Fitch outlook on Lankan telecom sector stable

Fitch Ratings has maintained a stable outlook on Sri Lanka’s telecoms sector despite higher taxes slapped on telcos.

“We expect the credit profiles of Sri Lanka Telecom (SLT, B+/Negative/AAA(lka)/Stable) and Dialog Axiata PLC (Dialog, AAA(lka)/Stable) to remain steady despite higher taxes and large capex.
“The ratings of both telcos benefit from high headroom capable of absorbing some margin dilution and lower cash generation,” the rating agency said.
The stable outlook reflects Fitch’s expectation of data-led high-single-digit revenue growth in 2017, despite re-introduction of VAT. We expect data’s contribution to revenue to rise to around 18 percent - 20 percent in 2017 from around 15 percent in 2016, given low data tariffs and the availability of cheaper smartphones. SLT’s and Dialog’s FCF will be negative in 2017 due to significant capex requirements, Fitch noted.
The rating agency also said regulatory risks have increased since the new government took office in 2015 and raised taxes on telcos.

Effective May 2016, the government imposed a value-added tax (VAT) of 15 percent and nation building tax (NBT) of 2 percent on telecom services, raising the tax on voice and data services to 50 percent and 32 percent, respectively (earlier: 28 percent and 12 percent). 
 VAT has been suspended since July 2016, although the rating agency expects it to be reintroduced in the budget to be announced during November-December 2016. 

‘We still expect two smaller, unprofitable telcos - Hutchison Lanka and Bharti Airtel Limited’s (BBB-/Stable) Sri Lankan subsidiary, Airtel Lanka - to exit the industry amid competition and the uncertain tax regime. 

 Their business model is unviable, given the small addressable population (21 million) and the presence of a regulatory tariff floor on voice services that limits their ability to boost market share,” 
Fitch noted.