Fitch maintains negative outlook for telcos over tax uncertainties

Says Hutch, Airtel may exit market  


Fitch Ratings has maintained a negative outlook on Sri Lanka’s telecom sector based on the uncertainty over the proposals to increase taxes by the government.

Fitch said such taxes are likely to lower profitability and increase leverage for telcos, if implemented.

The original tax proposals were to impose a one-off “super gains” tax of 25 percent on profits, and a tax of Rs.250 million on each telco. 
The proposals also shift the burden on to the telcos of a recurring telecom levy of 25 percent and 10 percent on prepaid voice and data revenue, respectively, having previously been borne by consumers. 

These tax proposals were originally introduced in February 2015 and in October 2015 the government withdrew only the recurring taxes. 
“The government may still reintroduce recurring taxes in part, or full, in 4Q15,” Fitch cautioned. 

Fitch expects the industry’s 2016 revenue to grow by the mid-single digit percentage, driven by data services as cheaper smartphones proliferate. 

Yet, apart from the tax impact, profitability may still decline in 2016 as low margin data services replace traditional, more profitable voice/text revenue.

“We expect both Sri Lanka Telecom PLC (BB/AAA(lka)/Stable) and Dialog Axiata PLC (AAA(lka)/Stable) to invest around 22 percent 25 percent of their revenue on capex. 

Both firms are exposed to depreciation of the Sri Lanka rupee given that 95 percent (US $ 180 million) and 81 percent (US $170 million) of their respective debt are US dollar denominated while we estimate they each generate only around 15 percent of their revenue in US dollars,” the rating agency said.

Fitch noted that the two smaller, unprofitable telcos - Hutchison Lanka and Bharti Airtel Limited’s Sri Lankan subsidiary, Airtel Lanka - may exit the industry amid competition and the uncertain tax regime.