Dialog can maintain ‘AAA(lka)’ rating despite slower revenue growth: Fitch

Dialog Axiata PLC can maintain a credit profile commensurate with a ‘AAA(lka)’ rating in the next 12-18 months, despite the slower revenue growth, escalated costs and likely slight higher leverage, Fitch Ratings said.
The rating agency affirmed the Sri Lanka-based telecom company’s National Long-Term Rating at ‘AAA(lka)’, with a Stable Outlook. Dialog’s rating is based on its Standalone Credit Profile (SCP) of ‘aaa(lka)’. 

According to Fitch, this reflects a strong market position across the mobile, home broadband and Pay TV segments, effective cost management amid a challenging economic environment and a solid financial profile, compared with the national peers.
“We expect no material impact on leverage from Dialog’s merger with Airtel Lanka PLC. Dialog plans to settle the transaction by issuing new shares to Bharti Airtel Ltd (Bharti, BBB-/Stable) and inherit a small portion of Airtel Lanka’s outstanding borrowing,” Fitch said.
The EBITDA is likely to be affected by the consolidation of Airtel Lanka’s operation, which is expected to have an EBITDA loss in the first 12-18 months after the merger. 
“The slight deterioration in Dialog’s financial profile is mitigated by a slightly improved business profile and high ratings headroom,” Fitch said.
While Dialog is the market leader across the mobile and home broadband segments, the acquisition of Airtel Lanka subscribers is likely to increase Dialog’s mobile subscriber market share to over 60 percent, from above 50 percent in 2023. 
The rating agency said the merger would also improve Dialog’s competitiveness in both mobile and home broadband, through acquiring Airtel Lanka’s 4G network and a portion of Airtel Lanka’s 75MHz spectrum across the 850MHz to 2.6GHz bands. Dialog relies on fixed-wireless access to deliver its broadband service to households.
Dialog’s organic revenue growth is expected to remain at a low to mid-single digits (2023: 5 percent) in 2024, as the household purchasing power will be affected by a higher Value Added Tax rate on a wider range of goods. 

The real income has fallen significantly, following the currency depreciation and unprecedently high inflation in the past two years. 
Dialog has already seen a decline in its mobile and Pay TV subscribers and a much slower broadband subscriber growth in 2022 and 2023.
The EBITDA margin is expected to remain above 30 percent in 2024-2025 (2023: 32 percent), despite the consolidation of loss-making Airtel Lanka, before improving in 2025 and beyond. The company expects to reduce the EBITDA loss at the Airtel Lanka business and gradually reach breakeven within 12 months of the merger. 
“We expect this to be achieved by cost savings generated from integrated network, sales and marketing channels and other administrative costs,” Fitch said.