Telecom sector to face turbulent times

Current trend might lead to telecom oligopoly in Sri Lanka- Analyst

By Santhush Fernando
Sri Lanka’s telecommunications industry which was the leading sector during the last few years, will not see such a growth momentum in 2009.

“From an investors’ perspective, the telecom industry outlook in the short term especially in the next six months, is not very good. Profitability of all operators has been affected due to heavy competition in prices. However the sector has a lot of potential in the long run. The sector has not peaked, so there’s room for growth.” CT Smith Stockbrokers Senior Analyst, Talaal Maruzuk told The Nation Economist.

“The last two years saw rates coming down by 40 percent. This in turn resulted in the reduction of revenue in avenues of postpaid, pre-paid and fixed lines. Fixed line subscribers will continue to switch to mobile phones due to high fixed line costs.” Maruzuk said.
“There won’t be any substantial reduction in price in future. Competition will not impact price. Price decreases in the past have caused profit margins of telecom operators to come down. This is clearly shown by Dialog results which record over Rs. 3 bn loss. In the long term, Lanka Bell profits are likely to come down. Hutch which has less than 10% of the market share, will find it difficult to go forward,”he said

“Airtel is anyway expected to make losses as it’s very new, but its parent company is there to pump in money. There’s a possibility of this situation leading to an oligopoly of 4 big players in the long run. Operators who have a big market share will turnaround with further consolidation in the market.” Maruzuk said.

“The last quarters saw the highest number of new subscribers joining, in the history of the industry. From October to December 2008, over 1.25 mn new subscribers entered the mobile sector due to drastic price reductions and giveaway of free SIMs. However in the third quarter (July to September) the sector grew only by 440,000 new connections as Hutch churned out 333,000 from its subscriber base. So there has been no slowdown in growth during the past.”

“The telecom industry saw too much of competition so the sector needs to consolidate. Capital expenditure discipline is also required. Government should not impose excessive tariffs to the sector as the operators will find it hard to absorb rising costs.” Murtaza Jafferjee, Managing Director of JB Securities said.

“Growth momentum of telecom industry will slow down compared with 2005-07 period. Market has reached some sort of maturity which has cause saturation, so the profitability of all operators will come under severe pressure. During the next two to three years telecom sector will not out perform other sectors the way it happened in the last few years” Telecom Analyst of Acuity Partners, Geeth Balasooriya told The Nation Economist.

Telecom gets Rs 2.2 TDC refund
Sri Lanka Telecom has been refunded Rs. 2.2 bn by Telecommunications Regulatory Commission (TRC) of Sri Lanka for rural expansion work.

“Sri Lanka Telecom was able to record over Rs 7 bn profits with the Rs. 2.2 bn TDC Refund they got from the TRC which is utilsed for rural network roll out” CT Smith Stockbrokers Senior Analyst, Talaal Maruzuk told The Nation Economist.

Telecom Development Charge also known as the international telecom operator’s levy is charged by the telecom watchdog of a country, for the development of the telecom sector in the underdeveloped areas of a country.
It is learnt that SLT has been refunded 2/3 of TDC amounting to Rs 2, 183 million. TRC has refunded charges paid up to 2005. From 2005 onwards Sri Lanka Telecom has paid Rs. 6 bn as TDC.


Implementing laws can prevent corporate collapses

Former vociferous CCC Chief Chandra Jayaratne was seen closely listening to the speakers who spoke at the TISL Forum on recent corporate collapses in the country (Pic by Ravindra Dharmathilake)

By Azhar Razak
A recent group discussion on corporate collapses organised by Transparency International Sri Lanka (TISL,) has highlighted the issue of Sri Lankan regulators not taking adequate and prompt action against lawbreakers. The majority of the participants at the discussion said that they felt that although Sri Lanka had the necessary rules and regulations in place, their implementation was the main concern.

‘Most of the corporate collapses unfolding in Sri Lankan companies, are due to the regulators not taking enough action, even though they had every authority to do so. They always play a laid back approach when influential people are involved,’ said Sujeewa Mudalige, a Partner at PriceWaterhouseCoopers who presented a comparative analysis of recent corporate collapses in Sri Lanka and India.

The regulators involved were the Central Bank of Sri Lanka, Securities and Exchange Commission, Inland Revenue and the Colombo Stock Exchange, who he says could not use their powers when the issues unfolded.

‘The Central Bank escapes involvement by simply saying that Golden Key was not a registered institution. This is a very irresponsible statement, given the fact that even registered firms such as Pramuka had collapsed in the past,’ Mudalige said.

He said that other factors like poor quality audits, capacity of auditors, expectations gap, inadequate analysis by rating agencies and lack of media coverage, were some other issues that had led to these collapses.
‘The electronic media in Sri Lanka does not do enough to highlight these fraudulent scams, while in other countries television and radio channels are running 24 hour coverage on these issues,’ he said.

He also questioned the skills of the investigating authorities in Golden Key case, which involved a financial mismanagement.
‘I don’t think the Criminal Investigations Department or the Attorney Generals Office, which are investigating the Golden Key, have the necessary skills needed to investigate a fraud of this nature,’ he said.

Another official who chaired the discussion panel, said that the lack of disclosures by companies also complicated the problem.
‘Asian countries are mostly run by family owned businesses, and therefore this gives the need for a proper account of Related Party Transactions and Intra-group ones. For example the Indian Satyam, had little separation in ownership and control,’ a Chief Executive Officer at a Fund Management Company who wised to be unidentified said.

Other views expressed at the discussion as possible measures to prevent such failures in future, were to run deposit insurance schemes where deposits could be protected, a new banking commission to look into the unregistered firms, a new method where investors could put their money without paying taxes, and educating the public to avoid depositing at unauthorised ‘high interest’ paying institutions.

‘In the absence of a critical media we should also look to debate these issues at least on a web based forum,’ another official who joined the discussion commented.
‘The changing corporate climate with the global financial crisis, and both local and international corporate collapses, has led to an escalated need for implementation of collective initiatives for business integrity, and that Sri Lanka’s Corporate collapses and scams lay special significance in that the impact is borne by the public, whose awareness is limited, in their role as external investors’ TISL, the global coalition fighting corruption, said in a statement.

The discussion was a part of a new emphasis on corporate governance, ethics and values which has been prompted by the collapses and scandals that have rocked the corporate world, both locally and internationally.

‘Sri Lanka’s recent Supreme Court Judgments, highlight the need for enhanced collective strategic action by multi stakeholders groups. Further, the recently introduced Companies Act and Central bank interventions, have made it less likely that directors and officers can turn a blind eye to corrupt practices, and more likely that they will have to put in place strengthened risk management processes and compliant systems,’ it said.


Fitch revises Sri Lanka’s outlook to negative from stable

Fitch Ratings has Friday revised the Outlook on Sri Lanka’s Long-term foreign and local currency Issuer Default Ratings (IDRs) to negative from stable. At the same time, the agency has affirmed the Long-term foreign and local currency IDRs and the Country Ceiling at ‘B+’, and the Short-term IDR at ‘B’.

“The revision to Sri Lanka’s Outlook reflects heightened concern regarding the sovereign’s external financial position in light of the marked decline in official foreign exchange reserves,” notes James McCormack, Head of Asia Sovereign ratings. At end-December 2008, Sri Lankan official reserves were USD1.75bn, down sharply from their peak of USD3.56bn in July 2008.

Fitch estimates Sri Lanka’s current account deficit widened to USD3.6bn in 2008 (8.8% of GDP) from USD1.5bn in 2007, with most of the deterioration in the trade deficit, which grew to an estimated USD4.4bn from USD2.4bn. As a net oil importer, higher international oil prices raised Sri Lanka’s oil import bill substantially last year. International oil prices have declined in recent months, and so too has Sri Lanka’s trade deficit, but this has not prevented a steady drawdown in official reserves, as improvements in the trade balance have been more than offset by external debt repayments and other net capital outflows.

In 2009, Fitch forecasts the trade deficit will fall to USD3.5bn and the current account will decline to USD2.1bn, equivalent to 4.9% of forecast GDP. “In Fitch’s view, without a sharp contraction in domestic demand to curtail imports, or a significant depreciation of the exchange rate to otherwise correct the trade imbalance, Sri Lanka may not have access to sufficient international funding to cover the current account shortfall and its international debt repayments, resulting in ongoing pressures on official reserves,” adds McCormack. At end-2008, Sri Lanka’s reserves covered just 1.3 months of current external payments (including all debit items in the current account of the balance of payments), one of the lowest coverage ratios of any emerging market.

Fitch notes that the Central Bank of Sri Lanka has initiated various measures to bolster capital inflows and official reserves, including bilateral swaps with other central banks, a further opening of the domestic Treasury market for non-resident investors, and higher interest rates on foreign-currency deposits in Sri Lankan banks. The agency suggests that these measures, together with international donor funding that could materialise if Sri Lanka’s civil conflict ends, might provide critical support to the country’s external finances, but timing is uncertain, as is the willingness of non-resident investors and depositors to take advantage of whatever incentives may be on offer. Fitch believes there is an increasing likelihood that international financial support may be necessary.

In addition to the stresses on Sri Lanka’s balance of payments, the country’s fiscal position remains strained. Fitch forecasts a fiscal deficit of 6.7% of GDP in 2009, up from the government’s 6.2% of GDP revised estimate for the 2008 deficit, and higher than the 2009 budget projection of 5.9% (Fitch adjusts official data to include grants as revenue, not financing). The agency expects GDP growth to slow to only 3% in 2009, consistent with recessionary conditions in advanced economies and other emerging markets.

Of equal concern to the large fiscal deficit is the government’s increased reliance on foreign-currency borrowing in recent years. Fitch estimates that domestic debt accounted for 57% of total government debt at end-2008, but the share of local-currency denominated debt was lower, at 50%. The government thus faces heightened exchange rate risk, as an exchange rate depreciation would have implications even for some portion of debt issued domestically.


Will Sri Lanka be forced to seek IMF aid?

By Indika Sakalasooriya
In view of the newest attack on Sri Lanka’s economy by Fitch Rating revising the country’s outlook from stable to negative, financial analysts and economists are of the view that the country might have to seek the assistance of International Monetary Fund (IMF) though Central Bank has vehemently refused to do so.

A financial analyst on the grounds of anonymity told The Nation Economist that securing financing from other countries in the region or elsewhere, would be very challenging, with a low credit rating and now with the negative outlook given by Fitch.

“Though the Central Bank has gone for bi-lateral currency swaps with regional central banks and various other source of funding, the poor rating of the country by various globally accepted rating agencies may negatively impact these initiatives,” the economist said.

In December 2008, Standard & Poors cut Sri Lanka’s sovereign rating by one notch from B+ to B, pointing out the country’s declining foreign reserves situation and high fiscal deficit. This is the lowest rating besides those of Bolivia, Pakistan, Grenada, Argentina and Lebanon.

According to the Colombo University’s Professor of Economics, Dr. Sirimal Abeyratne, the negative outlook forecasted by Fitch will add up to the country’s current crisis situation of Balance of Payment and the Trade Balance.

“Things seem to be getting out of control. If the Central Bank cannot beef up external reserves, the country would have to resort to IMF assistance whether we like it or not” Abeyratna said.

Sri Lanka kept its exchange rate at about 108 rupees per dollar between January and October 2008, to slow inflation at the expense of its external reserves, even as the currencies of neighboring countries like India and Pakistan were allowed to depreciate. The Sri Lankan rupee has since dropped to 114.95.

Though there were calls from economists, exporters and various other interest groups urging Central Bank to allow the rupee to depreciate, the country’s high rate of foreign borrowings have not allowed the Central Bank to do so.
Dr. Saman Kelegama of the Institute of Policy Studies, in a recent presentation pointed out that undertaking depreciation was not an easy task given the large external debt of 38 percent of the country’s GDP.

In its Monetary Road Map for 2009 Central Bank proposed currency swaps and patriotic Treasury bills and bonds. A high ranking Central Bank official last week said that a bi-lateral currency swap worth of $ 200 has been agreed upon with the Malaysian central bank.


 Results in brief

BOC profits steady- thanks to FOREX income
Bank of Ceylon has recorded a NPAT of Rs.3.1 bn for the 2H ended Dec 08’, a 43% increase YOY. The profits for six months were boosted by a sharp rise in foreign exchange income which rose by 8725% to Rs. 2.28 bn. NPAT for the year ended Dec 08,.’ increased only by 24% to Rs. 3.7 bn YOY. Debt to Equity ratio increased to 5.39 while specific provision for non performing advances rose by 127% to Rs.0.97 bn.

SLT profits bloated by TDC

Sri Lanka Telecom has posted a NPAT of Rs. 7.4 bn for the year ended Dec 08’, a 31% growth YOY. The profits were boosted by the TDC refund of Rs. 2.18 bn for the year despite an 807% increase in VRS cost to Rs. 390 mn YOY. SLT said that the subscriber base in Mobitel had increased by 92% YOY to 2.68 million.

Richard Pieris suffers further loss

Richard Pieris recorded a loss of Rs.339.6 mn for the 3Q ended Dec 08’, a 288% slump YOY. However, the profits for the 9 months ended Dec 08’ shot up by 387% to Rs. 228 mn. The company’s gross profit for 3Q dropped by 41% to Rs. 743 mn while the book value per share stands at Rs.28.6.

UML profits nearly halved in 3Q
United Motors Lanka has recorded a 99.6% drop in PAT to mere Rs. 0.9 mn for the 3Q ended 08’. UML was hit by a dip in revenue by 18% to Rs. 1.8 bn YoY. Finance expense rose by 53% to Rs. 233.7 mn, amidst increased and relatively high net gearing. The Book Value per Share now stands at Rs. 70.7.

Maskeliya Plantations negative twist

Maskeliya Plantations has recorded a loss of Rs. 96.6 mn for 3Q ended Dec 08’ from a profit of Rs. 42.9 mn YoY. Revenue fell by 33% to Rs. 492.5 mn while administration expense increased by 20% to Rs. 11.6 mn. The steep decline in Tea prices had a negative impact in revenue while management fees virtually remained unchanged at Rs 94 mn.

Renuka Hotels positive turnaround

Renuka City Hotels Plc has posted a PAT of Rs. 31.8 mn for 3Q ended Dec 08’, a positive turnaround from a loss of Rs. 9.1 mn YOY. The profits were boosted by its other operating income, a 396% increase to Rs. 30 mn YOY despite a drop in revenue by 10% to Rs. 18.8 mn. Other operating income included primarily interest income, dividend income and share trading capital gains.

Milk Foods profits slashed
Lanka Milk Foods recorded a 93% drop in PAT to Rs. 12.8 mn for the 3Q ended Dec 08’. The group was affected by a sharp decline in Gross profit margins and steep erosion in net interest income. The company recorded a net finance expense of Rs. 39.6 mn compared to a net finance income of Rs. 49.2 mn YOY.