APRIL 2015

The Pakistan Credit Rating Agency Limited

NEW [APR-15]

PREVIOUS[MAY-14]

REPORT CONTENTS

1. RATING ANALYSES

Long-Term AA- AA- 2. FINANCIAL INFORMATION

Short-Term A1 A1 3. RATING SCALE

Outlook Stable Stable 4. REGULATORY AND SUPPLEMENTARY DISCLOSURE

PAKISTAN MOBILE COMMUNICATIONS LIMITED

The Pakistan Credit Rating Agency Limited

TELECOMMUNICATION

PAKISTAN MOBILE COMMUNICATIONS LIMITED April 2015 www.pacra.com

RATING ANALYSIS (APRIL 2015) PAKISTAN MOBILE COMMUNICATIONS LIMITED (PMCL)

Industry: Pakistans telecom revenue after witnessing a growth of ~6%, stood at PKR 465bln in FY14. Cellular mobile segment continues to have the largest share (FY14: ~70%; FY13: 71%). With USD 903mln FDI inflows on account of 3G and 4G license auction, telecom investment reached to USD 1,816mln in FY14 three times higher than last year ( FY13: USD600). The number of active cellular subscribers, after touching the level of 140mln at end-Jun14, currently stands at 136mln owing to significant decline in the subscribers of Ufone and Warid. Though, PMCL, continues to be the largest market player with a share of 28% at end-Feb15, nevertheless ongoing biometric SIM verification may rationalize the share of the industry players. As competitive landscape exists, average revenues per user (ARPUs) have yet to stabilize. Going forward, business potential in value added services is expected to provide impetus to revenue growth to the market players, though time-line is uncertain. Performance: During CY14, in line with network expansion, up gradation and

aggressive marketing efforts, PMCL aptly sustained its subscriber base. Amidst declining ARPU (Dec14: PKR 196; Jan14: PKR 221), PMCLs top-line witnessed a decline of 7%. However, considerable reduction in operating costs helped the company register positive operating margin depicting a marked improvement YoY. Thus, higher contribution margin led to sustained EBITDA margin. Meanwhile, rise in other income a facet of exchange gains recorded during the period along with reduced cost of borrowing, helped the company in registering significant profit before taxation YoY (CY14: PKR 7,519mln; CY13: PKR 8,062mln). To keep the leveraging of PMCL in check, the company converted management fee payable to sponsors (GTH: PKR 22,089mln; IWCPL: PKR 136mln; Equity conversion: PKR 15,984mln) into equity in the last quarter of CY14. However, as a prudent measure, the company created a provision against tax benefits taken during prior years, and it may be reversed going forward. Resultantly, PMCL registered net loss of PKR 1,438mln (CY13: net loss of PKR 5,947mln). Business Strategy: Given the continuing competition among the industry players,

ARPUs may remain under pressure. Moreover, higher addition of 3G subscribers by other players and regulatory verifications may pose challenge to Mobilink in sustaining its largest share. The management being aware of the same is making efforts, aligning its market strategy to changing market dynamics. This is expected to help the company to sail through these challenging times. Moreover, PMCL is embarked on exploring business potential in mobile financial services, through its group company Waseela Microfinance Bank. This would support the companys revenues through additional income avenues. Working Capital Management: On account of revised capex payment terms, the

companys creditors increased significantly. Major payments would fall due in CY15. The company continues to enjoy negative net cash cycle (Dec14: -89days, Dec13: -64days, Dec12: -69days,) mainly benefiting from stretched creditors days. Coverages and Cashflows: The company maintains reasonably good cash conversion

ratio; though it has slightly reduced in recent years. FCFO of the company remained largely sustained (CY14: PKR 32,760mln; CY13: PKR 33,984mln) as higher EBITDA earnings were mitigated by rising tax payment during CY14. Furthermore, the new debt, acquired to finance license acquisition and capex in CY14, have reduced the coverages. With additional debt of PKR 15bln in CY15, PMCLs coverages would come down further. Nevertheless, with upcoming debt repayments, the company is likely to fix its financial risk profile over the medium term. Capital Structure: PMCL has relatively leveraged capital structure and would increase

further in the current year. However, comfort is drawn from the managements plan to deleverage its balance sheet after CY15. Profile: PMCL, countrys largest cellular service provider, is operating under the brand

name of Mobilink. PMCL commenced its operations in August 1994. PMCL is a wholly owned subsidiary of Global Telecom Holding (GTH), which in turn is majority owned by worlds seventh largest telecom group VimpelCom Limited. VimpelCom is rated Ba3 by Moodys. Governance and Management: PMCLs eight member board is dominated by

professionals from GTH. Mr. Jeffrey Hedberg, the newly appointed CEO of Mobilink, has more than twenty years of experience, majorly in telecom sector. Though no board committee exists, the sponsor through matrix reporting structure keeps control and provides strategic guidance to the company.

KEY RATING DRIVERS

The ratings are dependent on the companys ability to: i) sustain its business margins and ii) generate sufficient cashflows to keep the coverages at comfortable level. Meanwhile, support of the sponsor operationally and financially would remain important. Any adverse changes in the competitive landscape, impacting the companys business profile, may have negative implications for the company.

RATING RATIONALE PMCL is the largest cellular operator with ~28% share of total cellular connections in the country. Successful acquisition of 3G license (10MHz) helped the company to sustain its strong business profile in a highly competitive telecom landscape. Given considerable decline in ARPUs mainly in voice and related services, the management intends to build its footprints in data services, thereby sustaining healthy EBITDA margins. The company plans to gradually expand outreach of its 3G network. The expansion would mainly be funded through debt. This is likely to impact the debt service coverages in the short-term, as leveraging increases. However, healthy cashflows are expected to provide respite to the financial profile. The ratings continue to draw comfort from, i) sponsors support - recent conversion of management fee payable into equity is a reflection of it, and ii) availability of supplier credit. The company's association with one of the largest telecom operators - Vimplecom - is a key rating factor.

The Pakistan Credit Rating Agency LimitedPKR mln

Pakistan Mobile Communications LimitedBALANCE SHEET 31-Dec-14 31-Dec-13 31-Dec-12

Annual Annual Annual

Non-Current Assets 137,047 98,781 116,154 Investments (Others) 5,301 6,292 7,847 Current Assets 11,553 17,074 19,731 Inventory (Finished Goods) 222 250 676 Trade Receivables 1,980 1,960 2,290 Other Current Assets 3,821 3,943 10,217 Cash & Bank Balances 5,530 10,921 6,549 Total Assets 153,901 122,147 143,732

Debt 40,875 20,519 49,640 Short-term - 23 500 Long-term (Inlc. Current Maturity of long-term debt) 40,875 20,496 49,140 Trade Payables 20,672 13,839 16,143 Due to Associates 136 18,940 12,762 Provision for Taxation 4,943 60 - Other Liabilities 52,331 48,396 38,870 Shareholder's Equity 34,944 20,393 26,317 Total Liabilities & Equity 153,901 122,147 143,732

INCOME STATEMENTTurnover 92,379 99,394 101,871 Gross Profit 28,029 25,158 38,504 Operating Profit 7,193 (3,711) 11,205 Other Income 3,138 2,809 1,469 Financial Charges (4,473) (8,109) (9,363) Taxation (8,957) 2,114 (4,141)

Financials (Summary)

Telecommunication

( , ) , ( , )Net Income (1,438) (5,947) 641

Cashflow StatementFree Cashflow from Operations (FCFO) 32,760 33,984 36,445 Net Cash changes in Working Capital 10,758 19,511 (1,546) Net Cash from Operating Activities 40,269 49,053 28,845 Net Cash from InvestingActivities (67,840) (12,534) (19,302) Net Cash from Financing Activities 20,681 (30,647) (5,347) Net Cash generated during the period (6,891) 5,872 4,196 Closing Balance of Cash & Equivalents 5,530 12,421 6,549

Ratio AnalysisPerformance Turnover Growth -7.1% -2.4% 13.7% Gross Margin 30.3% 25.3% 37.8% EBITDA Margin 40.1% 35.4% 36.6% Net Margin -1.