Fitch affirms Sri Lanka’s Dialog Axiata at ‘AAA(lka)’; Outlook stable


Fitch Ratings has affirmed Sri Lanka-based telecom company Dialog Axiata PLC's National Long-Term Rating at 'AAA(lka) with a Stable Outlook.

This reflects our view that Dialog can maintain a credit profile commensurate with a 'AAA(lka)' rating in the next 12-18 months, despite slower revenue growth, escalated costs and likely slight higher leverage.

Dialog's rating is based on its Standalone Credit Profile (SCP) of 'aaa(lka)'.

This reflects a strong market position across mobile, home broadband (HBB) and pay-TV segments, effective cost management amid a challenging economic environment and a solid financial profile, compared with national peers.


Airtel Lanka Merger: We expect no material impact on leverage from Dialog's merger with Airtel Lanka PLC. Dialog plans to settle the transaction by issuing new shares to Bharti Airtel Ltd (Bharti, BBB-/Stable) and inherit a small portion of Airtel Lanka's outstanding borrowing.

EBITDA is likely to be affected by consolidation of Airtel Lanka's operation, which we expect to have an EBITDA loss in first 12-18 months after the merger.

The slight deterioration in Dialog's financial profile is mitigated by a slightly
improved business profile and high ratings headroom.

Market Leadership: Dialog is the market leader across mobile and home broadband segments. The acquisition of Airtel Lanka subscribers is likely to increase Dialog's mobile subscriber market share to over 60% from above 50% in 2023. The merger will also improve Dialog's competitiveness in both mobile and home broadband through acquiring Airtel Lanka's 4G network and a portion of Airtel Lanka's 75MHz spectrum across the
850MHz to 2.6GHz bands. Dialog relies on fixed-wireless access to deliver its broadband service to households.

Lower Organic Revenue Growth: We expect Dialog's organic revenue growth to remain at a low to mid single digits (2023: 5%) in 2024, as household purchasing power will be affected by a higher value-added-tax rate on a wider range of goods. Real income has fallen significantly following the currency depreciation and unprecedently high inflation
in the past two years. Dialog has already seen a decline in its mobile and Pay TV subscribers and much slower broadband subscriber growth in 2022 and 2023.

Profitability Bottomed: We expect EBITDA margin to remain above 30% in 2024-2025 (2023: 32%) despite consolidation of loss-making Airtel Lanka, before improving in 2025 and beyond. The company expects to reduce the EBITDA loss at the Airtel Lanka business and gradually reach break-even within 12 months of the merger. We expect this to be achieved by cost savings generated from integrated network, sales and marketing
channels and other administrative costs.

Lower Foreign-Currency Debt: The company paid down foreign-currency (FC) debt to USD157 million by end-2023 or 45% of total outstanding debt, from USD227 million a year earlier. There is no imminent repayment pressure on FC debt as it is mostly a term loan from International Finance Corporation that matures in 2029 and a shareholder loan from Axiata Group Berhad. Dialog had USD56 million in FC deposits to meet its FC
interest costs of around USD11 million a year.

Moderating Capex: We expect capex intensity to remain largely flat at the 2023 level of around 23%-24%, before household spending power recovers further. The acquisition of Airtel Lanka's network and spectrum should also reduce the capex requirement in the near term. The absolute capex amount has risen significantly in comparison with the level before 2022, due to the currency devaluation as most of the equipment is imported.

Support from Strong Parent: Our assessment of 'Medium' legal and strategic support incentives from its stronger parent, Axiata Group Berhad, would result in a potential two-notch uplift to its rating if its SCP were to weaken, under our Parent and Subsidiary Linkage Rating Criteria. Axiata guaranteed around 40% of Dialog's debt as of end-2023.

The subsidiary makes a moderate financial contribution to the parent, with moderate long-term growth potential. The operational support incentive is 'Weak' due to minimal operating synergies with the parent.

Sector Outlook Improving: Fitch expects the aggregate EBITDA net leverage for Dialog and Sri Lanka Telecom PLC (SLT, A(lka)/Rating Watch Positive) to peak in 2024, before improving from 2025 onwards, supported by margin recovery and cautious capex. The aggregate EBITDA margin should start improving after largely stabilising in 2023 at 30%, due to cost reductions, moderating inflation and a recovery in the exchange rate
against the US dollar. Competition in the mobile sector is likely to moderate, as the merger of Dialog and Airtel Lanka reduces price competition.

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