% YoY). Therefore, the ratio moved only at the behest of the stock in trade and stores and spares figures. The stock in trade increased from around 22 million rupees in FY06 to 91 million rupees in FY08 (at an average of 23 million per annum). Stores and spares increased by around 23 million rupees in the same period at an average of 7.6 million per annum.
The total assets turnover increased in FY06 from 0.11 (FY05) to 0.27. The increase was due to the fact that the revenue for FY05 was limited and not comparable to that of FY06. The company started operations in December 2004, therefore the revenue under FY05 is only of the period followed (ie Dec04-Jun05). Thereon, the total assets turnover decreased continuously. It touched 0.25 (in FY07) and 0.23 (FY08). The decrease was due to increasing assets (current and fixed combined). Fixed assets increased 20% and 11% YoY in FY07 and FY08 respectively. Current assets showed a varied change as they decreased 25% YoY in FY07 before increasing 13% YoY in FY08.
In summation, total assets showed a continuous increased (average increase of 1.1 billion rupees per annum). The sales to equity ratio increased dramatically in FY06, but steadied thereon. It was 0.25 in FY05 due to a lesser period of operation in FY05 (December 04 to Jun 05). Also, the equity was very low. The sales to equity increased to 0.39 in FY06. The increase was due to a large increase in revenues (542% YoY) amid a smaller increase in equity (311% YoY). Thereon, the ratio decreased to 0.36 (FY07) due to increasing equity. This increase was due to a fresh issue of shares and an increase in accumulated profit (33% YoY). In FY08, the ratio remained unchanged due to a concurrent increase in both equity and revenues.
The day sales outstanding (DSO) decreased from 159 days (FY05) to 58 days in FY06. This decrease was a product of an increase in trade debts (134% YoY) amid a huge increase in revenues (542% YoY). The large increase in revenue is explained by the larger operational time period. In FY05, the operational period for the company was from December 2004 to June 2005, ie around seven months, while it was a full year for FY06. The DSO improved to 75 days in FY07. This was due to a 28% YoY increase in trade debts with a marginal decrease in revenue (-1% YoY). The ratio then decreased to 72 days (FY08). This decrease was due to an increase in revenues (4.54% YoY) while trade debts remained unchanged.
DEBT MANAGEMENT RATIO
Of the debt management ratios, the debt to assets ratio witnessed a decline in FY06. It decreased from 54.17% (FY05) to 29.48% in FY06. The decrease came due to a low increase in total debt (45% YoY) as compared to the increase in total assets (167% YoY). The increase in assets was led by large increases in property, plant & equipment (647% YoY) and intangible assets (100% YoY). In FY07, the ratio remained near the previous value (30.65%). This small increase was seen because the increase in the assets (9% YoY) was lower than the increase in debts (14% YoY). The ratio spiked in FY08 reaching 36.23% due to the increase in debt (32% YoY) being larger than the increase in assets (12% YoY).
Thus currently (FY08), almost 36% of the assets are covered by debt. The debt to equity ratio has shown a similar trend as the debt to assets though it is less varied. This ratio was 1.18 in FY05 but decreased to 0.42 in FY06. The decrease came due to a large increase in equity (311% YoY) amid a smaller increase in debt (45% YoY). The increase in equity was due to issuance of shares. In FY07, the ratio maintained itself at 0.44. It increased in FY08 to 0.57 due to a comparatively larger increase in debt (32% YoY) over equity (3% YoY). The long term debt to equity ratio showed a huge plunge in FY06. It decreased from 75.58% in FY05 to 23.56% in FY06.
Again (as with debt to equity) this was a result of the large increase in equity (311% YoY). The ratio maintained itself in FY07 at 24.73% due to synchronous increases in equity (7% YoY) and long-term debt (15% YoY). In FY08, the ratio increased to 44.79%. This increase came due to a large increase in long-term debt (84% YoY) compared with a 3% YoY increase in equity. The company is restructuring its debt by issuing lower cost TFCs to retire expensive loans. Also, the debt to equity options have been exercised by some creditors. However long-term debt has increased due to issuance of new TFCs worth Rs 3350 million with rates between KIBOR+1.6% and KIBOR+2.75%. The financial charges are expected to increase further in FY09.
While trying to understand the following ratios, one thing should be kept in mind and that is FY05. A financial year for this company ranges from July of one year to June of the next. In the case of FY05, the time period should be from July 2004 to June 2005. But what is exceptional is the fact that the company started its operations from 1st December 2004. Therefore the company generated revenue for only the seven months (December 04 to Jun 05). Thus the profitability ratios of FY05 are not directly comparable to other years. The gross profit margin increased from a mere 10.33% (FY05) to 38.63% (FY06).
The increase came amid a 2302% YoY increase in gross profit compared to a 542% YoY increase in revenues. In FY07, the gross margin remained almost constant. It was 39.04% in FY07. This happened because both the gross profit and revenue remained constant (approx). In FY08, the margin decreased to 36.67%. The decrease came amid an increase in revenues (4.54% YoY) and a decrease in gross profit (-1.81% YoY). The net profit margin has followed the trend set by the gross margin. It was -2.83 in FY05 and increased to 21.75% in FY06. This was due to a 5031% increase in net profit (as it came out of the red) compared to a 542% YoY increase in revenues.
The net margin decreased to 14.46% in FY07. This was due to a 34% YoY decline in net profit with a 1% decrease in revenues. The large decrease in net profit can be attributed to a 74.74% increase in finance costs and a 39 million rupee addition to the other expenses column. This was due to creation of a 41 million-rupee provision for impairment of long-term investments. In FY08, the net profit margin decreased further to 1.69%. This decrease came amid an 87.78% decline in net profit caused by a variety of reasons. In FY08, costs increased due to inflationary pressures thereby decreasing the operating profit by 29.19% YoY. The skyrocketing interest rates also took their toll on the company. The financing costs increased by 47.18% YoY.
As world markets plunged, the Pakistani markets also tumbled. This caused a decrease in values of investments (-98.72% YoY) and properties (-74.14% YoY). Other operating income also declined by 32.39% YoY, a direct consequence of the tumbling markets. Thus the profit before taxation decreased by 92.38% YoY, leading to a decrease in the net profit which further led to a plunge in the net profit margin. The return on assets (ROA) was in the red in FY05 due to the loss faced by the company. In FY06, it improved to 5.95% but has since travelled on a downward trajectory. The improvement of FY06 came amid increased net profit (as explained in the note above) coupled with the increase in total assets.
The subsequent decline in FY07 can be attributed to a falling net profit (YoY decrease of -34.20%) and an increasing asset size (9% YoY). The same trend continued into FY08 as net profit declined (-87.78% YoY) and the asset base increased (12% YoY). Thus the ROA was 0.39% for FY08. The return on common equity (ROE) also depicted a trend similar to that of the return on assets. The basic reason for this similarity is the fact that the net profit is same in both these ratios, while both assets and equity have showed a similar (increasing) trend. The ROE for FY05 was -0.70, which increased to 8.44% for FY06.
Then it started decreasing, touching 5.17% for FY07 and 0.62% for FY08. This (as already done) is attributed to the increasing equity amid decreasing profits. Equity increased by 311% YoY due to issuance of new shares and a profit in FY06. It further increased by 7% due to more issuance, a surplus on revaluation and another year of profit. Growth in equity slowed to 3% YoY for FY08 even though paid up capital increased by 14% and share premium increased by 104% YoY. The slowdown was witnessed due to a decrease in the convertible loan reserve. Thus the ROE for FY08 was 0.62%.
A major challenge being faced by the WLL segment of the company is the price war in calling rates. Worldcall is committed to compete in this price sensitive market by further strengthening the quality of its service, for which Worldcall is upgrading its network and increasing the cell sites. As per the planned strategy, the company will continue to enhance its subscriber base for telephony as well as data and video. The new operation, which was launched recently, ie, EVDO, metro connectivity, business and Cable TV services in new cities focuses more on grabbing the subscriber base in the initial stage of launching.
The company has an aggressive rollout strategy for wire lines and wireless broadband which would revolutionize the service offerings in the coming days. Post Omantel acquisition of Worldcall's major shareholding, new avenues of growth would be available through synergies and expertise. The recent acquisition of the company by Omantel, is proof of the attractiveness of the Pakistani market. Pakistan has one of the highest teledensity in the world.
It has a huge consumer base, which is going more and more 'electronic' by the day. Though the telecommunications market is saturated by long time players, the related market for data and video is in its initial stages. Omantel is aiming to capture the market in its infancy, and this may prove a very profitable venture. But a fact that should also be considered is that none of the longstanding players are backing out of this new field. All players are entering with guns blazing and already a price war is underway.