Sri Lanka, most crowded telecom market in Asia, says Fitch

Fitch Ratings, in a November 16 Asia region report, has singled out Sri Lanka as one of the region's most crowded telecom markets with five operators serving just 21 million people. This also follows the ratings agency recently speculating that Sri Lankas telecom industry could be gearing up for consolidation, with Sri Lanka Telecom planning to acquire Hutch, and Etisalat and Airtel looking to merge.

According to Fitch: "Weaker telcos in India, Indonesia and Sri Lanka may consolidate or exit the industry allowing the remaining telcos to enjoy higher tariffs. These weaker, unprofitable operators will see mergers as a way to strengthen their uncompetitive market positions, and to maximise their ability to invest in capex, given their limited financial flexibility... Sri Lanka continues to be the most crowded market with five operators serving a population of 21 million".

Further, the report also commented that "Indian, Indonesian, Sri Lankan, and Philippines telcos' 2015 revenue is likely to grow by mid-single-digits due to grow- ing data usage arising from the greater availability of cheaper smartphones and generally affordable data tariffs. Singaporean telcos'

revenue will only grow by low-singledigit due to higher intensity of cannibalisation of voice/text and international revenues by data. This is in spite of higher data revenues as the industry moves to volume-based pricing.

Malaysian and Thai telcos' revenue is likely to grow by low single digits due to intense competition".

Additionally, it also indicated "(most) South and South East Asian telcos will face a generally challenging environment in 2015, although our sector outlooks will remain broadly stable. Free cash flow (FCF) will be minimal or negative due to high capex; profit margins will decline on competition; and revenue growth will be limited to low-to-mid single digit percentages as fast-growing data services offset declines in traditional voice and SMS revenues.

FCF will be under pressure as telcos will continue to invest heavily in 3G/4G networks at the same time as cash from operations grows slowly due to lower margins. Philippine, Sri Lankan and Thai telcos' investment requirements are particularly high as they plan to invest 25-30 per cent of their revenue either to expand networks or acquire new spectrum. Major Indian telcos will also need to acquire additional spectrum to support growing data traffic. Singaporean telcos' FCF will also be low despite reduced capex at 10-11 per cent (2014: 13 per cent) of revenue as they will continue to distribute 80-100 per cent of their net income in dividends".

Also noteworthy, the report further highlighted incidence of declining profit margins in the Asian region, stating: "Philippines, Malaysian and Indonesian Telcos' 2015 profit margins will decline due to competition, higher marketing expenses and data-to-voice/text substitution. Philippine telcos are most exposed to margin declines as their most profitable text revenue is replaced by data services given that text's revenue contribution is highest at 30 per cent than peers. Indian telcos' margins are likely to remain stable benefitting from a gradual rise in voice tariffs as pricing powers return to major telcos.

However, Singaporean telcos' EBITDA margins could improve by 1 percentage point (pp). They may benefit from volume-based pricing and lower handset subsidies as monthly data use per subscriber grows higher. In addition, private Thai telcos' profitability could improve by 3pp in 2015. Regulatory cost savings will more than offset their higher marketing costs as consumers migrate to the 3G licensing regime from 2G concessions".

Concluding, the report also pointed to future rating actions as a result of these observations, commenting: "Fitch believes that most South and South East Asian telcos have moderate to high ratings headroom going into 2015.

However, three telcos which have relatively lower ratings headroom include - Bharti Airtel Limited (BBB-/Stable), Singapore Telecom (A+/Stable) and PT Tower Bersama Infrastructure (BB/Stable). All three have higher leverage than peers at their ratings level and have limited financial flexibility for additional debt-funded M&A"