Squeeze on disposable income to trim telecom industry revenue growth: Fitch

• Fitch estimates Dialog’s EBITDA margins to fall to mid 30-32% this year from 39-40% before 2022 

The ongoing squeeze on disposable incomes could trim the revenue growth in telecommunication sector as red-hot inflation and higher taxes would shift people to prioritise their spending on essentials, negatively affecting the sector players’ margins, free cash flows and debt matrices, Fitch Ratings said. 

In a rating report on Dialog Axiata PLC, Sri Lanka’s largest telecommunication operator by revenues, Fitch Ratings said the company would maintain its credit profile to commensurate with its current rating despite the headwinds.  

Fitch Rating affirmed Dialog’s rating at ‘AAA’ with a Stable outlook.

The rating agency however estimated that Dialog could see a deceleration in revenue growth to around 10 percent in 2023 from 25 percent in 2022 as people are prioritising essential spending amid higher inflation and taxes. 

Dialog faced pressure on subscriber numbers and usage minutes in 2022. Telecom operators raised voice and data tariffs by 20 percent and payTV by 25 percent in 2022 to pass through the escalating costs, reducing the services’ affordability.

Dialog reported Rs.33.38 billion net loss for the financial year ended in December 2022 due to brutal impact coming from net foreign exchange losses, which rose to the tune of Rs.30.28 billion from Rs.2.64 billion a year ago, as the company carried 91 percent of its outstanding borrowings in foreign currency. 

While Fitch does not believe that Dialog’s current foreign currency revenue would be sufficient to meet its foreign currency obligations, the company does not have any foreign currency debt repayments due in the next 24 months. 

Further, the company also has US$ 41 million in deposits to meet its foreign currency interest cost around US$ 12 million per year.

The company however is planning to restructure its balance sheet by reducing its foreign currency debt exposure to less than 50 percent by the end of 2023. 

“It is considering asset monetisation and alternative funding arrangements with existing lenders to achieve a more balanced funding mix,” Fitch said.  

Meanwhile, Dialog’s EBITDA margins or operating margins are estimated to remain at around 30-32 percent over 2023 and 2024, slightly up from 28 percent in 2022 benefitting from the recent tariff hikes and cost rationalisations. 

But, this is unlikely to return the margins to between 39 to 40 percent levels before 2022, Fitch said. 

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

While Dialog’s low profitability and higher capex requirement will turn the free cash flow into negative in 2023, Fitch is of the view that it could turn positive from 2024 once the EBITDA margins gradually recover.