Fitch Ratings revised the outlook for Sri Lanka’s telecoms sector to stable from negative as the government’s new budget scrapped recurring taxes that could have diluted operators’ EBITDA margin by an average of 6-7 per cent.
Dialog Axiata’s and Sri Lanka Telecom’s (SLT) 2016 EBITDA margin should dilute by only 1-2 per cent following the new budget, due to changes in their revenue mix and lower revenue from profitable international gateway operations, the ratings agency said.
The new budget doubled the government’s share in the international levy to $0.06 from $0.03 per minute. Fitch said the operators’ strategy to pass this increase to consumers could affect usage, as users will likely move to applications like Skype and Facebook. The firm estimates that international termination revenues contribute about 12 per cent of Dialog’s and SLT’s revenues.
Fitch revised the sector’s outlook to negative last March based on proposals to increase taxes that could lower profitability and raise operators’ leverage. The original proposals called for a one-off ‘super gains’ tax of 25 per cent on profits, a tax of LKR250 million ($1.8 million) on each operator and a one-off tax of LKR1 billion ($7.5 million) on companies offering satellite direct-to-home (DTH) TV with more than 50,000 subscribers. The proposals would also have shifted the burden of a recurring telecoms levy (25 per cent on prepaid voice and 10 per cent on data revenue) to operators from consumers.
Dialog and SLT, the country’s two largest mobile players with 62 per cent of total connections, paid LKR1.02 billion and LKR2.04 billion, respectively, last year on one-off taxes that were introduced in February. The one-off tax on satellite direct-to-home TV operators and the recurring tax on prepaid services have been scrapped.
The 2016 budget also proposes to structurally separate operators’ fibre, towers and spectrum assets to a special-purpose company to be regulated by the Information and Communication Technology Authority. The impact of such a structural separation is uncertain as the regulator hasn’t disclosed details on the asset separation, Fitch said.
The government’s decision to impose a tax of LKR50,000 per tower is not likely to have a major impact on the credit profile of the two operators. The agency said that their credit profile will now remain intact.