Business
Fitch Ratings affirms National Long-Term Rating of Dialog Axiata at ‘AAA (lka)’, Outlook Stable
The affirmation and Stable Outlook reflect Fitch’s view that Dialog will be able to maintain a credit profile commensurate with a ‘AAA(lka)’ rating in the next 12-18 months, despite lower demand for telecom services, escalating costs and a significant increase in the company’s debt amid the Sri Lankan rupee’s devaluation.
Dialog’s rating is driven by its Standalone Credit Profile (SCP) of ‘aaa(lka)’, which reflects its market leadership across mobile, pay-TV and home-broadband (HBB) segments, better execution and network capability and a solid financial profile, offset to an extent by the high exposure of its revenue to the weak Sri Lankan market.
KEY RATING DRIVERS Weak Demand in 2023: We expect Dialog’s revenue growth to slow to around 10% in 2023, from 25% in 2022, amid weakening consumer spending. Consumers are increasingly prioritising essential needs, such as food and medicine, as real income has plunged following the currency depreciation and unprecedently high inflation. Dialog faced pressure on subscriber numbers and usage minutes in 2022. Telecom operators raised voice and data tariffs by 20% and pay-TV by 25% in 2022 to pass through the escalating costs, reducing the services’ affordability.
We believe the recent increases in telecom taxes would also discourage demand as consumers now have to pay 38% tax on voice and 20% on data. Sri Lanka currently has one of the highest telecom tax structures in Asia. To mitigate its domestic market exposure, Dialog is increasingly focusing on its international businesses and enterprise clients, who are somewhat immune to the local environment. The contribution from the international business climbed to 23% in 2022, from 16%17% earlier.
Market Leadership: Dialog is the domestic market leader across mobile, pay-TV and HBB segments. The competition within the mobile segment has intensified in recent months amid the falling demand, with some of the smaller operators aggressively cutting prices. However, we do not believe such a strategy is sustainable as the smaller telcos do not have the network capability, service quality or the financial strength to compete with operators such as Dialog.
Low Profitability: We expect Dialog’s EBITDA margin to improve to around 30%32% over 2023-2024 from 28% in 2022, benefitting from the recent tariff hikes and cost rationalisation measures. Dialog’s EBITDA margin contracted by 12 percentage points in 2022 amid the high inflation and currency depreciation. Around 52% of Dialog’s direct costs are in foreign currency (FC) compared with only 30% of its revenue, exposing the company to currency volatility.
Dialog expects to streamline its costs by consolidating its facilities, optimising its network and rationalising overheads, but we do not believe this will be sufficient to improve margins to the 39%-40% levels before 2022. The low realisation of the recent tariff hikes amid the drop in usage and increased contribution from the lowmargin international business would also mean margins would remain in the low-tomid 30s range in the next few years.
High Foreign-Currency Debt: Around 91% of Dialog’s outstanding debt was in FC at end-2022. The depreciation of the rupee by almost 80% in 2022 materially increased Dialog’s FC debt exposure, while it had to raise more FC debt to fund capex amid the FC shortage in Sri Lanka. We do not believe Dialog’s current FC revenue is sufficient to meet its FC debt obligations, but the company does not have any FC debt repayments due in the next 24 months. Dialog has USD41 million in FC deposits to meet its FC interest costs of around USD12 million per year.
Balance-Sheet Restructuring: Dialog is planning to manage its currency exposure by reducing the FC debt to less than 50% of its outstanding debt by end-2023. It is considering asset monetisation and alternative funding arrangements with existing lenders to achieve a more balanced funding mix. The higher debt stock also raised Dialog’s EBITDA net leverage to 1.3x in 2022, from 0.4x in 2021. We expect leverage to remain around 1.0x until there is a sustainable recovery in margins.
Positive FCF from 2024: We expect Dialog to generate negative free cash flow (FCF) in 2023 amid low profitability and high capex. Dialog’s capex has risen due to the currency devaluation as most of the equipment is imported. Therefore, we expect capex intensity to rise to around 27% of revenue in the next few years from around 23% earlier. Capex will be spent mostly on mobile and fixed-data capacity expansion to cater to the growing demand. Dialog’s FCF should turn positive from 2024, once EBITDA margins gradually recover.
Support from Strong Parent: Our assessment of ‘Medium’ legal and strategic support incentive from its stronger parent, Axiata Group Berhad, would result in a potential two-notch uplift to its rating if its SCP were to weaken, according to our Parent and Subsidiary Linkage Rating Criteria. Axiata guaranteed around 45% of Dialog’s debt as of end-2022. The subsidiary makes a reasonably material financial contribution to the parent, with moderate long-term growth potential. The operational support incentive is ‘Weak’ due to minimal operating synergies with the parent.
Sector Outlook Deteriorating: Fitch expects the average 2023 net debt/EBITDA ratio for Dialog and fixed-line leader Sri Lanka Telecom PLC (SLT, A(lka)/Stable) to weaken to 1.4x in 2023 (2022E: 1.2x) amid weak margins and high capex. We expect sector revenue growth to slow to 8% in 2023 (2022E: 15%), while theaverage 2023 EBITDA margin for SLT and Dialog will remain flat at 32% (2021: 38% and 2022E: 32%) amid low usage and high costs.
Business
Inflation curbed by govt. fuel subsidy introduction and surcharge on vehicle import tax – CBSL Governor
By Hiran H. Senewiratne
The government’s decision to introduce the fuel subsidy and the surcharge on the vehicle import tax helped curb inflation to a great extent, Central Bank Governor Dr. Nandalal Weerasinghe said.
‘The government this week approved a Rs. 40 billion fuel subsidy for the next three months on top of Rs. 57 billion provided from April-June, Governor Weerasinghe told the media yesterday at the Central Bank head office in Colombo at the CBSL’s monthly monetary policy review meeting.
‘If not for fuel subsidy and surcharge on the vehicle import tax, the inflation would have been higher than the current level, the Governor said.
‘There could have been higher imports and reserve building up would have been difficult. Inflation has risen beyond the Central Bank’s upper band of 7 percent since July, he said.
‘The country’s inflation hit a 37-month high of 8 percent in August after the government raised fuel prices more than 50 percent following the Middle Eastern escalation by end February, Dr Weerasinghe said.
The Central Bank’s inflation target for the past three years have been 5 percent with lower band of 3 percent and higher band of 7 percent, Governor said.
The Governor added: ‘The government provided Rs.57 billion as a fuel subsidy mainly for diesel. The latest Rs.41 billion has been allocated only for diesel as it is used for public transport.
‘The government also imposed a temporary 50 percent surcharge on Customs Import Duty on new personal vehicles on May 16 and has extended it until December 31, a move that will help to prevent outflow of foreign currency.
‘The Central Bank also tightened the monetary policy in May, raising the key monetary policy rate by 100 basis points, to curb excess demand in the economy to control demand-driven inflation.’
Meanwhile, head of the CBSL’s Economic Research Department L.R.C. Pathberiya said, ‘Credit growth has slowed to 24.5 percent year on year in August from a higher level of 30 percent a few months ago, after the Central Bank’s monetary policy tightening in May.
‘However, the Central Bank is optimistic about the current credit growth, he explained.
Pathberiya added: ‘The credit to the private sector from commercial banks has slowed, but we believe it is sufficient for economic growth.
‘The nation’s economic growth slowed to 4.2 percent year-on-year, its lowest in 11 quarters’’.
Business
PM warns Sri Lanka’s waste crisis is a ‘disaster waiting to happen’
By Ifham Nizam
Prime Minister Dr. Harini Amarasuriya warned that Sri Lanka’s worsening waste-management crisis, particularly the uncontrolled accumulation of plastic waste and poorly managed landfills, was a “disaster waiting to happen”, urging scientists, researchers and policymakers to help the government find practical solutions before the problem reaches a critical point.
Addressing the launching of the Open University of Sri Lanka organized, ‘International Conference on Plastics, Innovations and Environmental Sustainability’ (ICPIES 2026) as Chief Guest, at the Cinnamon Lakeside Hotel yesterday she said waste management, waste reduction and recycling had become national priorities, with the government placing greater emphasis on the issue in its preparations for the 2027 Budget.
‘This is becoming a critical issue and something that, at any moment, if we don’t manage it properly, could become a huge disaster. It’s a disaster waiting to happen, Dr. Amarasuriya said.
She said unregulated and poorly managed landfills, particularly in and around Colombo, posed serious environmental and public risks, while increasing urbanisation was extending the waste-management challenge beyond the capital to other parts of the country.
‘As a member of Parliament for the Colombo District, I can tell you that one of the biggest challenges we are facing is waste management and actually managing the recycling of waste, and particularly of plastic products. This is something that we are battling every day, she said.
The Prime Minister said the government could not regard economic development as meaningful if it came at the expense of the country’s environment and natural resources.
‘If we are to speak of a beautiful life, we must first ensure that the air we breathe, the water we drink, the soil on which we live, the food we eat is clean and secure, she said.
She pointed to the scale of the global plastics crisis, noting that around 400 million tonnes of plastic waste are generated worldwide each year, while between 19 and 23 million metric tonnes of plastic waste enter natural ecosystems annually.
Plastic waste eventually breaks down into microplastics, which can enter aquatic organisms and subsequently the human food chain, she said.
Dr. Amarasuriya also linked plastic consumption and environmental degradation to the wider climate crisis, warning that the consequences of climate change were already being experienced by communities around the world.
She referred to devastating floods and landslides in the Himalayan region and said the impacts of climate change demonstrated that environmental damage could have consequences far beyond national boundaries.
Coastal clean-up projects and other waste-separation and recycling initiatives are also being implemented, while the government is working with the Western Provincial Council on a refuse-derived fuel project at Karadiyana.
The third ICPIES, held under the theme “Eco-Driven Innovations,” brings together researchers, policymakers, industry representatives and other stakeholders to examine plastic pollution, microplastics, circular-economy approaches, waste-management policy, technological innovation, artificial intelligence and smart environmental monitoring. The conference ends today.
Senior Professor P. M. C. Thilakarathne, Vice Chancellor of the Open University of Sri Lanka, was the Guest of Honour.
Business
Mention of possible future inflation dampens investor appetite
By Hiran H. Senewiratne
Stock investors were worried yesterday following Central Bank Governor Dr. Nandalal Weerasinghe’s mention at the CBSL monthly monetary policy review meet of possible future inflation pressures that may impact the economy.
The All Share Price Index went down by 4.89 points, while the S and P SL20 rose by 16.1 points. Turnover stood at Rs 1.55 billion with four crossings.
Those crossings were; Access Engineering crossed 1.5 million shares to the tune of Rs 119.8 million; its shares traded at Rs 79.60, Sampath Bank 450,000 shares crossed tfor Rs 63 million; its shares sold at Rs 140, Sunshine Holdings 750,000 shares crossed to the tune of Rs 21.4 million; its shares traded at Rs 28.50 and Softlogic Life 290,000 shares crossed for Rs 20.4 million; its shares sold at Rs 70.40.
In the retail market companies that mainly contributed to the turnover were: Access Engineering Rs 150 million (1.9 million shares traded), JKH Rs 113 million (six million shares traded), Softlogic Life Rs 80 million (one million shares traded), Softlogic Capital Rs 64.7 million (6.7 million shares traded), Lanka Realty Rs 64.3 million (1.3 million shares traded), Colombo Dockyard Rs 53.7 million (452,000 shares traded) and Sierra Cables Rs 50 million (1.43 million shares traded). During the day 58.9 million share volumes changed hands in 13536 transactions.
It is said that mixed market reactions were noted especially in manufacturing while banking, insurance and FMCG sectors performed well. Further, construction sector counters, especially Access Engineering, and banking sector counters, especially Sampath Bank, performed well.
People’s Leasing & Finance PLC announced its allotment basis for 100 million listed debentures it issued to raise Rs 10 billion, after receiving applications for the full amount.
Yesterday the rupee was quoted at Rs 330.68/75 to the US dollar in the spot market from Rs 330.70/90 the previous day, while bond yields were quoted steady to lower, dealers said.
An auction of Rs 80,000 million Treasury bills was ongoing.
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