Mar 03, 2015 (LBO) – Sri Lanka’s One-off and recurring taxes imposed in the interim budget by the new rulers on the Island’s telecom sector would raise regulatory risks and lead to lower profitability and higher financial leverage, says Fitch Ratings in a statement.
The rating agency has revised its outlook on the sector to negative from stable.
“If enacted, we believe the proposals may hasten consolidation as two loss-making smaller operators could exit the industry, leaving three remaining,” Fitch said in a statement.
Sri Lanka’s telco market is one of the most overcrowded markets in the world, with five mobile operators serving a population of 21 million, the statement said.
“If the proposals are implemented, Sri Lankan telcos will pay one of the highest taxes as a percentage of revenue among Asia-Pacific telcos,” Fitch said.
The rating agency said that SLT and Dialog will pay about 28 percent and 36 percent (2014: 12% and 17%) of their respective 2015 revenue in taxes, fees and levies.
“This is much higher than the case for India’s Bharti Airtel and Indonesia’s PT Telekomunikasi Indonesia (BBB-/Stable), which paid about 20% and 17% of their 2014 revenue in similar taxes and levies to their respective governments.”
Sri Lanka’s telecom industry was imposed a one-off “super gains” tax of 25 percent on profit, and a tax of 250 million rupees on each mobile operator.
Also the government proposed to shift the burden of a recurring telecom levy of 25 percent and 10 percent on prepaid voice and data revenue, respectively, on to telcos from consumers. Operators can no longer pass these taxes on to consumers, as changes in retail prices require approval from the telecoms regulator.
A one-off tax of 1 billion rupees (USD7.5m) is also proposed on companies offering satellite direct-to-home (DTH) TV with more than 50,000 subscribers.
These proposals, if enacted, will be effective from 1 April 2015.
Sri Lanka telecom sector consist by 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) and 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.
Fitch says Dialog will be more affected compare to other operators if the proposal enacted.
“Should the proposals go ahead, 2015 FFO-adjusted net leverage for Sri Lanka Telecom (SLT, BB-/Stable) and Dialog Axiata (Dialog, AAA(lka)/Stable) is likely to deteriorate to 1.8x and 2.5x, respectively (2014: 1.2x and 1.3x), while the operating EBITDAR margin may narrow by 400bp and 800bp, respectively,” Fitch said.
“Of the two, Dialog will be more affected by the taxes as 38 percent of its 2014 revenue was from prepaid services, compared with 21 percent for SLT,”
“Dialog will also pay LKR1bn, as the sole DTH operator with over 50,000 subscribers.”
Fitch said even though the tax burden of the telecom levy shifted to operators from consumers which will ultimately incentivize the voice and data usage of the consumers, it is insufficient to offset the impact of the absorption of the telecom levy.
“We think that this increase will be only gradual – and insufficient to offset the impact of the absorption of the telecom levy.” Fitch said.
Smaller, loss-making telcos including Hutchison Lanka and Bharti Airtel’s (BBB-/Stable) fully owned subsidiary, Airtel Lanka, may consider exiting the industry as most of their revenue is pre-paid, Fitch said.
“We believe that market leaders Dialog and SLT could acquire the smaller operators to reduce price-based competition and consolidate spectrum assets,” the rating agency said.