Dialog drops market share as competition grows

Aggressive competition amongst mobile operators has led to industry leader Dialog Telekom dropping market share to around 53 percent of total subscribers in fiscal year 2007 from 57 percent and 63 percent in fiscal 2006 and 2005, respectively, a top rating agency says.

It said ‘competition among local mobile operators has intensified considerably over the last two years driven by aggressive network expansion which has resulted in Dialog's incremental subscriber growth lagging that of the industry for the first time in the past two years.’ Fitch Ratings, while affirming Dialog’s National Long-term rating at 'AAA(lka)' with the outlook being stable, said group EBITDA margin deteriorated to around 43% at FYE07 from around 54% at FYE06, partly due to the drag created by Dialog's subsidiaries which are still in the early stages of development.

Fitch said total contribution of subsidiary revenue to the group was relatively small at around 5% at FYE07. It noted that Dialog's subsidiaries may find it challenging to break even at an EBITDA level over the short term. Fitch expects Dialog's mobile operations to continue to account for a significantly large portion of the group's earnings and cash flow generation over the medium term.

The agency said though the outlook on the rating is stable, Dialog's rating could come under negative pressure over the medium term if its competitive position within the local mobile industry deteriorates considerably, and/or if it becomes reasonably clear that perceived support from the company’s largest shareholder, Telekom Malaysia, International Berhad Group (TMI), which owns 83.15% of Dialog's equity, has waned.

Fitch said it believed Dialog's credit metrics are likely to weaken due to its proposed debt-funded expansion, intensifying competition among local mobile operators, and macroeconomic cost pressures. However, the affirmation is driven by the implied support deemed to be available from. The rating also factors in Dialog's leading position in Sri Lanka's mobile telecommunication landscape at present, and its continued strong operating cash flow generation.

Dialog's contribution to TMI's regional earnings is material, albeit on a reducing trend due to more recent investments in TMI's portfolio, as well as the intensifying competition amongst local mobile operators. However, Fitch believes that TMI's commitment to Dialog should remain strong over the medium term given that Dialog is pioneering multiple service delivery platforms which should benefit TMI's strategy over the longer term. Fitch's sentiment is further justified by TMI's contribution of over Rs 13.05 billion or 84% of the total funds raised during Dialog's 2007 rights issue.