Fitch sees strong growth for Sri Lankan telcos despite higher taxes

ECONOMYNEXT – Higher use of data services should help Sri Lankan telecommunications firms like Dialog Axiata and Sri Lanka Telecom grow strongly, Fitch Ratings said, maintaining a stable outlook on the sector.

“The stable outlook reflects Fitch’s expectation of data-led high-single-digit revenue growth in 2017, despite re-introduction of Value Added Tax (VAT),” it said in a report on the sector.

“We expect data’s contribution to revenue to rise to around 18%-20% in 2017 from around 15% in 2016, given low data tariffs and the availability of cheaper smartphones. Both SLT’s and Dialog’s Free Cash Flow will be negative in 2017 due to significant capex requirements.”

Fitch Ratings said it has maintained a stable outlook on Sri Lanka’s telecoms sector with the credit profiles of Sri Lanka Telecom (SLT, B+/Negative/AAA(lka)/Stable) and Dialog Axiata PLC (Dialog, AAA(lka)/Stable) expected 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 report said.

But the rating agency 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 of 15% and nation building tax (NBT) of 2% on telecom services, raising the tax on voice and data services to 50% and 32%, respectively (earlier: 28% and 12%).

VAT has been suspended since July 2016, but Fitch said it expects it to be reintroduced in the budget to be announced during November 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,” the report also said.

“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.”
(COLOMBO, Oct 21, 2016)





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