New taxes imposed by Sri Lanka’s government will result in stagnant revenue growth this year as well as lower profitability, Fitch Ratings forecasts.
The regulatory risks have risen for telcos since the new government assumed office last year. It increased taxes on telecoms operators in an effort to shore up revenue. Effective from May, the government imposed a VAT rate of 15 per cent and nation building tax of 2 per cent on telecoms services, which will increase the tax on voice and data services to 50 per cent and 32 per cent, respectively, from 28 per cent and 12 per cent.
The government abandoned an earlier tax proposal that could have diluted the industry’s EBITDA margin by an average of 6-7 percentage points. Fitch in mid-January revised the outlook on Sri Lanka’s telecoms sector to stable from negative following the new budget.
The agency expects market leader Dialog Axiata’s revenue to decline by low-single digits as voice and data usage could weaken following the tax increases.
Dialog’s operating EBITDA margin could narrow due to lower usage and decline in profitable international voice business. This would more than offset the improving margin on data segment revenue and savings from its new Bay of Bengal undersea cable.
Recovery in 2017
Fitch, however, expects Dialog’s revenue to grow by mid-single digits during 2017-19, driven mainly by higher data revenue and a gradual recovery in usage. Dialog’s mobile data revenue grew by 64 per cent last year and accounted for about 15 per cent of mobile revenue.
Dialog, the market leader with 10.5 million connections and 41 per cent share, will likely increase its 2016-17 capex to 30 per cent of revenue from 23 per cent last year to expand its 3G/4G networks and fibre infrastructure.
Fitch said the tax increases could accelerate industry consolidation to reduce the number of players to three from five. Two smaller, unprofitable operators – Hutchison Lanka and Bharti Airtel’s Sri Lanka subsidiary, Airtel Lanka – may exit the industry. It believes Dialog and Sri Lanka Telecom could acquire smaller telcos to strengthen their market position and consolidate spectrum.
Malaysia’s Axiata Group and India’s Bharti Airtel announced in February they were discussing merging their operations in Sri Lanka to create a company serving half the country’s 25 million mobile connections. Dialog reportedly approached authorities in early February about a possible takeover of Airtel Lanka, which has a 9 per cent share with 2.3 million mobile customers.