Rupee depreciation hurts Sri Lanka’s largest telco

• Seventy percent of Dialog Axiata’s borrowing in US dollars 
• Records Rs.1.8bn non-cash translational foreign exchange loss
• Dollar earnings have dried up largely due to lack of int’l calls 

The feeble Sri Lankan rupee eroded Dialog Axiata PLC’s bottom line during the September quarter (3Q18) as the country’s largest telco booked a hefty foreign currency translational loss against its dollar-denominated borrowings. 

The bulk of Dialog Axiata’s borrowings or up to 70 percent is denominated in US dollars and the balance is in rupees, the group’s latest annual report showed. 

Dialog Axiata said the Sri Lankan rupee depreciated 6.8 percent in value against the US dollar and as a result, it had to book Rs.1.8 billion in non-cash translational foreign exchange loss, which erased much of the earnings during the quarter under review. 

The group’s net finance cost for the quarter surged to Rs.2.5 billion, from Rs.361 million in the same period last year, due to the effects of the translational foreign exchange losses. 

The group may have revalued its dollar-denominated liabilities at the weak rupee rate by end-September and had recognised its finance cost in rupee terms. 

When the rupee weakens against the dollar, the dollar-denominated liabilities worth more in rupee terms and so are their finance costs, as companies have to pay more in rupees to buy a unit of dollar.

Such translational foreign currency losses could be minimized if the borrower generates revenues in dollars, providing a natural hedge against currency volatility.   

With applications like WhatsApp, Viber, Skype, etc. the number of international calls placed and received have drastically come down over the years. As a result, Dialog Axiata’s dollar earnings may have dwindled significantly.

The currency woes in part overshadowed an otherwise a modest top line performance by Dialog Axiata, which has diversified into many other sectors in recent times from its core mobile operations. 

The group is into digital television, fixed broadband, digital commerce and electronic payments and forayed into financial technology (fintech) with its acquisition of Colombo Trust Finance PLC, last year. 

The group recorded consolidated revenues of Rs.28 billion for the July-September quarter, up 15.4 percent year-on-year (YoY). 

The revenue from mobile operations, which still commands a biggest share, was up by 3.0 percent YoY.

The operating profit stood at Rs.4.64 billion, up just under 5.0 percent YoY, as the costs rose faster. 

The group reported earnings of 21 cents or Rs.1.72 billion for the quarter under review, compared to earnings of 46 cents a share or Rs.3.72 billion during the same period, last year. 

The Dialog share ended 10 cents or 0.86 percent higher at Rs.11.70 on Friday.  Meanwhile, for the nine months ended on September 30, 2018, the Dialog Axiata group reported earnings of 91 cents or Rs.7.4 billion, compared to 93 cents a share or Rs.7.6 billion in total earnings for the same period in 2017.

The group revenue was up by 16.2 percent YoY to Rs.80.6 billion.

The revenue was led by the group’s key mobile operations, which recorded revenues of Rs.66 billion, up 13.3 percent YoY.

Meanwhile, the other two key business segments— fixed telephone and broadband and pay TV— reported a double-digit growth in their top lines and the television unit narrowed losses to Rs.275.1 million, from a loss of Rs.394 million a year ago.

For the nine months, the Dialog Axiata group incurred Rs.18.3 billion in capital expenditure, largely for high-speed broadband infrastructure. 

The group said it remitted a significant Rs.25.9 billion in direct taxes and levies and consumption taxes collected on behalf of the government. 

By end-September 2018, Dialog’s Malaysian parent Axiata Investments (Labuan) Limited, held a 83.32 percent stake in the company, while the Employees’ Provident Fund held a 2.22 percent stake being the second largest shareholder.