Business Times

Higher costs, lower margins for telcos in 2012: Fitch

Greater competition and higher subscriber acquisition and retention costs (SARC) will likely mean lower margins will be earned by Sri Lankan telcos in 2012. Additionally, increased capital expenditure (capex) required to meet rapid increases in demand for voice and data services will also take a higher toll on the industry's earnings potential.

As such, 2012 will probably be a year during which local telcos will be unlikely to grow profits or cash flows significantly, with the further probability that profits and cashflows will remain flat or even be eroded in terms of year-on-year growth compared to 2011, according to a recent report by Fitch Ratings entitled "2012 Outlook: Sri Lanka Telecommunications Services."

The Fitch report also added that it expects the outlook for incumbents (Sri Lanka Telecom and Dialog) to remain stable while their challengers would be more negatively positioned for the coming year. This is said to be due to the expectation of mid-single-digit percentage revenue growth combined with slow rate of new wireless subscriber additions. The latter is due to high telephony penetration, since 84% of the population has mobile phones, a situation that Fitch predicts will favour incumbents due to off net calls, or calls to other networks, being priced twice as high as calls within the same network (at a Rs. 1 floor price), which will end up driving more subscribers to the most populous networks.

The document additionally suggested that, in relation to Sri Lanka Telecom and Dialog, "a significant proportion of 2012 capex is likely to be invested in enhanced optical fibre capabilities and next-generation network rollout – to improve data capacity."

Fitch also stated that it considered "regulatory risk to be high – given the regulator's limited independence from the political framework, and relatively low transparency of procedures and policies versus most Asia-Pacific markets."

While also indicating that this could be a factor in pushing the outlook for the entire industry into the negative region, where there could be any "significantly adverse" regulations exercised. At the same time, it was also noted that the entire industry could enter a negative outlook situation should further price wars break out, since these would put extreme pressure on the smallest telco while also weakening the largest, or Sri Lanka Telecom and Dialog, even with the latter currently having financial profiles capable of weathering a significant downturn.

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