Fitch Affirms Sri Lanka Telecom at 'AA-(lka)'

Fitch Ratings, affirmed Sir Lanka Telecom PLC's (SLT) National Long-Term Rating at 'AA-(Ika)'. The Outlook is Stable. They have also affirmed the 'AA-(Ika)' national rating on the company's LKR 7 billion of senior unsecured debt.

SLT's ratings are constrained by the sovereign's ratings as per Fitch's Government-Related Entities Rating Criteria, as the state holds a majority stake in SLT directly and indirectly, and exercises significant influence on its operating and financial profile.

At end-September 2020, SLT's cash balance of Rs10 billion was insufficient to cover its short-term debt of Rs 11 billion. SLT has about Rs 14 billion in undrawn facilities which are uncommitted. Fitch  expect SLT to roll over its maturing short-term debt given its solid access to local banks. It has a solid history of accessing capital from local banks and capital markets.

Fitch  expect SLT's capex to increase to Rs 22 billion-23 billion (2020 estimate: Rs 14 billion-16 billion) in 2021 as they  expect the company to resume investments to expand fibre infrastructure and 4G network coverage. The company's capex deployment was disrupted in 2020 by the Covid-19 pandemic, which we expect, led to free cash flow (FCF) margin of 3%-5%. However, FCF will turn negative in 2021 as capex rises. We expect SLT's FFO net leverage to remain stable at around 2.0x in 2021 (2020 estimate: 1.9x-2.0x)

SLT aims to add fibre to about 400,000 homes during 2021 to expand its existing fibre coverage of around 450,000 homes. We expect 5G network roll-out to be delayed in Sri Lanka to beyond 2022. Dividends are likely to remain around LKR 2 billion in the next two to three years.

Firch expect, revenue and EBITDA to grow by mid-to-high single-digit percentages in 2021 (2020 estimate: 4%-5%) driven by higher mobile data and fixed-broadband usage. We expect, 4G smartphone penetration to rise by 4%-6% annually from 60% at end-2020 with the proliferation of cheaper China-made phones. We also forecast, EBITDA margin to remain stable at 32%-33% in 2021 (2020 estimate: 32%-33%) as 3G users migrate to higher-tariff 4G networks. Profitability will also improve as users gradually upgrade to fibre networks from copper-based networks.

We estimate, SLT's group revenue grew by 4%-5% in 2020, led by rising mobile data usage and subscriber additions in fixed-broadband. Revenue was also boosted by the government's reduction of the tax on telecommunication tariffs by 25%, VAT to 8% from 15% and removal of the 2% of nation building tax.