Other

Fitch cuts telecom sector outlook to negative

04 Mar 2015 - {{hitsCtrl.values.hits}}

Says new tax structure raises regulatory risks, leads to lower profitability

Fitch Ratings has cut the country’s telecom sector outlook to negative from stable amid the one-off and recurring taxes slapped on the industry by the interim budget of the new administration.

Small players to exit

Meanwhile, citing probably the only silver lining, Fitch said the budget proposals would hasten sector consolidation as two loss-making smaller operators could exit the market, leaving three remaining.

“Smaller, loss-making telcos including Hutchison Lanka and Bharti Airtel’s fully owned subsidiary, Airtel Lanka, may consider exiting the industry as most of their revenue is pre-paid,” Fitch said.

“We believe that market leaders Dialog and SLT could acquire the smaller operators to reduce price-based competition and consolidate spectrum assets,” the rating agency added.

Sri Lanka’s telco market is one of the most overcrowded markets in the world, with five mobile operators serving a population of 21 million.

According to Fitch, the new taxes raise regulatory risks and would lead to lower profitability and higher financial leverage for Sri Lankan telcos.

The interim budget proposes a one-off “super gains” tax of 25 percent on profit, and a tax of Rs.250 million on each mobile operator.

The proposals also shift the burden of a recurring telecom levy of 25 percent and 10 percent on prepaid voice and data revenue respectively, on to telcos from consumers.

Operators can no longer pass these taxes on to consumers, as changes in retail prices require approval from the regulator.

A one-off tax of Rs.1 billion is also proposed on companies offering satellite direct-to-home TV with more than 50,000 subscribers.

The budget proposals, if enacted, will be effective from 1 April 2015.

“Should the proposals go ahead, 2015 FFO-adjusted net leverage for Sri Lanka Telecom and Dialog Axiata is likely to deteriorate to 1.8x and 2.5x, respectively (2014: 1.2x and 1.3x), while the operating EBITDAR margin may narrow by 400bp and 800bp, respectively,” Fitch said.

The rating agency also said out off the two, Dialog will be more affected by the taxes as 38 percent of its 2014 revenue was from prepaid services, compared with 21 percent for SLT.

Dialog will also pay Rs.1 billion, as the sole satellite TV operator with over 50,000 subscribers.

A shift in the burden of the 25 percent telecom levy from consumers to telcos is likely to incentivise consumers to increase voice and data usage.

However, Fitch thinks that this increase will be only gradual and insufficient to offset the impact of the absorption of the telecom levy.

If the proposals are implemented, Sri Lankan telcos will pay one of the highest taxes as a percentage of revenue among Asia-Pacific telcos.

SLT and Dialog will pay about 28 percent and 36 percent (2014: 12 percent and 17 percent) of their respective 2015 revenue in taxes, fees and levies.

“This is much higher than the case for India’s Bharti Airtel and Indonesia’s PT Telekomunikasi Indonesia (BBB-/Stable), which paid about 20 percent and 17 percent of their 2014 revenue in similar taxes and levies to their respective governments,” Fitch noted.

Other

Fitch cuts telecom sector outlook to negative

Says new tax structure raises regulatory risks, leads to lower profitability

Small players to exit

Most Popular Articles

Shipping majors circle Sri Lankan ports amid regional expansion race

ADB sees slower growth, higher inflation for Sri Lanka through 2027

Sri Lanka’s IMF reserve target comes under pressure: KPMG

Sri Lanka explores local gold refinery as IMF regulations delay import tax relief for jewellers

CSE ends lower as turnover falls to year’s lowest, ASPI holds key support

HMD introduces latest range of feature phones to Sri Lanka

Latest News

India amends tax treaty with Sri Lanka to plug avoidance

SLS certification mandatory for sanitary napkins from October 8

Russia launches major ballistic missile attack on Kyiv

Former UNP Councillor arrested over Rs. 160 million fraud

Man injured in Dehiwala Cemetery shooting