S&P ratings agency sees high telecom regulatory risk in Lanka; Asia Securities maintains bullish vie

The S&P ratings agency recently issued a report on the Sri Lankan Telecommunications industry and has highlighted that regulatory disruptions such as the super gains tax (SGT) and the pre-paid reload levy remain a key risk for telecom operators in the country. 

However, Asia Securities is of the view that 1) both SLT and DIAL have strong balance sheets to pay out the SGT with minimal impact if needed, and 2) the recent 2Q reports show that the pre-paid levy has a much lower than expected impact on EBITDA margins.

DIAL has already retained cash within the company by cutting dividends in case the SGT does get passed in the parliament and even then would account for only 3.8% of 2Q CY15 equity, while in the case of SLT it would account for only 2.6% of 2Q CY15 equity.

On the pre-paid levy, Asia Securities notes that the market was expecting an EBITDA margin decline of around 10pp on the mobile side. However, it highlighted in its initiation report that the impact would be around 4-5pp due to the strategy of giving the 25% as bonus talk time as opposed to bearing it on a cash basis. The fact that for 2Q CY15 both companies reported a lower than expected EBITDA margin decline of 2pp further supports Asia Securities’ view.

The S&P article goes on to say that deeper smartphone penetration and lower capex will help support industry profitability which Asia Securities believes will happen given that 1) there are smartphones available for even Rs. 6,000 now, and 2) both companies reported a lower than expected capex for 2Q CY15.