NDB Securities refutes bearish sentiment on telco sector

NDB Securities Ltd. (NDBS), a top brokerage, has released a study on the telecommunication sector recently which refutes the bearish sentiment in the industry.

The inaugural report on the sector used publicly available data and expert opinion of industry stakeholders to provide one of the most in – depth views on a highly competitive sector of the country. Further, the report delivered better data, analysis and strategic direction on the overall telecommunication landscape, thus providing the investor the opportunity of making an informed investment decision on a key sector of the economy.

 Commenting on the publication, NDBS CEO Prasansini Mendis stated: “2016 is expected to be a rather quiet equity market for Sri Lanka, at least in Sri Lanka’s standard. This we believe is an opportunity for us as investment professionals to go back to the basics on creating value to our clients. This is the moment to rebalance their investment portfolios. It is also an opportunity to increase their exposure to potential high growth segments of future Sri Lanka. This is the view we take in selecting sectors to allocate research resources. 

“Further, fundamental research shows that certain listed companies with excellent earnings potential within those sectors are trading at significant discounts. Therefore, we as a company thoroughly believe that in – depth research will continue to add value to the investor, especially in the current market context. With that in mind, our commitment towards value added research is expected to reach a new height in 2016 through increased coverage in macro, sector and counter publications.”

The telecommunication sector is expected to play a vital role in the future economic growth of the country. Apart from the significant revenue contribution to the government through direct and indirect taxes, the sector will play a pivotal role in building an ecosystem connecting people, societies and businesses that will enable Sri Lanka to achieve the inclusive economic growth the government forecasts going forward. 

NDBS Head of Research Sidath Kalyanaratne commenting on the sector mentioned: “The future of ICT will depend heavily on the local telecommunication sector ability to create a platform to provide mobility, broadband and cloud to a demanding eco system. The local players have already invested heavily on technology that will enable them to take that leap. When it comes to telco, Sri Lankan companies have been the first to invest in new technologies in the South Asian region.  However, in our opinion, the key thrust sectors of the economy are still not aligned fully with ICT for the local telco players to optimise their product offering. 

“Further, future potential sectors of this country such as transportation, logistics, banking, healthcare, education, hospitality etc. have not embraced the opportunities presented by the telecommunication sector to increase their value addition. Even on a global scale, none of these sectors have done enough to improve their service offering to the end client. Studies done by Ericsson, the leading telecommunication infrastructure provider in the world, has shown that full ICT integration to the global healthcare and transportation sector alone is expected to add $14 trillion to the global GDP. The full ICT integration to all key sectors is expected to increase the global GDP by $75 trillion. Sri Lankan economy too can benefit from these synergies in our own way if all industries increase their commitment towards ICT.”

He added: “The Government and the regulator will need to play a significant role in laying the environment to build the necessary eco system where connectivity will result in a sustainable and inclusive economic development in the country.”

Assistant Manager, Research and the sector analyst Dhinali Peiris stated: “Mobile data is the future for mobile telco operators in the medium to long term. As at September 2015, internet and email subscriptions (mobile) were reported to be 3.4 m (40.5% YoY increase). The appetite for mobile data has been growing exponentially. In particular, mobile broadband is preferred owing to its ‘affordability’ due to increasing household income, ‘accessibility’ due to its mobile nature and ‘availability’ due to over 70% of the country covered by 3G or 4G.” 

Peiris added “We identify three main factors to fuel mobile data growth in the country in the short to medium term; smart phone adaptation rate increasing, 4G technology supporting increased data usage and telco operators already having committed investments in technology to support future growth. At the moment, Sri Lanka mobile prices are some of the lowest in the world. Therefore, we feel sector consolidation is required with two to three large players left in the industry. We expect data prices to increase and mobile operators to improve Average Revenue per User (ARPU), post consolidation. However, Telecommunications Regulatory Commission of Sri Lanka (TRCSL) recently revised voice floor prices introducing a common floor price in order to benefit the small players.”

Peiris concluded saying: “Growth in profitability of telecommunication companies is heavily reliant on the consolidation of the industry and the intervention of the regulator/government. Post consolidation, the growth is to be fueled more by mobile internet rather than fixed internet coupled with expected firmer mobile data prices. Other factors such as smartphone adaption, technology support and subscriber demographics driving mobile data growth are currently in a positive trajectory.” 

NDB Securities is a fully owned subsidiary of NDB Capital Holdings, the capital market arm of the NDB group. NDBS provides a platform to its institutional and retail clients to access the capital market in Sri Lanka through its equity and debt trading platform. This is supported by a number of value added services such as state of the art online trading facilities for speedy trade execution, margin trading and other credit facilities through its parent NDB Bank and comprehensive coverage of research to add value to support trading activities.