Corporates

Telecommunications / Sri Lanka

Dialog Axiata PLC

Update
Key Rating Drivers

Ratings
National
Long-Term Rating

AAA(lka)

Outlook
National Long-Term Rating

Stable

Financial Data
Dialog Axiata PLC (Consolidated)
30 Sep 12
(9 mths)

31 Dec 11
(12 mths)

41,526
111

45,637
152

34.8

37.9

8,610

15,966

3,193

5,907

40.79

44.38

25,782

28,863

Revenue (LKRm)
Operating EBITDAR
(USDm)
Operating EBITDAR
margin (%)
Funds from
operations (LKRm)
Free cash flow
(LKRm)
FFO gross interest
coverage (x)
Total debt with equity
credit (LKRm)
Gross adjusted
debt/EBITDAR
FFO net adjusted
leverage
LKR/USD month-end

1.34

1.67

1.59

1.10

129.7943

113.9013

Annaulised

Parent Linkages: Dialog Axiata PLCs (Dialog) AAA(lka) National Long-Term Rating factors
in Fitch Ratings expectations that its 83%-parent, Axiata Group Berhad (Axiata) of Malaysia, is
likely to extend support in extreme circumstances, if required. This is underpinned by strong
linkages including a common brand, board control, as well as Axiatas strategic and
operational involvement in Dialog. Support has been forthcoming in the past, and includes
corporate guarantees on debt, shareholder loans, and equity injections.
Strong Standalone Profile: Dialogs standalone profile has improved between 2010 and 2012,
helped by a more benign competitive environment and rising usage across most service
segments. This has led us to shift its standalone rating up by a notch, to AA+(lka). This is also
supported by Dialogs leading market share in mobile; evolving position in fixed-line, broadband,
and pay-TV; and its strong balance sheet.
Improving Balance Sheet: We expect Dialogs funds flow from operations (FFO) net adjusted
leverage to improve over the medium term, supported by positive free cash flow (FCF)
generation (after dividends and capex). However, sustained increases in FFO net adjusted
leverage over 1.75x (end-September 2012 (9M12): 1.59x annualised) and/or the EBITDAR
margin weakening below 30%, could lead to pressure on Dialogs standalone rating.
Stable Industry Outlook: Fitch has a stable outlook for the Sri Lankan telecoms industry for
2013, supported by relatively lower competition, with operators maintaining tariffs above the
regulatory floor of LKR1.50/outgoing minute on local calls to other networks. However, high
competition could persist within revenue segments that are not subject to floor tariffs such as
international calls, international roaming, and data as six operators compete for market share
among a 21 million population.
Industry Consolidation is Positive: We believe consolidation among Sri Lankan telecom
operators will be the key to reducing long-term industry risk.
Moderate Organic Revenue Growth: The agency expects high-single-digit growth in Dialogs
organic revenue in the medium-term, underpinned by increasing usage and a more benign tariff
environment. Group revenue increased by 24% yoy during 9M12 helped by a sharp 15%
weakening in the local exchange rate, which increased foreign-currency revenues in Sri Lankan
rupee terms and also due to the acquisition of Suntel, a fixed-line operator.
Suntels contribution to group revenue and EBITDA (4% on both counts in 9M12) should
increase in 2013 as its full-year results are consolidated. A lower reliance on mobile revenue
will improve Dialogs business risk over the long term.

What Could Trigger a Rating Action

Related Research
2013 Outlook: Sri Lanka Telecommunications
Services (November 2012)

Analysts
Hasira De Silva, CFA
+941 1254 1900
hasira.desilva@fitchratings.com
Nitin Soni
+65 6796 7235
nitin.soni@fitchratings.com

www.fitchratings.com

Weaker Linkages with Parent: A substantial dilution in Axiatas ownership or board control of
Dialog, removal of the common brand name, or a weakening of current operational or strategic
ties between the companies, could result in a downgrade.

Liquidity and Debt Structure

Strong Liquidity: Dialogs cash reserves exceeded near-term debt maturities by LKR211m at
end-September 2012. This, and our expectations for positive FCF during FY13-FY15, supports
Dialogs strong internal liquidity. Dialog also has sufficient foreign-currency earnings in order to
repay interest and principal on its US-dollar denominated debt through 2016.

31 January 2013

Corporates
Immediate Peer Group Comparative Analysis

Peer Group
Issuer
BBB
Globe Telecom, Inc.
BBB
PT XL Axiata Tbk

Country
Philippines

Indonesia

BB
Sri Lanka Telecom PLC Sri Lanka

Issuer Rating History

Date

National Outlook/
LT Rating Watch

8 Oct 12
6 Oct 11
8 Oct 10
2 Mar 09
5 May 08
20 Apr 07
5 Dec 06
3 Oct 05

AAA(lka)
AAA(lka)
AAA(lka)
AA(lka)
AAA(lka)
AAA(lka)
AAA(lka)
AAA(lka)

Stable
Stable
Stable
Negative
Stable
Stable
Stable
Stable

Sector Characteristics
Operating Risks
Incumbent operators are generally exposed to market share erosion, especially in the highly
competitive mobile segment. Operators investing heavily in fibre-based data infrastructure may
run the risk of inadequate revenue growth and protracted repayment periods on investment.
Over the longer term, telecom operators in emerging markets run the risk of having their voice
revenue replaced by cheaper data- and IP-based services. The risk to operators with multiple
established service platforms from such a shift is lower.

Financial Risks
The key financial risk for an incumbent operator will be the inability to generate sufficient
operating cash flows to fund growing capex required to build out a robust network in terms of
capacity and coverage, as well as to keep abreast of changing technology. Profitability can also
suffer due to weakening growth in the fixed-wireless and wireline segments, as well as high
competition from an overcrowded industry.
Telcos with high cash reserves are better insulated against the risk of their operating cash
flows falling short of ongoing capex needs during periods of prolonged weak macroeconomic
performance. Such cash shortfalls may then require companies to increase leverage to meet
investments, increasing their financial risk, or fall back in terms of technology leadership.

Peer Group Analysis

Issuer
FC IDR/National Rating
Standalone rating
Outlook
EBITDA (USDm)
EBITDA margin (%)
FFO gross adj leverage (x)
FFO fixed-charge cover (x)
Free cash flow (USDm)

Globe
XL
BBB / n.a. BBB / AAA(idn)
Stable
802
43.1
1.9
6.6
79

Stable
1,005
48.7
1.5
9.6
41

SLT
BB / AAA(lka)
Stable
149
33.7
1.0
21.3
-1

Dialog
n.a. /AAA(lka)
AA+(lka)
Stable
152
36.2
1.7
15.1
52

Source: Fitch, companies

Key Credit Characteristics

Regional peers are differentiated mainly via the analysis of competitive position, technology
leadership, product diversification, regulatory risk, quality of network, and scale of operations.
Sri Lankan telcos have considerably smaller operating scale than their regional peers, due to
being limited to the local market. However, the ratings benefit from lower leverage.

Overview of Companies

Snapshot Profile: Major

Issuer-Specific Rating
Factors and Trends
Rating factor
Operations
Market position
Finances
Governance
Geography

Statusa
Strong
Strong
Strong
Average
Weak

Trend
Neutral
Improving
Improving
Neutral
Neutral

Relative to peer group

Source: Fitch

Globe Telecom, Inc. (Globe, BBB/Stable) the Phillipines second-largest operator stands
to benefit from market consolidation in terms of a slower decline in profitability. Higher capex
and low flexibility to cut shareholder distributions will keep FCF negative in the short term.
PT XL Axiata Tbk (XL, BBB/Stable) Indonesias third-largest mobile operator. XLs strategic
importance to its parent Axiata Group Berhad (66.7% beneficial ownership) has resulted in its
rating being more closely aligned with its parent.
Sri Lanka Telecom PLC (SLT, BB/AAA(lka)/Stable) Sri Lankas incumbent fixed-line
operator with a strong share in mobile, and evolving broadband and pay-TV segments. SLTs
LC IDR of BB is constrained at the sovereign level, due to its majority state ownership.
Dialog Axiata PLC (Dialog, AAA(lka)/Stable) Sri Lankas leading mobile operator, with a
subscriber market share of over 39% at end-September 2012.

Related Criteria
Corporate Rating Methodology (August 2012)

Dialog Axiata PLC

January 2013

Corporates
Dialog Axiata PLC Telecommunications Median Emerging BB Cat Median
Source: Company data; Fitch

Leverage

Interest Cover

including Fitch expectations

including Fitch expectations

5.0

50.0

4.0

40.0

3.0

30.0

2.0

20.0

1.0

10.0
0.0

0.0

2009
Fitchs expectations are based on the
agencys internally produced,
conservative rating case forecasts.
They do not represent the forecasts of
rated issuers individually or in
aggregate. Key Fitch forecast
assumptions include:
FFO profitability to dip below 30%,
due mainly to expiry of tax holiday;
FCF to remain positive in the medium
term;

2010

2011

2012

2013F 2014F

Debt Maturities and Liquidity at End-2011

Debt maturities
2012
2013
2014
2015
After 2015
Cash and equivalents

(LKRm)
8,562
4,066
4,066
1,278
8,067
10,453

Definitions
Leverage: Gross debt plus lease
adjustment minus equity credit for
hybrid instruments plus preferred
stock divided by FFO plus gross
interest paid plus preferred dividends
plus rental expense.
Interest cover: FFO plus gross
interest paid plus preferred dividends
divided by gross interest paid plus
preferred dividends.
FCF/revenue: FCF after dividends
divided by revenue.
FFO profitability: FFO divided by
revenue.
For further discussion of the
interpretation of the tables and
graphs in this report, see Fitchs
Interpreting the New EMEA and AsiaPacific Corporates Credit Update Format,

2010

2011

2012

2013F 2014F

2012

2013F 2014F

2012

2013F 2014F

FCF/Revenues
including Fitch expectations

20%
15%
10%
5%

Source: Fitch

0%
-5%

capex/revenue to average around

20%;
strong liquidity due to cash reserves,
good access to banks, and spreadout debt maturities.

2009

2009

2010

2011

FFO Profitability

Capex/CFO

including Fitch expectations

including Fitch expectations

40%
35%
30%
25%
20%
15%
10%
5%
0%

120%
100%
80%
60%
40%
20%
0%

2009

2010

2011

2012

2013F 2014F

Dialog Financial Performance

2008-2014F

2010

2011

9M12 Segmental Split

Outer ring: Revenue
Inner ring: EBITDA

Revenue (LHS)
EBITDA (LHS)
FFO net adj leverage (RHS)

(LKRm)
70,000

2009

Mobile
Fixed

5.2%

TV

7.7%

60,000
3

50,000
40,000

30,000
20,000

2.3%
10.9%
86.8%

10,000
0
2009

0
2010

2011

2012F 2013F 2014F

87.1%

dated 25 November 2009 and

available at www.fitchratings.com.

Dialog Axiata PLC

January 2013

Corporates
Figure 1

Dialog Axiata PLC - Financial Summary

Year End
31 Dec 10
31 Dec 09

9 Months - 3rd Quarter

30 Sep 2012

31 Dec 11

41,526
23.70
6,081
13,880
33.43
20.19
7.68

45,637
10.17
6,218
16,523
36.21
27.87
12.94

41,423
15.79
5,827
15,631
37.74
25.00
17.65

35,774
-1.39
-106
9,561
26.73
15.90
1.53

36,278
6.30
719
8,571
23.63
13.44
-56.94

40.79
64.14
11.98
0.58
1.50

44.38
45.32
15.10
0.98
1.86

15.51
16.49
8.78
1.31
2.08

3.54
3.56
2.90
0.33
1.06

4.63
4.33
3.45
-1.16
0.30

1.15
0.83

1.47
0.84

1.87
1.52

3.74
3.18

3.76
3.57

757
1.34
2.06
16.51

757
1.67
1.70
20.46

818
2.08
2.21
21.38

908
3.93
3.95
1.33

952
3.98
3.75
-54.45

1.34

1.67

2.08

3.93

3.98

Liquidity
(Free cash flow+available cash+committed facils)/(st debt +
interest) (%)

170.48

264.41

221.95

84.63

-115.56

Balance sheet summary

Cash and equivalents (unrestricted)
Restricted cash and equivalents
Short-term debt
Long-term senior debt
Subordinated debt
Equity credit
Total debt with equity credit
Off-balance-sheet debt
Lease-adjusted debt
Fitch- identified pension deficit
Pension adjusted debt

5,842
n.a.
5,631
15,611
n.a.
n.a.
21,242
4,540
25,782
n.a.
25,782

10,452
n.a.
6,055
17,018
1,250
n.a.
24,323
4,540
28,863
n.a.
28,863

5,434
n.a.
5,383
20,123
3,750
n.a.
29,255
4,945
34,201
n.a.
34,201

5,295
n.a.
7,237
24,729
3,750
n.a.
35,715
5,446
41,162
n.a.
41,162

1,646
n.a.
14,092
13,631
4,500
n.a.
32,223
5,713
37,937
n.a.
37,937

13,880
-216
-97
n.a.
4,957
8,610
6,951
15,562
n.a.
-10,373
-1,996
3,193
-3,365
n.a.
1,751
1,580

16,523
-213
-106
n.a.
-237
15,966
257
16,223
n.a.
-8,719
-1,597
5,907
-11
n.a.
4,056
9,951

15,631
-655
-95
n.a.
-841
14,040
75
14,115
-13
-6,790
0
7,312
n.a.
n.a.
-713
6,598

9,561
-1,828
-76
n.a.
24
7,681
2,611
10,292
n.a.
-9,745
0
548
n.a.
n.a.
-390
157

8,571
-1,265
-60
n.a.
653
7,898
-1,100
6,799
n.a.
-23,064
-4,392
-20,657
n.a.
n.a.
-1,268
-21,925

64
3
238

46
5
55

67
4
49

103
7
53

104
12
50

(LKRm)
Profitability
Revenue
Revenue growth (%)
Operating EBIT
Operating EBITDA
Operating EBITDA margin (%)
FFO return on adjusted capital (%)
Free cash flow margin (%)
Coverages (x)
FFO gross interest coverage
Operating EBITDA/gross interest expense
FFO fixed charge coverage (inc. rents)
FCF debt-service coverage
Cash flow from operations/capital expenditures
Debt leverage of cash flow (x)
Total debt with equity credit/operating EBITDA
Total debt less unrestricted cash/operating EBITDA
Debt leverage including rentals (x)
Annual hire lease rent costs for long-term assets (reported and/or
estimate)
Gross lease adjusted debt/operating EBITDAR
Gross lease adjusted debt /FFO+Int+rentals
FCF/lease adjusted debt (%)
Debt leverage including leases and pension adjustment (x)
Pension and lease adjusted debt /EBITDAR + pension cost

Cash flow summary

Operating EBITDA
Gross cash interest expense
Cash tax
Associate dividends
Other items before FFO (incl. interest receivable)
Funds from operations
Change in working capital
Cash flow from operations
Total non-operating/non-recurring cash flow
Capital expenditures
Dividends paid
Free cash flow
Net (acquisitions)/divestitures
Net equity proceeds/(buyback)
Other cash flow items
Total change in net debt
Working capital
Accounts receivable days
Inventory days
Accounts payable days

31 Dec 08

Source: Fitch

Dialog Axiata PLC

January 2013

Corporates

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch
has been compensated for the provision of the ratings.

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Dialog Axiata PLC

January 2013