Court case leaves Sri Lanka Telecom Rs. 4.5 bn poorer

Sri Lanka Telecom's credit profile is unlikely to weaken even if the Supreme Court orders the telco to refund about Rs. 4.5 billion in tariffs payments, Fitch Ratings Lanka said Wednesday.
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Sri Lanka Telecom's credit profile is unlikely to weaken even if the Supreme Court orders the telco to refund about Rs. 4.5 billion in tariffs payments, Fitch Ratings Lanka said Wednesday. SLT, 35 percent owned and fully managed by Japan's Nippon Telegraph and Telephone Corp (NTT), is on the mat after Consumer Association of Sri Lanka won a lawsuit in July to revoke the telco's Sept. 2003 tariff hike.

During the 21 months between September 2003 and June 2005, the CCPI moved up by 22 percent, while SLT’s average tariffs increased by only about 11 percent as a result of the fifth revision.

Theoretically, SLT could readjust tariffs upwards by up to 18 percent, using the index- adjusted formula.

The country's dominant fixed line carrier has taken its case to the Supreme Court, but a ruling may take a year or so materialise, Fitch Ratings said while maintaining SLT's AAA (sri) status.

A preliminary estimate of SLT's net liability for the 21 months ending June 2005 is in the region of Rs.

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3.0 billion, while the gross liability is estimated to be Rs. 4.5 billion.

The latter estimate corresponds to around 28 percent of expected earning before interest tax dividends and amortization for financial year 2005.

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It is based on the assumption that while the company could conceivably set off excess rentals against lower call charges, it may not be practically possible to recover net claims from customers (at least in the near-term), explains Fitch.

A "revert back to pre-Sept. 2003 tariffs with retrospective effect, is unlikely to have any near-term effect on the credit ratings or the rating outlook of the company," Fitch said.

If Supreme Court upholds the ruling, SLT is expected to refund the monies during the financial year 2005.

Fitch estimates a Rs. 4.5 billion one-time charge would cause the company's leverage metrics for the financial year 2005, to weaken slightly, but nevertheless remain comfortable for the current rating level.

SLT's financials for the first six months of 2005 were also not impressive, with its fully-owned cellular subsidiary Mobitel, performing modestly in an increasingly competitive market.

Though Mobitel currently contributes only around 10 percent of group consolidated revenue, SLT's future growth prospects hinge on its mobile operations.

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A tariff refund in financial year 2005 would strain its liquidity (although the estimated amount could be met from the group's cash reserves, which stood at Rs. 12.2 billion during the first six months of 2005) as free cashflows will be significantly negative with Mobitel spending heavily on its network expansion.

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However, there may be downward rating pressure "if SLT's refund liability subsequently proves materially larger than current estimates and/or if the company does not readjust tariffs to limit the impact on profitability going forwards."

Sri Lanka Telecom commands around 85 percent of the country's fixed-line market. Besides NTT, the government controls 49 percent, while 12 percent is in the hands of the public and the employees own the rest.

The Formula:

The Telecommunications Regulatory Commission or TRC approved SLT’s tariff revision in Sept 2003.

The increase was in line with the fifth and final tariff rebalancing exercise agreed between the two key shareholders – NTT and the Sri Lankan government.

Among other things, the agreement was intended to gradually ease off ease off cross subsidization of local calls through international call charges.

The five annual rebalancing exercise started in 1998 and was due to wrap up by Aug. 2002.

However, the fourth and fifth stages were delayed and the exercise concluded only in 2003.

According to the rebalancing exercise, SLT’s tariff increases would be based on an index-adjusted formula, namely that the tariff increase in percentage terms would be equal to or less than the percentage change in the Colombo Consumer Price Index (“CCPI”), minus two percent.

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