Tax hike may accelerate telecom industry consolidation: Fitch

The recent tax increases slapped on telecom services may accelerate Sri Lanka’s telecom industry consolidation, Fitch Ratings in a rating review said yesterday. “The tax increases might accelerate industry consolidation to reduce the number of telcos to three from five.

Two smaller, unprofitable operators - Hutchison Lanka and Bharti Airtel Limited’s (BBB-/Stable) Sri Lanka subsidiary, Airtel Lanka - may exit the industry,” Fitch said. Effective from May 2016, the government imposed a valueadded tax (VAT) of 15 percent and nation building tax (NBT) of 2 percent on telecom services, which will increase tax on voice and data services to 50 percent and 32 percent, respectively from 28 percent and 12 percent, earlier. “We believe that Dialog and Sri Lanka Telecom PLC (B+/Negative) could acquire smaller telcos to strengthen their market position and consolidate spectrum. Dialog’s ratings have sufficient headroom for a debt-funded acquisition of a smaller telco for around Rs.10 to 12 billion,” Fitch noted. Meanwhile, Fitch affirmed Dialog Axiata PLC’s (Dialog) ‘AAA(lka)’ national long-term rating. The outlook is stable. Fitch believes resilience to foreseeable risks puts Dialog in the top-tier of Sri Lankan corporates for credit quality. Dialog is likely to receive support from its 83 percent-parent,

Axiata Group Berhad (Axiata) of Malaysia, if its standalone credit profile were to weaken. Amid the tax increases, Fitch forecasts Dialog’s revenue to decline by the low-single-digits as voice and data usage could ease off following the tax increase. However, Fitch expects Dialog’s revenue to grow by the mid-single-digits during 2017-2019, driven mainly by higher data revenue and a gradual recovery in usage. Dialog’s mobile data revenue grew by 64 percent in 2015, and accounted for around 15 percent of its mobile revenue. Fitch also said that Dialog would be likely to increase its 2016-2017 capex to 30 percent of revenue (2015: 23 percent) to expand 3G/4G networks and fibre infrastructure. Dividends are likely to be around Rs.2bn- 2.5bn in 2016 and 2017.