Annual Report and Financial Analysis by Ehab abusabha

ETISALAT Financial Statement Analysis

February 28, 2005

Letter of Transmittal

We have combined intensive analyses/\]\ and research to be able to come up in a high level of information required to facilitate the preparation of this report. It is inclusive of live data, actual information and facts. The authors evaluate Etisalat as the main entity and Qtel as a competitor.  

We also presented some business strategies that the company is currently adopting to compete with their now-a-days business environment. The same is true with some Financial and Accounting policy as we feel deemed necessary in analysing the company as a whole.

As a going concern we also thought that it is a necessary to include a SWOT analysis based in our opinion. The main analysis leads to recommendations supported by actual data and facts gathered in the preparation of the report.

Group assignment number 1 is a part of the course assessment and learning process pertaining to course TBS901 ‘Accounting For Managers’, We, the whole group,  would like to thank the University of Wollongong and Prof. Nabil Baydoun for giving us the opportunity to work on such a challenging activity.

Table of contents

Title Page                                                   Page 1

Letter of Transmittal                                    Page 2

Table of Contents                                                Page 3

Executive summary                                     Page 4      

Introduction                                                Page 6      

Main Report                                                      

        Introduction (P & G)                             Page 6

Introduction (Benchmark Cos.)              Page 7      

Industry Overview                               Page 8

Areas of Judgment                               Page 10

Ratios                                                        Page 13

                  

Notes                                                        Page 39    

Recommendation                                        Page 40

Conclusion                                                  Page 41

Appendices                                                 Page 42    

Bibliography                                               Page 43    

Executive Summary

This report on Emirates Telecommunication Corporation (ETISALAT) is produced after studying the financial statements of ETISALAT for the last 5 years.   Additionally, financial statements of Qatar Telecommunications holding the major market share after ETISALAT in the region was used as a benchmark to compare the overall position of ETISALAT in relation to these representatives of the Telecommunication Service Industry.

        Introduction

·         The Introduction of the report throws the challenges that we have to face to draw up this report.

Main Report

·         The main report starts with a brief introduction of ETISALAT and the benchmark company to highlight the superiority of services and its performance financial wise. 

·          Before we go any further, we need to understand what type & conditions of Industry ETISALAT operates in. This is highlighted under Industry Overview. 

·         Under financial review the basic financial details  and balance sheet ratio and other important analyses pertaining to the position of the company as of 31^st  December 2003 as reflected in the financial statements are brought out.  

·         Areas of Principal Judgements contained in the financial statement are identified.

Ratios

·         By means of ratio analysis, we have measured the finance & investment, solvency & liquidity, profit & profitability ratios.

·         A summary has been drawn out for each of these ratios.

Notes

·         Points of interest are explained in the notes section which we then copied and attached to this report.

Recommendation

·         You will find our recommendations given under this section.

Conclusion

·         Our conclusions are based on the report and our recommendation.

Appendices

·         This section contains copies of the financial statements and other material for reference.

·         Bibliography

This section refers to the material and sources we have referred to for doing this analysis on Etisalat.

Introduction

Financial reports are the summarized and gathered financial information where stability, growth, soundness of the company are being expressed and based upon to give meaningful information to it’s shareholders, stakeholders, potential investors and even to the simple reader. The financials tackled and reported onto this report are based on live data and actual numbers and are even audited to portray a ‘true and fair value’, of the company;

Particularly on this report, we have evaluated the financial information of ETISALAT against Qtel and thereto reported the factual findings as per the authors’ opinion using 4 basic steps:

(1) Business strategy analysis for developing and understanding of a firm’s competitive strategy;

(2) Accounting Analysis for representing the firm’s business economic and strategy it its financial statements, and for developing adjusted accounting measures of performance;

(3) Financial analysis to evaluate their economic and financial performance;

(4) Prospective analysis for forecast and valuation based on cost value.

Main Report

1.           Company Background:

1.1       Emirates Telecommunications Corporation (ETISALAT)

In 1976, five years after the Trucial States became the United Arab Emirates - a Federation of seven emirates - Emirates Telecommunication Corporation came into being.

Within a short span of just two decades, the Corporation has succeeded in transforming the UAE into one of the most advanced countries in the world in the field of telecommunications by providing advanced, efficient and reliable services.

The group had a monopoly on the UAE market until a federal decree was passed allowing for competition and is 60% owned by the UAE government and 40% by the UAE nationals. The paid up capital stood at AED 2,812. 5 million at the end of 1999, divided into 28.12 million shares with a par value of 100 dirhams each. As of December 1999, ETISALAT had a combined number of subscribers of 2.15 million, 830 thousand of which were mobile subscribers while 950 thousand were subscribers in the fixed line network.

Businesses use a wide range of state-of-the art services offered by Etisalat. New services are constantly being introduced with existing ones regularly being upgraded - these are all designed with the aim of helping customers to streamline and improve their communication needs, stay productive and compete globally.

Etisalat’s network of Satellite, Earth and Coastal stations; landlines covering the length and breadth of the UAE; submarine cable systems, cable ships, optic fiber cables and international projects are all utilized to service the communication needs of its local and international customers. (1)

THE SERVICES

Telephone, Mobile , Paging , Internet , comtrust  , Ebtikar ,  Data services

Besides a comprehensive range of readily available standard telephones and feature phones, Etisalat offers businesses sophisticated keyphone and PABX systems incorporating the very best in telecommunications technology to meet their communication needs. They also offer several other products and services:

Etisalat’s Calling (ECC) and Prepaid Cards (PPC) enable customers not only to call from the UAE to a host of countries worldwide but also make calls from these countries to the UAE while travelling. ECC Cardholders can make their calls and have the call charges billed to their designated business, mobile or home phone while PPC cards, available in a variety of denominations, enable users to budget their telephone expenditure and offer ease of use and call mobility.

The GSM Service incorporates advanced digital communication technology with full roaming facilities in countries where there exists a reciprocal arrangement. The unique feature of the GSM cellular service is the subscriber’s identity module (SIM) card which is used to activate GSM handsets and provides unprecedented levels of security and privacy combined with high quality transmission. A prepaid GSM SIM card called ‘Speak Easy’ is also offered.

The advanced Voice Mail Service - Al Zajel is ideal when a similar message is to be sent to a group of people. The facility takes all the subscriber’s

messages, whether he has a standard or a mobile telephone, and forwards these automatically to any phone number he chooses. Access to voice mail is controlled by a personal identification number.

A range of advanced Star Services provide added convenience to our customers - Call Waiting, Do Not Disturb, Call Barring, Hot Line Dial, Call Forwarding, Conference Calls, Incoming Call Transfer, Call Transfer on No Reply, Call Transfer on Busy are a few of these services.

Etisalat’s Service 800 is a nationwide, toll-free service which provides businesses with a valuable tool to effectively market their products and services by dialling one easy-to-remember, dedicated number. This service enables subscribers to streamline their internal communications and reduce their manpower overhead costs.

The Calling Line Identification Presentation Service - CLIP gives customers the ability to see the telephone number of the calling party alongwith the date and time of the call. A small cost-effective attachment or a CLIP integrated telephone enables easy hook on to this service.

Etisalat’s Fax Plus Service - a Store and Forward Service offers subscribers a wide range of features and options e.g. message handling, broadcasting and multi-addressing, virtual fax, follow-me fax, never busy fax, fax on demand and pager notification to mention a few.

2.           Benchmark Company

QTEL (QATAR TELECOM)

Qtel is the exclusive telecommunications provider in Qatar and is one of the largest public companies in the country with around 1,750 employees.

Qtel provides a range of telecommunications products including national and international, wireline and mobile telephony. It also offers Internet as well as Cable television services.

2.1       Qatar Telecommunication

The Qtel board has set six strategic priorities for the company. These were identified as the most important areas for Qtel's ongoing success and they will be the focus of the organisation's attention in the coming years. These strategic priorities follow directly from the assessment of the organisation's current performance relative to the expectations of its customers, investors and employees.

The six strategic priorities are:

• Create a professional business run on modern management principles
• Become customer focused
• Capture growth
• Strengthen financial structure
• Achieve first class operational efficiency and effectiveness
• Enable Qatar's development

The first lays the foundation for the rest. The second and third focus on increasing the revenues of the company while the fourth and fifth focus on improving profitibility. The final priority addresses the strategic importance of Qtel within the Qatar Economy.

Business Analysis:

A- The Industry In Terms of product development

The challenges that face telecommunications companies echo those of other companies in highly competitive industries: identifying and capitalizing on revenue enhancement and lowering operating costs while increasing leverage on existing assets. To enhance their revenues, companies are:

       ▪        Opening new markets and channels

       ▪        Improving their product/service positioning and differentiation

       ▪        Reducing their time-to-market for new products and services

       ▪        Lowering operating costs (with enhanced or new technology development) and leveraging existing assets (e.g., R&D management, sales management, supply-chain integration, operations strategy, lean manufacturing, call and network center management, benchmarking, etc.).

 In one of the fastest paced industries of our time, telecom service developers must now contend with new competitors, rapid technology advances, marketing and technology alliances, and shifting regulatory constraints

The development process in this industry, as in many others in the technology sector, has transitioned from being technology-driven to market-driven, requiring swift delivery of new services to capture the growth potential of the market. New services, in turn, are demanding more customer support, training, communications, and billing support.

Benchmarking helps clients rationalize their development pipeline, using our Product And Cycle-time Excellence. methodology. Lost product-development investment—funds used to support a product that is canceled and never reaches the marketplace—is a significant indicator of the effectiveness of a company's overall development process and pipeline management. Average telecom companies waste twice what top performers do.

B- Etisalat Business Environment Analysis

The UAE communications market and Etisalat has scored total GSM and PSTN revenues to grow from US$ 1.6 billion in 2000 to more than US$ 2.48 billion by yearend 2006. The UAE comfortably stands out as the Arab World’s most advanced communications market. While the partially privatized operator, Etisalat, remains the monopoly operator the country’s penetration levels of services are quite impressive by all standards: 32% PSTN penetration, and 57.75% GSM penetration as of yearend 2001. The UAE market still has quite high Average Revenue Per User (ARPU) levels, which clearly shows that the UAE market has all the fundamentals to support a thriving competitive telecom landscape.

The GSM market still has room for growth. The subscriber base grew rapidly at a CAGR of 66% between 1997 and 2000. Even at a quite high penetration rate of close to 58%, the monthly ARPU ‘Average Revenue Per Unit’ per GSM user in the UAE is an impressive 54 US$. This qualifies as a dream ARPU for GSM operators in competitive countries with a similar penetration rate”, Ms. Baqain added.

 analysis of Etisalat and its business divisions, shows that GSM revenues have contributed 41% of Etisalat’s total revenues in 2000. The Arab Advisors Group believes that the GSM revenues in the UAE will continue to grow at a much higher rate than fixed service revenues. Total PSTN revenues are projected to grow at a Compound Annual Growth Rate - CAGR of only 2% between the years 2001 to 2006 to exceed US$ 926 million in 2006. In the meantime, GSM revenues are projected to exceed US$ 1.5 billion by yearend 2006, constituting more than 62% of the combined GSM and PSTN revenues in the country. the PSTN market in the UAE to grow at a CAGR of 5% and to exceed 1.3 million lines in 2006, a penetration rate of 32.5%. GSM market, however, is projected to grow by a higher CAGR of 14% between 2001 and 2006 to reach close to 3.7 million subscribers by 2006.

The move toward greater globalization not only brings new competitors to global markets, but also boosts economic development and trade. Telecommunications companies’ expansion into global markets continued as a result of deregulation and a strengthening global economy.

-Fluctuations in exchange rates between the currencies, especially the US dollar, the Euro and the Japanese Yen, materially slightly affect the Group’s financial results.

-Etisalat has no control over changes in inflation and interest rates, foreign currency exchange rates and control over other economic factors affecting its businesses.

B-2 Legal & Political Environment

The Etisalat had a monopoly on the UAE market until a federal decree was passed allowing for competition and is 60% owned by the UAE government and 40% by the UAE nationals. The paid up capital stood at AED 2,812.5 million at the end of 1999, divided into 28.125 million shares with a par value of 100 dirhams each. As of December 1999.

Zayed housing funds

Diversity: The Etisalat diversity initiative continued to focus on creating an inclusive work environment, aiming to enhance employee innovation and productivity, and measurably improve employee attraction, development and retention.

Reliance on information technology Etisalat is increasingly dependent on information technology systems, including internet based systems, for internal communication as well as communication with customers and suppliers, from different IT and technical vendors (e.i. IBM,ORACLE,SUN,LUCENT,,,,etc)

C- Business strategy analysis for developing an understanding of a firm's

To evaluate the overall attractiveness of the Etisalat  industry, an industry analysis was conducted using five forces model ,which is  used to understand the industry/market where the business is operating within. It can be used to :

1) understand how profitable an industry is to be in which can be used to decide whether to enter or exit the market.  

2) by firms operating in that industry to understand the forces impacting upon industry profitability and change how they operate to become more  profitable themselves.

Industry Analyses

1.       Threat of New Entrants -  No surprise, in the capital-intensive telecom industry the biggest barrier-to-entry is access to finance. To cover high fixed costs, serious contenders typically require a lot of cash. When capital markets are generous, the threat of competitive entrants escalates. When financing opportunities are less readily available, the pace of entry slows. Meanwhile, ownership of a telecom license can represent a huge barrier to entry. In the US, for instance, fledgling telecom operators must still apply to the Federal Communications Commission to receive regulatory approval and licensing.

2.       There is also a finite amount of "good" radio spectrum that lends itself to mobile voice and data applications. In addition, it is important to remember that solid operating skills and management experience is fairly scarce, making entry even more difficult.

3.         Power of Suppliers - At first glance, it might look like telecom equipment suppliers have considerable bargaining power over telecom operators. Indeed, without high-tech broadband switching equipment, fibre-optic cables, mobile handsets and billing software, telecom operators would not be able to do the job of transmitting voice and data from place to place. But there are actually a large number of large equipment makers around. Nortel, Lucent, Cisco, Nokia, Alcatel, Ericsson, Tellabs are just a few of the supplier names. There are enough vendors, arguably, to dilute bargaining power. The limited pool of talented managers and engineers, especially those well versed in the latest technologies, places companies in a weak position in terms of hiring and salaries.

4.         Power of Buyers - With increased choice of telecom products and services, the bargaining power of buyers is rising. Let's face it; telephone and data services do not much vary regardless of which companies are selling them. For the most part, basic services are treated as a commodity. This translates into customers seeking low prices from companies that offer reliable service. At the same time, buyer power can vary somewhat among market segments. Customers can be as small as individual residential users like you or me, or be as big as an ISP like America Online or a large university. While switching costs are relatively low for residential telecom customers, they can get higher for larger business customers, especially those that rely more on customized products and services.

5.         Availability of Substitutes - Products and services from non-traditional telecom industries pose serious substitution threats. Cable TV and satellite operators now compete for buyers. The cable guys, with their own direct lines into homes, offer broadband Internet services, and satellite links can substitute for high-speed business networking needs. Railways and energy utility companies are laying miles of high-capacity telecom network alongside their own track and pipeline assets. Just as worrying for telecom operators is the Internet: it is becoming a viable vehicle for cut-rate voice calls. Delivered by ISPs - not telecom operators - "Internet telephony" could take a big bite out of telecom companies' core voice revenues.

6.         Competitive Rivalry - Competition is "cut throat". The wave of industry de-regulation together with the receptive capital markets of the late 1990s paved the way for a rush of new entrants. New technology is prompting a raft of substitute services. Nearly everybody already pays for phone services, so all competitors now must lure customers with lower prices and more exciting services. This tends to drive industry profitability down. In addition to low profits, the telecom industry suffers from high exit barriers, mainly due to its specialized equipment. Networks and billing systems cannot really be used for much else, and their swift obsolescence makes liquidation pretty difficult.

Think of telecommunications as the world's biggest machine. Strung-together by complex networks, telephones, mobile phones and Internet-linked PCs, the global system touches nearly all of us. It allows us to speak, share thoughts and do business with nearly any one, regardless of where in the world they might be. Telecom operating companies make all this happen.

Not long ago the telecommunications industry was comprised of a club of big national and regional operators. Over the past decade the industry has been swept up in rapid de-regulation and innovation. In many countries around the world, government monopolies are now privatized and they face a plethora of new competitors. Traditional markets have been turned upside down, as growth in mobile services outpaces the fixed line and the Internet starts to replace voice as the staple business.

Plain old telephone calls continue to be the industry's biggest revenue generator, but thanks to advances in network technology this is changing. Etisalat is less about voice and increasingly about text and images. High-speed Internet access, which delivers computer-based, data applications such as broadband information services and interactive entertainment—is rapidly making its way into homes and businesses around the world. The main broadband telecom technology—Digital Subscriber Line (DSL)—ushers in the new era. The fastest growth comes from services delivered over mobile networks.

Of all the UAE customer markets, residential and small business markets are arguably the toughest. With one  player in the market, Etisalat rely heavily on price to slog it out for household's monthly bill; success rests largely on brand name strength and heavy investment in efficient billing systems. Etisalat market, on the other hand, remains the industry's favorite. Big corporate customers - concerned foremost about the quality and reliability of their telephone calls and data delivery - are less price-sensitive than residential customers.

It is hard to avoid the conclusion that size matters in telecom. It is an expensive business; contenders need to be large enough and produce sufficient cash flow to absorb the costs of expanding networks and services that become obsolete seemingly overnight. Transmission systems need to be replaced as frequently as every two years. Big companies like Etisalat that own extensive networks - especially local networks that stretch directly into customers' homes and businesses - are less reliant on interconnecting with other companies to get calls and data to their final destinations. By contrast, smaller players must pay for interconnect more often to finish the job. For little operators hoping to grow big some day, the financial challenges of keeping up with rapid technological change and depreciation can be monumental.

Accounting Policy Analysis:

Obligations of the Corporation

          As a self financing corporation Etisalat generates its own revenue, from services rendered to the public and from its share in international traffic, which provides the necessary funds to facilitate its business needs.

          The Corporation is required to maintain Accounts in accordance with Generally Accepted Accounting Principles (GAAP). Annual financial statements must therefore be produced comprising:

·         Profit and Loss Accounts for each calendar year;

·         Balance sheets as at 31st December; and

·         Statements of Cash flows for each calendar year.

After making the usual provisions for depreciation, bad debts, loss on sale of capital assets and obsolete stock in stores, staff terminal benefits, royalty, etc., the Corporation is able to utilise a part of its surplus profits to finance its own capital developments. The Board may decide to pay interim dividends to the shareholders during the year. The Corporation is also empowered to borrow funds to meet its Capital Development Programme.

The General Assembly will appoint an auditor or auditors at its General Assembly meeting and such appointment may be renewed. The auditor or auditors shall independently report on the annual accounts of the Corporation to its Shareholders. The audited Annual financial statements are presented to the Annual Shareholders Meeting.

The financial reporting currency in UAE Dirhams

Key Accounting Policy

The following accounting principles will underpin all accounting transactions and financial reporting within Etisalat.

Income

All income relating to a reporting period is accrued and taken into account in the period in which the services or products are provided to customers yet the necessary bills were not raised.

Expenditure

All expenditure relating to a reporting period must be accrued and taken into account in the period in which Etisalat receives the materials and services, yet the necessary invoices have not been received from the creditors.

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Prudence The carrying value of any item is determined on a prudent basis. The principle of prudence requires that uncertainties in financial accounting and reporting will be treated cautiously, particularly, where estimates are made. In general, this means that: a) All liabilities and losses which have arisen or are likely to arise in respect of the reporting period to which the accounts relate must be recognised; and b) Revenue and profit must not be anticipated but recognised only when they are realised in the form of cash or other assets which can be realised into cash in the foreseeable future.

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Consistency Accounting policies will be applied consistently within each accounting period and from one accounting period to the next.

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Substance over Form This principle applies where the legal form of a transaction does not reflect its economic substance. The accounting for such a transaction will reflect the economic substance and not merely its legal form.

Accounting Flexibility:

Fixed Assets

Obviously materiality limit for the items to be capitalised, is Dh 1,000. Items costing less than Dh 1,000 but whose usage is likely to exceed one year is also capitalised.

Fixed Assets are capitalised only if it meets the following criteria:

·         It physically exists.

·         It has a useful life to Etisalat’s business in excess of Two years.

·         It has a value equal to or exceeding the materiality limit for fixed assets as set forth by Etisalat Cost Management who is responsible to review and ensure that assets are in good condition.

·         It has not been acquired for subsequent resale as part of the normal trading activities of Etisalat.

·         It is new or it materially enhances the expected working life of an existing asset and has not been acquired simply to repair or renew that asset.

Depreciation costs is only capitalised if the expenditure will increase the expected future benefits from the existing asset for example by significantly prolonging the useful life of an asset.

Foreign Currency Transaction

All Foreign Currency Monetary Assets and Liabilities are translated at the year end using the exchange rate at the Balance Sheet date (31^st December). Any differences arising on translation of foreign currency balances is recognised in the Profit and Loss Account.

Investments

Investments in Associate Companies

An “associate” is an enterprise in which Etisalat has ‘significant influence’ and is neither a subsidiary nor a joint venture. ‘Significant influence’ is the power to participate in, but not control, the financial and operating policies of an enterprise: in general this is assumed to be a share of ownership (or voting powers) of between 20% and 50%.

In the consolidated financial statements of Etisalat, investments in Associates are accounted for using the equity method of accounting and it is disclosed as a separate item in the Balance Sheet. Under the equity method, the investment is initially recorded at cost, and the carrying amount is increased or decreased by the investor’s share of the profits or losses.

Also Profit/loss from associates it is disclosed as a separate item in the Profit and Loss Account.

Investments in Subsidiaries Companies

A subsidiary company is one where Etisalat holds, directly or indirectly more than 50% of the registered capital, can exercise more than 50% of the voting rights, or can appoint or dismiss a majority of the statutory or supervisory directors. Subsidiaries are consolidated into Etisalat’s financial statements. The consolidated statements include all subsidiaries.

Consolidated financial statements will be prepared, where practicable, using uniform accounting policies.  of the parent and its subsidiary Nothing is mentioned about subsidiary ???? in Financial Statement.

Joint Ventures

A joint venture is defined as a contractual agreement whereby control over an economic activity is shared by two or more parties. In practice, this will usually mean a company in which Etisalat and one, or a number of companies own the equity of the venture. In the consolidated financial statements of Etisalat an investment in a joint venture is accounted for using the proportionate consolidation method.

Under the proportionate consolidation method, the interest reported in the separate co-venture’s financial statements is one where only the co-venture’s share in each individual asset, liability, expense, or revenue of the joint venture is reported. This reflects the fact that each co-venture has an interest in the ‘output’ of the joint venture, not its result.

Other Investments

Other long term investments are stated at cost less provision for reduction in the value of the investment, which is other than temporary. Any permanent reduction in value will be recognised as a loss in the Profit and Loss Account.

 

Liabilities:

Creditors

A mounts owed by Etisalat to third parties in respect of purchases or other miscellaneous supplies and services.

Accruals

Accruals includes amounts representing costs and charges for products and services delivered but that are not actually invoiced by third parties at the balance sheet date.

Terminal Benefits

For UAE National employees, Etisalat makes a contribution to the Federal Pension Scheme. This defined contribution is recognised as an expense. For expatriate employees, who are entitled to terminal benefits in accordance with the UAE Labour Law, the cost of providing this defined benefit is charged to the Profit and Loss account.        Long term liabilities of Etisalat in respect of terminal benefits payable will be recorded in separate accounts under the Provision for staff terminal benefits.

Revenue

Revenue will comprise of the invoice value, of all services provided or goods sold to third parties. Revenue is stated after adjusting for amounts payable to and receivable from other telecommunications administrations. Revenue is a stated net of discounts, commissions, and rebates.

Capital

The cost of Capital Work in Progress is accounted for and clearly identified as such, pending commissioning of the completed asset or portion of that asset. The cost of Capital Work in Progress will include: Direct Labour, Payments to Contractors incurred in asset construction and Costs of installation including testing.

Financial Analysis

EMIRATES TELECOMMUNICATIONS CORPORATION - ETISALAT CONSOLIDATED STATEMENT OF INCOME
Performance (AED 000)
	1999	2000	2001	2002	2003
REVENUE	6,190,462	6,936,070	7,556,780	8,004,235	9,225,747
OPERATING PROFIT	1,759,601	2,087,697	2,290,068	2,367,945	2,801,014
OTHER INCOME	211,865	280,108	215,027	90,411	71,604
PROFIT	1,971,466	2,367,805	2,505,095	2,458,356	2,872,618
UNAPROPRIATED PROFIT BROUGHT FORWARD	11,043	7,509	19,064	6,659	15,015
	1,982,509	2,375,314	2,524,159	2,465,015	2,887,633
EARNINGS PER SHARE	70.10	84.19	8.35	8.19	9.58

The company maintains a high sales margin which shows a continuous improvement over years. The yearly average increase in revenue is 9% a clear indication that they have maintained the status as the leader in the industry. Operating Profit however has recorded remarkably in 2003 mainly due to the overhead cutting measures that they have adopted in the same year. Other Income on the other hand did not perform well in the last two years in comparison with 1999 to 2001. Earnings per share had sunk down to almost 10% in 2001, this is due to the additional weighted average shares changes from 28.12 million to 300 million. Graphical presentation is being presented for more and easy reference. (in ‘000)

The total assets created an overwhelming results and continuous increase over years. This is indicative of a sound business performance. Cash – as referred to be the blood of business is incredibly increasing every single year from 1999 to 2003. Indication of good cash management, excellent prevention of bad debts, remarkably increased in sales coupled with tight control over costs and operating overheads. Etisalat demonstrates an exceptional cash management over the top competitor in the region as shown in the graph below:

As the liquidity of Etisalat become stronger over years, it is volatile when it comes to Qtel.

Mobile connections in the UAE have now increased by 24 percent to 3.7 million lines.  This relates to a penetration rate of 88 per cent, which is comparable with the most advanced countries in the world.  Fixed telephones have increased by five percent to 1.2 million lines.  Internet connections increased to more than 400,000 accounts during the year, while the company’s popular Short Messaging Service (SMS) reached almost 900 million and Multi Media Service 1MMS) more than 300,000 customers.

Etisalat has seen performance and results soar at 2003. This is the result of the success of the Corporation’s policy of seeking to provide the highest standards of services by utilizing the latest applications and technologies.

Etisalat carefully examined the investment and expansion plans that will define the Corporation’s operations in the newly liberalized market. Accessing new markets is the core of Etisalat’s strategy for future expansion, both locally and regionally.

This policy is well underway and was evident when the Corporation led a consortium including six Saudi partners to success in gaining the second GSM license in the Kingdom. This was followed by the recent award to a second Etisalat-led consortium of the license to operate Sudan’s second nationwide fixed line phone service.

EMIRATES TELECOMMUNICATIONS CORPORATIONS
CONSOLIDATED BALANCE SHEET
in (AED 000)	1999	2000	2001	2002	2003
ASSETS EMPLOYED
FIXED ASSETS	7,103,360	8,357,711	9,127,557	9,096,351	8,669,399
INVESTMENTS	741,144	671,607	609,390	401,261	315,556
CURRENT ASSETS	5,163,826	5,664,286	6,198,128	6,564,362	8,882,735
TOTAL ASSETS	13,008,330	14,693,604	15,935,075	16,061,974	17,867,690
TOTAL LIABILITIES	5,788,321	6,512,040	6,748,416	5,916,959	6,350,057
FINANCED BY
SHARE  CAPITAL	2,812,500	2,812,500	3,000,000	3,000,000	3,000,000
DEVELOPMENT RESERVE	1,200,000	1,500,000	1,750,000	2,000,000	2,300,000
ASSET REPLACEMENT RESERVE	1,300,000	1,600,000	1,850,000	2,050,000	2,400,000
GENERAL RESERVE	1,900,000	2,250,000	2,580,000	3,080,000	3,800,000
UNAPPROPRIATED PROFIT	7,509	19,064	6,659	15,015	17,633
SHAREHOLDERS' FUNDS	7,220,009	8,181,564	9,186,659	10,145,015	11,517,633
TOTAL LIABILITIES & SHAREHOLDERS' FUNDS	13,008,330	14,693,604	15,935,075	16,061,974	17,867,690

Balance sheet above indicates a clear path towards success of ETISALAT via continuously reserving and appropriating part of annual earnings into development assets replacement. A sign of preparation in the coming “rainy season” or when the new entrants are ready to penetrate the UAE market and share with ETISALAT’s fortune.

Presented hereunder are some useful ratio analysis to further comment on the strength of the company as a leading provider of telecommunication services in the country.

Net Profit Ration Analysis
Year	Net Profit (EAT)	Sales Turnover	Etisalat Net Profit (%)	Qtel Net Profit (%)
2003	2,872,618	9,225,747	31.14	55.60
2002	2,458,356	8,004,235	30.71	56.70
2001	2,505,095	7,556,780	33.15	56.17
2000	2,367,805	6,936,070	34.14	54.73
1999	1,971,466	6,190,462	31.85
5 Yr. Avg.	12,175,340	37,913,294	32.28	55.80

In comparison over revenue and Net Profit (Earnings After Tax – EAT) of ETISALAT as against Qtel. Etisalat recorded an average of 32.28% over the last five years of operation as against Qtel of 56%. This is mainly due to the Etisalat’s policy of  heavy investment on Human Resources as they think people within the organization is one of the assets  as these people are the main pillar in their business’ success. On the other hand Qtel is investing heavily with their tangible investments that could prosper the company in short and long term.

Etisalat Telecommunications SWOT Analysis

The following are the SWOT analyses pertaining to the Etisalat’s overall performance, business formulations and strategies.

Etisalat’s Telecommunications maintain a healthy position. Etisalat has  substantial strengths to balance out weaknesses. Market opportunities in internet and services are fast growing. Competitive threats are becoming more of an issue as key competitors ramp up for new opportunities and other new competitors are entering the industry.
Strengths
Etisalat possesses the following strengths in the industry:
1- A sole service provider that controls all aspects of telecommunication services. This would limit foreign and local investment in telecommunications and Internet gateways;

2- Small population and country - making investments in the latest Telecommunications infrastructure and technologies are possible and cost effective;

3-  Overwhelming government support on their heavy investment on telecommunications industry and infrastructure. Policies aimed at inviting foreign technology firms into free trade zones such as Dubai Internet City and Jebel Ali Free Trade Zone will allow the UAE to continue its diversification efforts;

4 - Etisalat generally doesn't provide training to customers which could cause more expenses. However as systems become more complicated, especially with LAN and Internet practice the company had managed to formulate to have their systems equipped with friendly environment that could train the users while utilizing the said services,

5 -  Ability of the company to attract, train, and retain qualified technical, sales, marketing, financial, and management personnel to meet the challenges of growth.

6 – A product road map which leads to the development of new functionalities and the enhancement of existing system modules which are in-line with customer expectations.

Weaknesses

As many other telecommunication companies-Etisalat has currently experiencing the following weaknesses based on the authors’ opinion.
1- The cost of Internet access for end users is soaring high.  Although many of the people in the modernized administrative emirates (Abu Dhabi, Sharjah, and Dubai) are able to afford modern technologies while other regions are left behind. Until the gap between these emirates and the remaining four (Ras al-Khaimah, Ajman, Al Fujayrah, and Umm al Qaywayn) is sealed the UAE will never be
a fully modernized country.

Opportunities

Considering the new market horizon in the UAE, Etisalat’s future offers the following opportunities:

1- Nowadays communications are commonly use in small, medium and large company and corporations; the same is true with almost all domestic dwellings and offices. As the country grows rapidly in terms of population, the demands in other telecommunication services are fast increasing;

2 - The steadily needs of end users to search information globally create massive opportunities to the company as it yields positively with the over all performance of sales turnover;

Threats

Based on collective opinion of the authors suggests that companies in general are prone to harmful business treats.:

Internal Risk Factors

 External Risk Factors

1- Up Coming competition in the market of telecommunications, and customer care systems are highly competitive and the company expects this competition to increase. Not only does the company compete with other independent Service providers , it competes with system integrators and with internal billing departments of many telecommunications carriers.

2 - It is expected that continued growth and competition in the telecommunications industry, and the entrance of new competitors into the market is expected.

3 - an integral factor in the company's growth strategy is the development of third party relationships with a number of consulting and systems integrator firms to enhance its marketing, sales, and customer support efforts. The benefits are in respect to installation and support of its product and lead generation and assistance in the joint marketing and sales efforts in order to generate new business opportunities. Failure to generate these relationships will have a negative impact on the company's ability to meet its targeted growth in sales.

Prospective Analysis: (From my point of View)

        Etisalat’s future direction towards UAE telecom market should be important since the market is opened up to competition. The aim is to expand to build on the Corporation’s successes which have seen it become established as the market leader in the region on the back of a policy of rolling out the most advanced services to its customers. Suggested mechanism would be: moves to accelerate growth and development. Second defining the challenges and opportunities in the new liberalized market. Finally accessing new markets is the core of Etisalat’s strategy for future expansion, both locally and regionally so pinpointing what needs to be done to achieve the proposed objective is significant.

 

3.         Notes

§  The financial year of ETISALAT is from July to June, year ending June 30.

§  The financial year for the benchmark company is from January to December, year ending December 31.

§  The Industry average has been arrived taking 5 years 2003 – 1999 as the base years.

§  ETISALAT’s annual reports are published in August.

§  ETISALAT’s Balance Sheet figures of year ended June 30, 2000 are restated.

§  The currency used in the statements is AED (amounts mentioned are in million AED except per share amounts).

§  All 2 companies have consolidated accounts.

RECOMMENDATION

Based on the analysis our recommendation to the shareholders is to maintain their investments as ETISALAT progresses over the last five years. 

Currently it is holding the major share market of the Telecommunications Service industry. ETISALAT financial standing will improve in years to come. 

 

Appropriation of adequate funds to capital and jump-start the company to the next level. These funds will allow the company to hire needed resources, open regional sales offices, develop integration relationships, and develop system enhancements and new product offerings on a more timely basis.

Alternative pricing arrangements may be required to cultivate relationships with new market entrants, and to a lesser degree with established companies. These arrangements may call for deferred payments. However, if the company permits customers to pay for its products and services on a deferral or revenue sharing basis, the company may ultimately be unable to collect payments for such products and services.

CONCLUSION

Generally, Etisalat proves to be a profitable company dominating the Telecommunication Industry for more than three decades. With necessary infrastructures in place, Etisalat would assure its market dominance for more years or if not decades to come. New entrants would find difficulty to layout the necessary infrastructure and build reputation and presence in the market.

Etisalat’s P/E ratio of 15.5 is significantly lower than the average market P/E ratio of 20.6. The company also has an average dividend yield of 3.7% with earnings per share of AED 8.70. Etisalat has the ability to maintain high profit margins.

Given the nature of the company’s financials, we anticipate that Etisalat will be able to maintain its current market share and profit margin levels over the short to medium term period of this restructuring. Over the long run the Company’s market share, revenue and profit margin levels would adjust to stable conditions as new entrants establish their presence in the market. As of now, Etisalat has a reliable track record of providing good products at reasonable prices to its consumer market in an efficient and profitable manner.

Appendices

• Annual Statements of ETISALAT;
• Etisalat’s ratio and other profitability analyses vs. The leading competitor in the region (Qatar Telecommunication);

§  Annual Statements of benchmark Company, Qatar Telecom ;

Bibliography

·         ETISALAT information

http://www.            (February 14, 2005)

·         QTEL information

http://www.  (February 20, 2005)