Disposal of govt.’s stake in SLT will take at least 8-12 months: Fitch

• Places SLT’s ‘A(lka)’ rating on Rating Watch Positive amid govt.’s plan to sell its 49.5% stake in the company

The government’s plan to sell 49.5 percent stake in Sri Lanka Telecom PLC held by the Treasury will take at least 8 to 12 months, Fitch Ratings said yesterday.
In a new rating report, Fitch placed SLT’s National Long-Term Rating of ‘A(lka)’ on Rating Watch Positive (RWP).
Fitch said the potential upside in SLT’s rating is due to the government’s plan to sell its 49.5 percent stake in the company.

“The disposal is part of a plan to restructure state-owned entities (SOEs) to improve the state’s financial position. SLT said steps have yet to be taken to identify potential buyers and it will take at least eight to 12 months to finalise the transaction. We believe the government will push through the disposal as SOE restructuring is an integral part of IMF’s financial support to Sri Lanka,” Fitch said.The rating agency noted that SLT’s ratings are currently constrained by its parent’s weak credit profile and SLT’s standalone credit profile being stronger than that of the state.SLT is the market leader in fixed-line services, has second-largest share in mobile, and owns an extensive optical fibre network.Meanwhile, Fitch said SLT’s revenue growth is expected to slow to a low single-digit percentage this year amid weakening consumer demand.

“Consumers are increasingly prioritising essential needs, such as food and medicine, as real income has fallen significantly following the currency depreciation and unprecedently high inflation. SLT’s subscriber numbers and minutes of usage have already fallen in 2022. Competition has also intensified, especially in the mobile segment, leading to lower realisation of recently introduced tariff hikes,” Fitch noted. However, the rating agency said weak demand should be offset to an extent by increased migration to SLT’s fibre-to-the-home (FTTH) network, from its own copper network, and subscriber additions.FTTH carries higher revenue per user than the copper network. SLT had 475,000 FTTH connections, a 35 percent increase year-on-year, by end-2022.

Along with revenue, SLT’s profits at operating level is also expected to weaken amid lower demand and cost escalation.All telecom operators increased tariffs by 20-25 percent in late 2022 to tackle falling margins. 

However, Fitch said the realisation of hike in tariffs into revenue remains weak, especially in the mobile segment, due to deep price cuts by one of the smaller operators and falling demand. Meanwhile, Fitch expects SLT’s EBITDA net leverage to remain around 1.3x in 2023 (2021: 0.9x, 2022: 1.3x) amid falling profitability. “However, its leverage is strong for the rating,” the rating agency said.

It also expects SLT to incur capex of around Rs.25 billion annually over 2023-2024 on network upgrades and expanding its fibre infrastructure.
Fitch further said SLT could manage the impact coming from interest rate hikes and currency depreciation.“SLT’s foreign-currency revenue, which accounts for 10-12 percent of group revenue, is more than sufficient to meet the group’s foreign-currency operating expenses and interest costs. SLT had around US$10 million in foreign-currency debt at end-December 2022, compared with US$ 40 million in foreign-currency cash deposits,” the rating report said.

According to Fitch, the telecom industry outlook is deteriorating and it expects the sector revenue growth to slow to 8 percent this year (2022:15 percent), while the average 2023 EBITDA margin for SLT and mobile leader Dialog to narrow to 31 percent (2022: 32 percent) amid low usage and high costs.