It expects competition among local telcos to remain high through 2011.

"Sri Lanka’s mobile industry is one of the most competitive markets in the Asia‐Pacific region, with five operators competing for a total addressable population of 21 million," Fitch said.

"Subscriber acquisition and retention costs are likely to keep operators' profitability under pressure over the medium-term, as subscriber growth in both the mobile and fixed segments has slowed."

This was because of high headline penetration which by end-2010 was 83 percent of population for mobile phones and 17 percent of population for fixed phones.

The agency noted that "some consolidation among operators is likely to prove healthy for the industry."

The three larger mobile operators - Dialog, Mobitel, a subsidiary of state-run Sri Lanka Telecom, and Etisalat, a subsidiary of Emirates Telecommunications Corporation of the UAE) - controlled about 82 percent of subscriber market share at end-2010.

This has left the two later-entrants, Hutchison Telecommunications Lanka, a subsidiary of Hutchison Whampoa of Hong Kong, and Bharti Airtel Lanka, a subsidiary of India's Bharti Airtel, with "weak economies of scale", the rating agency said.

"Subscriber acquisition and retention costs are expected to remain high, due to relatively high telephony penetration and modest incremental growth, and are expected to exert pressure on profit margins."

Fitch said average mobile minutes of use (MOU) was on an improving trend in 2010, helped by a relatively lower‐inflationary environment and an increase in economic activity following the end of the island's 30-year ethnic war in 2009.

A floor tariff imposed by the regulator ended a price war allowing most operators to improve their financial profiles, Fitch said.

But it warned price competition could re‐emerge if floor tariffs are lowered as declared by government.

"This could precipitate further price competition among the operators, given that some of the newer entrants are yet to achieve a profitable subscriber mass," Fitch said.

As of December 2010, the mobile market was dominated by Dialog with a subscriber market share of 39 percent, followed by Mobitel with 23 percent, Etisalat at 20 percent, Bharti Lanka at 11 percent, and Hutch with 07 percent.