Financial Times

Fitch 'AAA(sri)' rating to Dialog, says competition hotting up
Fitch Ratings Lanka has announced that it has assigned Dialog Telekom Limited a Senior Unsecured Long-term rating of ‘AAA (sri)’. The Rating Outlook is Stable, the rating agency said in a statement.

AAA (sri) credit ratings denote the lowest expectation of credit risk. “This rating is assigned only in the case of exceptionally strong capacity for timely payment of financial commitments,” it said. “This capacity is highly unlikely to be adversely affected by foreseeable events.”

Dialog's rating reflects its position as Sri Lanka's leading mobile operator with a 60 percent market share as at end-1H05 with strong brand recognition and, as well as its robust operating performance, sound margins, strong cash generation and adequate liquidity.

The rating also takes into account credit concerns such as the evolving regulatory framework, the intensifying competitive environment and a substantial increase in capital expenditure leading to negative free-cash flow generation in the short-term, Fitch said.

“Despite being the last of the four mobile operators to commence operations, Dialog has rapidly gained market share by successfully executing a strategy of launching operations with strong initial geographic coverage, effective branding and innovative product offerings.”

Its decision to commence operations with a GSM network (when all other operators were on analog systems), low fixed-line penetration and a relatively benign competitive environment - till recently, also helped the company to consolidate its position in the market, Fitch said.

The growth potential in the mobile telephony sector remains robust with mobile and fixed-line penetration still low at 12 percent and five percent respectively, it said.

“However, the competition among the operators has intensified with the rival mobile operators having migrated to GSM operations and somewhat aggressive tariff based competition,” the rating agency said. “In addition, the recent launch of wireless services based on CDMA technology by the fixed-wireless operators will add pressure. The possible future regulatory determinations such as CPP, unified licensing and mandatory sharing of certain telecom infrastructure could create a more competitive environment overall.”

International operations are increasingly adding to Dialog’s operating performance. These include its external gateway operations and international voice termination revenues (since 2003) and leasing of international bandwidth to other operators and bulk-users.

“Although high, the dividend payments (of 40-60 percent of post-tax profits) appear manageable during this period of heavy investment outlay without much deterioration of the credit profile,” Fitch said.

Its liquidity position is also backed by adequate committed undrawn credit facilities and vendor financing available on telecom equipment purchases.
The Stable Outlook reflects the agency’s belief that Dialog will continue to retain its pre-eminent market position although some erosion in market share is likely in the medium-term, Fitch said.

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