Not as it seems: ‘Cartel’ helps telecom sector beat the market

Investors betting on inflated results in post-ICH quarter: analysts.

KARACHI:

The Lahore High Court has given its verdict to decide the fate of the international clearing house (ICH); however the illegal cartel of Long Distance and International (LDI) operators has already helped the telecom sector outperform the market by an exceptional 15% during last ten days.

The shares of WorldCall; Telecard; Pakistan Tele­communi­cation Company (PTCL) and Wateen, the LDI operators listed on the Karachi Stock Exchange (KSE) had been trading high recently. The telecom analysts linked this rally mainly with the upcoming results, the ICH and an expected increase in the overall call rates across various segments.

The analysts also predicted the telecom sector will see a phenomenal increase in revenues for the quarter ended December 31, 2012. This will be the first quarterly results of telecom sector post-ICH.

The Pakistan Telecommuni­cation Authority (PTA) established the telecom gateway on October 1, 2012. Under the ICH, all incoming international traffic was supposed to be handled through a centralised gateway, which was supposed to be operated and maintained by PTCL. Under the arrangement, the LDI operators were to share the revenues from international incoming traffic based on their respective market shares with fixed termination charges.

The establishment of ICH resulted in a massive increase – about 200% to 800% depending upon the location of the caller – for international calls made to the landlines and cell phones in Pakistan, annoying the expats by a great deal.

Brain Telecommunication filed a petition in the LHC, saying the cartel was violating competition rules. The court, then, ordered PTA to suspend ICH till further hearing – the next hearing is due on February 18.

PTA withdrew its notification regarding formation of the ICH in December but the rates never went back to the pre-ICH level – the main revenue driver for operators in the latest quarter, according to analysts.

The telecom companies have been booking their international incoming revenues on a higher tariff allowed through the ICH arrangement, BMA Capital report said.

“We attribute the recent activity in the sectors as a pre-result phenomenon where the entire [telecom] sector is anticipated to out-do its previous profitability on the back of increase in international call rates,” it said.

The market speculates that an arrangement has been made by the nine LDI operators in keeping the rates somewhere between Rs5.8 per minute, rates under ICH and Rs 0.9 per minute, pre-ICH rates, Arif Habib Research said in its report. The rates were kept mostly on the higher end, it said.

“This has been a game changer for LDI operators as we expect an increase of 4 to 5 times on their revenues,” the report said. Further delay in ICH’s case should result in higher cash flows for telecos in general and PTCL in particular, it added.

“As mentioned earlier due to the LDI rates hike, we forecast fourth quarter of 2012 top-line to increase by a massive 21% from Rs29 billion to Rs35.2 billion, culminating a full-year accumulated top-line of Rs120 billion,” Arif Habib Research said in its report.

Both the research houses termed PTCL as the main beneficiary based on its market share – the broadband giant alone caters to 50% of the market. “The revenues earned will duly reflect in the company’s quarterly results,” BMA report said.

Although the stocks of all four fixed line telecommunication service providers saw a dip on Thursday, both the research firms have predicted the rally is likely to continue.

Furqan Habib, a telecom analyst at JS Global, also linked the recent surge in telecom sector’s shares with the ICH and upcoming results. He, however, added there is still a lot of volatility in this segment. Given the ICH is suspended, uncertainty is still there, he said.

“In the past, ICH was operating with the approval of the government but now it is a private cartel operating unofficially,” Habib said.

Although the LDI operators have been benefiting from the ICH, the amount grossed through increased charges may be recovered from these companies in case the court’s verdict goes against it, a government official said while requesting anonymity.

It may be added that the LDI operators have been charging higher rates since October 1 last year but the surge in stock prices was observed only recently. The ICH rates are not new, the official said, but the stock prices went up a day after Farooq Awan, former chairman of PTA, was removed.

Published in The Express Tribune, February 2^nd, 2013.

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