Sri Lanka Telecom comes off a ratings watch, but concerns linger over its cellular subsidiary: Fitch Ratings

Telco giant Sri Lanka Telecom came off Fitch Ratings Lanka’s ratings watch, but management concerns over its mobile unit is holding back network expansion, the rating agency said Monday. Telco giant Sri Lanka Telecom came off Fitch Ratings Lanka’s ratings watch, but management concerns over its mobile unit is holding back network expansion, the rating agency said Monday. SLT’s AAA (sri) was put on a ratings watch on January 10, following uncertainties surrounding its international calling card, a management change at its cellular subsidiary and a new tax slapped on international calls.

The telco giant sought legal action after its UK based partner Premier Communications International (PCI), failed to settle over a billion rupees in claims arising out of SLT’s pre-paid calling card.

The bad debt works out to three percent of SLT’s 2004 revenues (Rs. 29 billion), but terminating the operation may cut the telecom operator’s future international long distance calls revenues, Fitch said.

Prior to the alleged fraud, the Sigiri calling card brought in some 30 percent of SLT’s traffic originating from the UK.

Fitch expects SLT to mitigate the potential loss of revenues through alternative sources.

Operations at SLT’s fully owned subsidiary Mobitel skipped a beat after its CEO suddenly departed. SLT’s CEO Shuhei Anan is currently doubling up at both units.

However, the present CEO’s term could end in the current year thus risking further group management change.

“Fitch harbours some concerns about this unsettled management situation in light of Mobitel’s importance to the group’s future growth prospects, the extent of investment planned by the group (particularly Mobitel) and an increasingly competitive environment. The agency believes that the management uncertainty has contributed to the mobile network rollout being behind its original schedule,” the statement said.

Sri Lanka’s Treasury slapped a new tax with retrospective effect on all international telecom operators in late 2004 for a two-year period starting March 2003.

SLT had to pocket out Rs. 2.5 billion during the 2004 financial year, on account of back taxes for 2003 and 2004. The amount paid up was marginally higher than Fitch’s initial estimates.

However, the overall tax effect is hurting the profitability and cashflows of all telecom operators.

The December 26, 2004 Asian tsunami also left SLT Rs. 750 million poorer, on account of infrastructure damage, revenue loss and some bad debts.

However telecom penetration in the damaged south and eastern coastal belts were relatively low. SLT has booked Rs. 300 million charge to its 2004 financial statement, but the revenue loss since the tsunami has so been only Rs. 60 million, Fitch said.

“The recent developments have combined to weaken SLT’s stand-alone credit profile, while Fitch retains some concerns over qualitative issues such as management instability, risk management practices and corporate governance.”

Despite these sudden jerks, Fitch says SLT’s financial strength remains relatively strong locally.

“Credit metrics combined with qualitative issues such as its continuing robust market position, prospects for growth and shareholder support underpin the company’s ratings and support the rating affirmation and the Stable Outlook,” the statement added.

SLT is owned by Japan’s Nippon Telegraph & Telephone Company (35.2 percent), the Sri Lankan government (49.5 percent), the general public (12.5 percent) and the employees hold the rest.

Fitch Ratings Lanka Ltd is a joint venture between Fitch Ratings Inc., International Finance Corporation Washington, Central Bank of Sri Lanka and several other leading local financial institutions.

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