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Thursday, February 15, 2024

Is Jazz going to take some tough decisions?

The sector is being challenged by rising operational costs as a result of high inflation and rising energy costs

Economic crisis has hit public as well as the business community. Recently, Jazz CEO Aamir Ibrahim expressed his concern about the country’s economic prospects and its impact on Jazz’s operations in an internal memo distributed earlier this week to the company’s employees.

The memo read, “I am elevating the level of this challenge to critical as we embark upon some tough but necessary decisions.”

This report adds to the recent string of incidents emphasizing telecom businesses’ bleak position. The sector is being challenged by rising operational costs as a result of high inflation and rising energy costs. Furthermore, due to the high cost of capital and the depreciating rupee, international operators in the industry have reduced their expectations of returns from Pakistani operations. The cost of capital is the benchmark rate used to determine how much value future cash flows would have in comparison to today’s cash flows.

Read more: From bell to broadband: A tale of telecommunication

High interest rates and a risk premium, which is a presumed return for investing in high-risk areas, are the key drivers of the Cost of Capital. Professor Aswath Damodaran, a well-known economist, recently estimated Pakistan’s equities risk premium as higher than that of India, Bangladesh, Egypt, and some African countries.

Considering these events, Telenor ASA, Telenor Pakistan’s parent company, has reduced the value of its local operations. Following this impairment, its recoverable assets in Pakistan are projected to be around $600 million, down from $850 million.

Similarly, PTCL recorded a net loss of Rs. 3 billion in its financial statements for the half year ended 30 June 2022 due to high operational costs as a result of rising energy prices and rising interest rates, which increased its finance costs.

In the internal memo, Jazz’s CEO also cited the aforementioned problems, saying, “We have all been personally impacted by the rising cost of goods and services.” He added that   Jazz is not immune to the current economic downturn. In fact, the interest rate hike, as well as the steep spike in power and fuel prices, have had a significant impact on the company.

Cellular Mobile Operators (CMO) in Pakistan are eagerly looking for a business model that will allow them to break free from the vicious cycle of low average revenues, rising operational costs, and thin profit margins.