Pakistan Telecommunication Company Limited Financial Analysis Report Period coverage: 1st July 2011 to 30th June 2012

Prepared and Presented by: Dr. Babur Zahiruddin Raza, Corporate Office Consultant in Human Resources & Master Trainer in H.R Applications Research Consultant IT Consultant Ph: 051-5584905, 5792836 Cell: 0332 4923235 Email: baburzahiruddin@yahoo.com, Mr. J. S Khan Mr. Raheel Rustam

Financial analysis of Pakistan Communication Company Limited-Year ended 30-06-2012

TABLE OF CONTENTS SR no Description Page no

Financial analysis approach ------------------------------------------

Key discussion points for AGM---------------------------------------

Financial analysis of Pakistan Communication Company Limited-Year ended 30-06-2012

1. FINANCIAL ANALYSIS APPROACH We have tried to perform holistic and integrated financial analysis of PTCL with the help environmental analysis, industry analysis, company operational review and annual report. 1.1 Flow chart of analysis approach

Environmental analysis

Industry analysis

Operational review of PTCL

Financial analysis

2.2 Requisite essential documents for financial analysis The under mentioned documents are essential to perform comprehensive analysis of financial position, performance and cash position of PTCL 1. 2. 3. 4. 5. Financial plan-Year 2011 to 2015 Audited financial statements-Year 2012 Internal audit reports Management letter /. Letter of internal control from external auditors Minutes of board meetings

Financial analysis of Pakistan Communication Company Limited-Year ended 30-06-2012

Key discussion points for AGM

HUMAN RESOURCES PAGE NO. (27) VSS only 33% response why is that a voluntary scheme ended up with arm twisting and coercion. Was it that the scheme was not lucrative and rosy?

EHTISILAT MANAGEMENT FEE TERM After the term of expiry why is it that the management fee was ratified by the BOD and not by the EOGM?

Page 76 of Annual Report and notes to accounts 27 Point no 1: Provision for obsolete stores, spares and loose tools The financial statements reveal that there is substantial increase in the provision of obsolete stores, spares and loose tools and it is evident from following table Variance in amount Rupees Rupees Rupees 284,623,000 73,992,000 210,631,000 2012 2011 Variance in %age 285%

Provision for obsolete stores, spares & loose tools

We make request to directors of PTCL to clarify the reasons of recognizing the provision for obsolete items in the financial statements as per IAS 2: Inventories

Page 76 of Annual Report and notes to accounts 27 Point no 2: impairment loss on property, plant and equipment

The financial statements reveal that there is substantial increase in the impairment loss on property, plant & equipment and it is evident from following table

Financial analysis of Pakistan Communication Company Limited-Year ended 30-06-2012

2012 Rupees 191,759,000

2011 Rupees

Impairment loss on fixed assets

Variance in amount Rupees 191,759,000

Variance in %age 100%

We make request to directors of PTCL to explain the reasons of recognizing impairment loss in the financial statements as per IAS 36: Impairment of assets

Pages 18 and 48 of Annual Report Point no 3: Non declaration of dividend: The statutory report of directors reveals the fact (page 18 of annual report) that dividend has not been declared by directors due to liquidity requirements for: 1. Voluntary separation scheme 2. Expansion and diversification of PTCL Network 3. Post 3G scenario Under section 249 of Companies Ordinance 1984, the PTCL has sufficient accumulated profits for the payment of moderate dividend and it is explicitly evident from following extracts of statement of change in equity (page 48 of annual report) A. B. C. D. Accumulated profits / un-appropriated profits as at June 30 2011: PKR 14,376,349,000 Profit for the year: PKR 7,212,079,000 Transfer to insurance reserve: PKR 293,196,000 Accumulated profits / un-appropriated profits as at June 30 2012: PKR 21,295,232,000

In the light of above mentioned facts, we would make request to directors to elaborate the underlying reasons of non-declaration of dividend. We would also make request to honorable board of directors to share the projected cash outflows for voluntary separation scheme, expansion and diversification during the period 1-072012 to 30-06-2013.

Financial analysis of Pakistan Communication Company Limited-Year ended 30-06-2012

Page 61 of Annual Report and notes to accounts 11 Point no 4: Substantial decrease in accrued liabilities The financial statements reveal that there is substantial decrease in the accrued liabilities and it is evident from following table Variance in amount Rupees Rupees Rupees 4,397,888,000 7,300,434,000 2,902,546,000 2012 2011 Variance in %age 40%

Accrued liabilities

We make request to directors of PTCL to explain the reasons of decrease in the accrued liabilities because it contains following suspected material misstatement - Understatement of liabilities - Overstatement of profits

Page 62 of Annual Report and notes to accounts 12.1 Point no 5: Failure to quantify financial impact of 1,744 cases which were filed against PTCL The directors assertion in note # 12.1 on page 62 regarding 1,744 cases A total of 1,744 cases (2011: 1,684 cases) have been filed against the Company primarily involving subscribers and employees.Because of the number of cases involved and their uncertain nature, it is not possible to quantify their financial impact at present. However, the management and the Companys legal advisors, are of the view that the outcome of these cases is expected to be favourable and a liability, if any, arising on the settlement of these cases is not likely to be material. Accordingly no provision has been made in these financial statements in this regard As per the requirements of IAS 37 and fundamental principle of prudence, the financial impact of 1,744 lawsuits against PTCL should be measured and recognized in the financial statements to ensure true and fair view of financial position and performance. The non-incorporation of provision for lawsuits gives rise to following material misstatements in the financial statements of PTCL for the year ended 30 th June 2012 A. Understatement of liabilities B. Overstatement of net assets C. Overstatement of profits

Financial analysis of Pakistan Communication Company Limited-Year ended 30-06-2012

Page 70 of Annual Report and notes to accounts 16.1 Point no 6: Rationale for paying loan of 11 billion rupees to PTML The note # 16.1 on page 70 of annual report contains following disclosure regarding payment of loan to PTML First loan 3,000,000,000 Nov 15 2008 Second loan 2,000,000,000 Nov 09 2009 Third loan 2,000,000,000 May 18 2010 Fourth loan 4,000,000,000 July 05 2010

Loan in PKR Disbursement date

We would make request to directors of PTCL to explain the purpose of paying loan of 11 billion rupees to PTML. Moreover, we need confirmation that PTCL have been receiving repayments from PTML in the post balance sheet period for instance on August 18 2013 and October 02 2013.

Page 72 of Annual Report and notes to accounts 18 Point no 7: Doubtful Trade Debts of 9.4 billion rupees The note # 18 on page 72 of annual report contains fact that amount of doubtful Trade Debts of PKR 9,490,723,000 We would make request to directors of PTCL to share the details of doubtful trade debts of PKR 9,490,723,000 for the information and understanding of shareholders.

Page 80 of Annual Report and notes to accounts 35 Point no 8: Policy and nature of Liabilities written back The note # 35 on page 80 of annual report contains fact that liabilities written back amounting to PKR 1,800,660,000 during the financial year ended 30th June 2012. We would make request to directors of PTCL to share the policy and nature written back liabilities of PKR 1,800,660,000 for the information and understanding of shareholders of Company.

Financial analysis of Pakistan Communication Company Limited-Year ended 30-06-2012

Page 90 of Annual Report and notes to accounts 43 Point no 9: Change in classification of last year figures amount to 2.6 billion rupees The note # 43 on page 90 of annual report contains change in classification of PKR 2,633,759,000 pertains to Capital work in progress cost which was incurred in last year. We would make request to directors of PTCL to share the reasons of transferring 2.6 billion rupees from the account head of capital work in progress to Long term loans and advances.

Page 34 of Annual Report Point no 10: Acquisition terms and conditions of Bank Limited The statutory report of directors reveals the fact that Company management has been finalizing the acquisition of ROZGAR Microfinance Bank Limited. We would make request to directors to share the terms and conditions of acquisition of bank for instance estimated purchase price, due diligence assignment and valuation of net assets of ROZGAR Microfinance Bank Limited.

Conclusion The management of PTCL is making tall claims that they have pulled the company out of the red but have omitted and skipped paying the dividend despite a hefty balance sheet as enumerated in point no. 3 of discussion. There is need to pay emphasis on HUMAN Resources and change the mind set of the employee for which a drastic cultural change is required which the hierarchy of PTCL is not cognizant of and is miss guiding the BOD (foreign investors). Certain SEVPs have outlived their utility and need to be shown the door for more progressive and competent successors. Shareholders are advised in their own interest to look for safer heavens and greener pastures.

DR. BABUR ZAHIRUDDIN Shareholder

Financial analysis of Pakistan Communication Company Limited-Year ended 30-06-2012