Fitch says Lankan telecom market faces ‘overcrowding’ risk

Fitch Ratings yesterday in a special report warned that ‘overcrowding’ remains the key medium-term risk to telecom operators (telcos) in Sri Lanka.

The agency expects competition among local telcos to remain high through 2011, given the fact that five mobile- and four fixed-operators serve an addressable population of less than 21 million.

Subscriber acquisition and retention costs are likely to keep operators’ profitability under pressure over the medium-term, as subscriber growth in both the mobile and fixed segments has slowed due to high headline penetration (end-2010: mobile 83% and fixed 17% of population).

Fitch also highlights that direct price competition, which eased thanks to regulatory intervention in 2010, could re-emerge if floor-tariffs on local calls are reduced as indicated by the Government of Sri Lanka in late 2010, or removed.

Floor tariffs on local calls, combined with aggressive cost-cutting, has improved the credit profile of Dialog Axiata PLC (Dialog, National Long-Term Rating: ‘AAA(lka)’/Stable), and to an extent of Sri Lanka Telecom (SLT, Foreign Currency Issuer Default Rating: ‘B+’/Positive, National Long-Term Rating: ‘AAA(lka)’/Stable), over 2010.

The agency notes that some consolidation among operators is likely to prove healthy for the industry. The three larger mobile operators – Dialog, Mobitel (a subsidiary of SLT), and Etisalat (a subsidiary of Emirates Telecommunications Corporation of the UAE, ‘A+’/Stable) – controlled approximately 82% of the subscriber market share at end-2010, which has left the two later-entrants, Hutchison Telecommunications Lanka (a subsidiary of Hutchison Whampoa Limited of Hong Kong, ‘A-’/Stable) and Bharti Airtel Lanka (a subsidiary of Bharti Airtel Limited of India, ‘BBB-’/Negative) with weak economies of scale.

Furthermore, two stand-alone fixed wireless operators, Lanka Bell Limited and Suntel Ltd., have been offered on sale in the recent past.

Growth is likely to be spearheaded by data (from both mobile and fixed sources) and to an extent by mobile voice, benefiting from relatively low penetration and improving usage, respectively. Usage volumes are on an improving trend across most segments since 2010, helped by improving economic activity, following the cessation of the war in mid-2009. Fitch also notes that tax reforms introduced in 2011 could help to improve usage levels.

See full report on Pages 10 and 11.