SLT to acquire Hutch; Etisalat likely to merge with Airtel Lanka
View(s):Over-capacity in Sri Lanka’s telecommunications industry could shrink as two weaker operators may exit the sector, which would benefit the remaining players, Fitch Ratings says in a new report released this week.
Data tariffs could rise following consolidation, and this would slow the decline in profitability and prevent duplication of capex. The number of industry participants could fall to three from five. Sri Lanka Telecom, the largest integrated operator, plas to acquire Hutchison Lanka; while the third-largest operator, Etisalat Lanka, could merge with the fourth-largest, Airtel Lanka.
The credit profiles for SLT and Dialog Axiata PLC will remain stable; ratings headroom will remain moderate despite a decline in profitability and continued large capex requirements.
SLT’s and Dialog’s average operating EBITDAR margins might decline to 30 -31 per cent in 2015, excluding any benefits of consolidation, due to price-based competition and the substitution of low-margin data services for traditional voice/text services. Free cash flow (FCF) for both SLT and Dialog is likely to be negative in 2015 as average capex/revenue for the two telcos will remain high, at around 28 per cent, to expand 3G/4G network coverage and fibre connectivity, Fitch said.
Fitch said it may revise the outlook for Sri Lanka’s telecommunications sector to positive if industry consolidation results in improvement in profitability. The regulator’s introduction of a data tariff floor could also ease pressure on profitability.