Karachi, March 08, 2013 (PPI-OT): Last development from the United States!
The Federal Communications Commission (FCC), the regulator Telecommunications body in USA, has given its order to disable payments to LDI operators in Pakistan at the higher ICH rates, which are above the pre-ICH USD 0.02/min.
According to Arif Habib Limited this order directs from an earlier petition filed by Vonage Holdings Corp (a provider of int’l communications services from the US using third party U.S. and int’l carriers to terminate its traffic overseas) filed on 3rd Oct’ 2012.
Vonage argued that Pakistani LDI operators formed an ICH arrangement to create a monopoly situation with a 400% increase in termination rates (adversely impacting number of outgoing calls to Pakistan) had resulted encouraging anti-competitive environment.
Impact of payment freeze from the US seems marginal, but the sword hangs! As per 2011 figures mentioned in the Memorandum Opinion and Order issued on March 5th, 2013 by the Federal Communications Commission, Washington, D.C. USA with respect to a petition lodged by a US LDI operator, the inbound LDI traffic from the US constituted an estimated 2.9% or ~261mn minutes during 2012 (2011: 1.7% or 261mn minutes at actual) of the total inbound LDI traffic/minutes to Pakistan from the world. On the other hand, the rates being charged before the ICH arrangement stood around 2 cents/min against the current 8.8 cents/min.
As per Arif Habib Limited estimates based on the given figures, any reversal in LDI rates, from the US only, should have an initial negative per share impact in the range of PKR 0.04- 0.10, as depicted in the table below. Arif Habib Limited has assumed a significantly decreased margin of 0.58 cents/min compared to post ICH-based margin of 5.85 cents/min. Earnings Sensitivity on Revenue decline from US incoming LDI traffic
|Incoming traffic (mn mins)|
|Previous Margins (cents)|
|Margin Loss/min (cents)|
|Margin Loss/min (PKR)|
|Total Loss (PKR mn)|
|No of Shares (mn)|
|Per share impact (PKR)|
|%age LDI Earnings|
Sources: Arif Habib Research and FCC
Why could incoming int’l traffic from the Middle East stay at the same rates? Even though a backlash on higher call rates has resulted from the United States, call rates from the Middle East (where most of the expatriates reside, around 40%- 45%) are least expected to be deterred. This is due to the fact that parent companies of most of the domestic telecom operators originate from the ME region i.e. Etisalat of UAE (PTCL), Abu Dhabi Group (WTCL) and OmanTel of Oman (WTL). Therefore, a domino effect of the same stands least probable.
LDI operators’ stance to the US operators remains to be seen It is now to be seen if the local LDI operators agreed to the Pre-ICH level call rates from the United States, or to the average US call termination rates of around 4.1 cents/min in terminating traffic from there even with FCC’s orders. As far as local LDI operators are concerned, outbound calls are also expected to have increased because of the higher incoming call rates, which should provide local LDI operators a leverage to deal with any such reactions from int’l LDI operators i.e. holding back payments etc., set aside any bilateral agreements between local and foreign LDI operators on telecom services enforcing necessary actions by and for the parties involved.
However, Arif Habib Limited suggests investors to stay cautious on the Telecom sector as the uncertainty may increase further given Competition Commission of Pakistan’s investigation and any unfavourable findings thereof, alongside US competition authority’s attention towards the calling rates being charged, even though the impact seems marginal as far as actual numbers are concerned.