Dialog to maintain credit profile with a ‘AAA(lka)’ rating in next 12-18 months: Fitch

• Revenue growth expected to slow down to 10% in 2023, from 25% in 2022
• EBITDA margin to improve to 30%-32% over 2023-2024, from 28% in 2022

Telecom service provider Dialog will be able to maintain a credit profile commensurate with a ‘AAA(lka)’ rating in the next 12-18 months, despite the lower demand for telecom services, escalating costs and a significant increase in the company’s debt, amid the Sri Lankan rupee’s devaluation, Fitch Ratings said.

However, the revenue growth of the telco giant is expected to slow to around 10 percent in 2023, from 25 percent in 2022, amid the weakening consumer spending. Consumers are increasingly prioritising essential needs such as food and medicine.

The reason being real income has plunged following the currency depreciation and unprecedentedly high inflation.
Dialog faced pressure on subscriber numbers and usage minutes in 2022.

“We believe the recent increases in telecom taxes would also discourage demand, as consumers now have to pay 38 percent tax on voice and 20 percent on data,” Fitch Ratings said in its latest rating outlook, where it affirmed the National Long-Term Rating of Sri Lanka-based telecom company Dialog Axiata PLC at ‘AAA(lka)’. The Outlook is Stable.

The telecom operators raised the voice and data tariffs by 20 percent and pay-TV by 25 percent in 2022, to pass through the escalating costs, reducing the services’ affordability. 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 international business climbed to 23 percent in 2022, from 16-17 percent earlier.

Further, Fitch Ratings said it expects Dialog’s EBITDA margin to improve to around 30 percent to 32 percent over 2023-2024, from 28 percent 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 percent of Dialog’s direct costs are in foreign currency, compared with only 30 percent 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 percent to 40 percent levels before 2022. 

The low realisation of the recent tariff hikes amid the drop in usage and increased contribution from the low margin international business would also mean margins would remain in the low to mid-30s range in the next few years,” noted the rating agency.