Strong growth for Sri Lankan telcos, despite higher taxes: Fitch

Oct 21, 2016 (LBO) – Fitch Ratings said Sri Lanka Telecom rating of B+/Negative/AAA(lka)/Stable and Dialog Axiata PLC AAA(lka)/Stable will 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 company’s rating statement said.

The stable outlook reflects Fitch’s expectation of data-led high-single-digit revenue growth in 2017, despite re-introduction of VAT.

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

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

VAT has been suspended since July 2016, although we expect it to be reintroduced in the budget to be announced during November-December 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.

“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,” Fitch said.