Dialog Telekom, among Sri Lanka’s fastest growing companies, has gone through troubled times in recent years plagued by a contraction in consumer demand (use of phone time) and rising costs. The company has reported losses on the books but says, it has undertaken an aggressive cost-cutting exercise aimed at raising revenue among other matters.
Dr Hans Wijayasuriya |
In this interview, Dialog CEO Dr Hans Wijayasuriya explains the issues and future plans to tackle rising costs plus shareholder concerns of a falling stock:
Excerpts:
“Starting off from where Dialog was in 2008, our principle challenge and objective was to rescale our cost structures for future profitability. Given that we faced an economic downturn, consumption patterns, change resulting in a lower elasticity of demand and therefore revenue growth was under pressure. When revenue growth is under pressure you turn your headlights onto the cost structure. Where this is concerned we looked at many, many dimensions like standard overheads such as facilities, buildings, services, vehicles which in a large operation like ours a scientific and structured approach can bring down overheads quite significantly and we achieved that.
We also looked at our human resource base and carried out a VRS for executive and management cadres and this brought a monthly saving of around Rs 30-35 million in payroll working out to Rs 400 million a year in payroll costs and add to that the overall costs of employment like office space, ancillary costs would work out to over Rs 500 million in total from the HR sphere and from overheads another Rs 300 million approximately, so far. But this cost scaling down is not over yet.
While looking at the descaling of costs, going down this journey, we looked at our network costs and within the network we identified the core network, which is the heart of the system – switches, exchanges, platforms (SMS and disaster recovery platforms) as an opportunity where we could exploit a step-change in technology moving from the legacy of IP based next generation based networks where operating costs are much lower and capital costs are also much lower. We could exploit this technology to further bring down Rs 300 million in operating costs, in cash costs on an annual basis and approximately Rs 1.2 to Rs 1.3 billion in depreciation charges.
Since the payback on this move --- which incurred an outlay, at this stage, of only Rs 450 million to achieve this 100 % --- enables us to save Rs 300 million in the first year itself, giving an IRR (Internal Rate of Return) of over 100 % and a payback period of one year, we felt this was an opportunity we should not miss to descale our cost structure.
The impact of this on the financials is that there is a one-off write down, which is a book entry, on the Profit & Loss of the company. This write down doesn’t affect the cash generation in the company because it is accelerated depreciation. So you invest Rs 450 million with a high payback and see immediate cash savings and depreciation savings in the very next year.
This is restructing of the cost base through this action. Where it impacts the financials is at the PAT (Profit after Tax) level where the depreciation charge has been applied, it doesn’t affect the company at the EBITA (Earning Before Interest, Taxes & Amortisation) level. EBITA represents the cash generation or operating profit. Typically if you look at a company’s financials from the viewpoint of a debt holder or equity holder, a debt holder will look at a company from its capability to pay its debt (interest and recovery of debts) and this is based on the cash generated by the company.
As long as your cash profit is not affected debt holders will not be too concerned as to what happens in terms of depreciation because that is a company’s internal decision regarding the age and life of its assets. Conservative companies which are transparent will write down their assets and continue to maintain an asset base.”
What about the depreciation of assets? Is the depreciation value higher because of the usage (in an industry like telecom)?
You need to continuously review your depreciation policies. There are companies that maintain, shall I say, lax policies where depreciation is concerned, therefore showing much more attractive bottom lines by under depreciating assets. I believe that if a company sees the opportunity to modernise and achieve a better cash operating structure through an action which in the short term will appear as a book entry and depreciation and a paper profit, a company should take that opportunity.
Is there an industry norm on depreciation?
Not really. This is an issue which leads to the earlier question of PAT and EBITA. There is no industry norm on how to depreciate assets. You can apply 20 years; you can apply five … and so on. Because of that there is high variability between company A and company B who have the same operating profit but different depreciating policies.
Have you been able to convince shareholders on this issue of costs and what is important to look at in the long term prospects of the company? Has there been a convincing message sent out to shareholders?
We have engaged shareholders quite transparently throughout, through this process as well. Investors generally conversant with the telco industry have not reacted adversely and they have supported the company because all shareholders and debt holders see that the prime objective of Dialog is to aggressively compete in the revenue space but more importantly bring its cost structure to a level to compete even in the current economic environment. A seasoned investor or shareholder will see a book entry or non cash event which is in the interest of future cash as something positive.
Going back, the fact that there can be variability in depreciation policies; how you decide to fund your business … for example a company that funds out of debt as opposed to equity … all this variability comes below your EBITA line. In terms of valuation, in a global sense where there are comparables which is at the EBITA or operating profit level by which telcos tend to get valued. Rightly so this is an indicator of the future cash flow which the company can pump back either to grow tomorrow or pay dividends to shareholders.
Is EBITA instead of PAT, as the main measurement, used in other sectors or is it unique to the telcom sector?
In a sector where capital assets and depreciation of capital assets are not significant then PAT becomes more relevant for example like in the banking sector -- unlike in capital intensive industries. In capital intensive sectors the real question is do you have enough money out of your operations to fund future investments, pay your debt and pay dividends – these are the three essentials. When a company’s cash profits start dwindling then questions are asked. Dialog is in a state of re-structure and all the headlights are on to bring down this operating cost structure. And if it means moving to technologies which are cheaper to operate, then that is something we need to look at. This is similar to the airline industry where newer aircraft are cheaper to operate.
On a percentage basis, how much has annual costs being brought down by?
Over the last quarter (quarter on quarter) we have brought down direct costs by 2 % and operating costs by 3%. Over the last two quarters the cost structure has come down approximately by 9 % in total. But the journey is not over yet. We want to maintain this traction.
What are the cost cutting targets for the current financial year?
I won’t be able to give you any targets but we have a range of plans for cost reduction.
Going on the basis of the first two quarters, could costs in the next two quarters also come down by a 9-10 %?
It could be. We also want to bring down our cost structure that matches the environment while maintaining an aggressive approach in the revenue space.
Is the strategy to cut costs and raise revenue?
Yes and therefore deliver an improving EBITA.
While looking at cutting costs, are there areas where costs are fixed and cannot be brought down or increasing all the time?
Yes, definitely. That is a challenge. One of the biggest challenges that Dialog faced is that since we are an organisation that serves consumers across the economic pyramid we had to bear the consumption impact on the revenue side – income coming from disposal income dynamics --, and at the same time our internal operations had to take a hit from energy costs, transport costs which all became expensive. Thus there was a period where we had a double whammy where consumption on one side was going up and input costs on the other was going up.
That is where the rescaling cost structure across the board instead of peace-meal options came into place. The challenge is very significant and that is where our entire organisation and management comes under a lot of pressure.
What is the global scenario in Asia for example in terms of consumption patterns vis-à-vis the global financial crisis?
The global impact, I believe, has very little impact on Sri Lanka. One of the reasons is that the policies of the Central Bank traditionally have been very strong and progressive on one hand, but also very protectionist from the country’s interest point of view. Sri Lanka has a good record in that we have not got hit by external crises because of a very good strategic approach to the capital account and current account management of the deficit, so on and so forth.
We should give all credit to the fiscal regulator. While some countries collapsed in 1997 (during the Asian financial crisis), Sri Lanka went through.
That was one reason why the global crisis didn’t hit us. Likewise we are fortunately placed that we have diversity of exposure to the various markets of the world.
On one hand while our exports to the West slowed down, labour markets didn’t shrink in the Middle East, etc
As far as consumption patterns in the mobile industry is concerned, India for example, is exhibiting high elasticity levels. Very mature markets like Singapore, Malaysia Thailand and the Philippines have also reached peak stages in their markets. |
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