Strong growth despite taxes for Telcos: Fitch

• Latest 2017 Outlook report expects data contribution to revenue to rise to around 18%­20% in 2017 from around 15% in 2016 
• Says both SLT and Dialog FCF would be negative due to capex requirements

Fitch Ratings in its latest 2017 Outlook report for telecoms said yesterday the industry has maintained a stable outlook on the sector despite higher taxes and large capex. 

“We expect the credit profiles of Sri Lanka Telecom (SLT,B+/Negative/AAA(lka)/Stable) and Dialog Axiata PLC (Dialog, AAA(lka)/Stable) to remain steady despite higher taxes and large capex. The ratings of both telcos benefit from high headroom capable of absorbing some margin dilution and lower cash generation,” it said.  The stable outlook reflects Fitch’s expectation of data­led high­single­digit revenue growth in 2017, despite re­introduction of VAT. The Agency expects data’s contribution to revenue to rise to around 18%­20% in 2017 from around 15% in 2016, given low data tariffs and the availability of cheaper smartphones. 

Both SLT’s and Dialog’s Free Cash Flow (FCF) will be negative in 2017 due to significant capex requirements. Regulatory risks have increased since the new government took office in 2015 and raised taxes on telcos. Effective May 2016, the government imposed a value­added tax (VAT) of 15% and nation building tax (NBT) of 2% on telecom services, raising the tax on voice and data services to 50% and 32%, respectively (earlier: 28% and 12%). 

VAT has been suspended since July 2016, although Fitch expects it to be reintroduced in the budget to be announced during November-December 2016. 

“We still expect two smaller, unprofitable telcos ­ Hutchison Lanka and Bharti Airtel Limited’s (BBB­/Stable) Sri Lankan subsidiary, Airtel Lanka ­ to exit the industry amid competition and the uncertain tax regime. Their business model is unviable, given the small addressable population (21 million) and the presence of a regulatory tariff floor on voice services that limits their ability to boost market share,” Fitch said in a press release.