Fitch Ratings said the entry of Emirates Telecommunications Corporation (Etisalat) into Sri Lanka can further delay any prospects for recovery in the Sri Lankan telecom operators’ profitability.
Millicom International Cellular SA last week sold its fully-owned subsidiary in Sri Lanka, Tigo, to Etisalat in a competitive bidding process.
Tigo is the third-largest mobile telephony operator in Sri Lanka with a market share of around 20 percent and a nationwide network footprint.
“Competition in the mobile space is already highly intense with five operators vying for market share,” Fitch Ratings said in a statement.
“Price competition has led to a rapid deterioration of tariffs over the last four years which has weakened profitability of the operators, especially in the wake of the licensing of India’s Bharti Airtel, which has a ‘BBB-’ rating with a stable outlook, as the fifth mobile operator in 2007.
“There was some hope for consolidation in the market with several local mobile operators interested in Tigo, most notably Bharti Airtel, which Fitch believes would have benefitted most from Tigo’s wide network footprint.”
Etisalat is among the world’s fastest growing telecom companies and has aggressively invested in telecom assets in the Middle-East, Africa and Asia as growth in its home market slowed and competition intensified, the rating agency said.
Etisalat has entered markets late in the race and aggressively challenged established operators, it said.
“If Etisalat’s track record is anything to go by, it is possible that it may invest heavily to acquire more market share in Sri Lanka, which will intensify the challenges facing other operators,” said Buddhika Piyasena, Director of Fitch’s Asia-Pacific Corporates team.
Under Millicom’s ownership, Tigo took a less aggressive approach to competition, although it did respond to tariff cuts initiated by others.
“However, Etisalat’s strong financial position allows it to aggressively challenge the established operators,” Fitch said.
Tigo recently acquired a 3G license, enabling it to offer more advanced communications services.
Under Etisalat’s ownership it can be expected that Tigo will invest in rolling-out 3G capacities, the agency said.
“Apart from lax regulation, a major reason for the heavy price-based competition in the Sri Lankan market is the absence of a framework that requires mobile operators to pay other networks for interconnection,” Fitch said.
“This allowed Bharti Airtel, which has a limited coverage, to challenge other operators resulting in a full scale price war.”
A revision to the interconnection framework is currently on the telecom regulator’s agenda and when implemented in 2010, Fitch said it expects this to ease further pressure on tariffs.
However, the operators may see subscriber acquisition and retention costs – including handset subsidies, subsidised starter packs and increases in selling and marketing cost – increasing with competition intensifying for market share.
“In addition, given Etisalat’s strong international links, operators could see stiff competition on international long distance and roaming services- these segments too have seen heated competition in the last two years resulting in lower tariffs over time,” Fitch Ratings said.
Etisalat’s entry into the Sri Lankan market comes at a time when financial flexibility of the established operators has weakened substantially as a result of heavy price-based competition.
The credit profiles of Fitch rated operators – Sri Lanka Telecom (FC IDR: ‘B+’/Stable; LC IDR: ‘BB-’/Negative; National Long-term: ‘AAA(lka)’/Stable) and Dialog Telekom (’AA(lka)’/ Negative) have been under pressure.
“The weaker balance sheets of established operators may limit their ability to aggressively defend their market shares,” said Piyasena.
Fitch said it is also of the view that a higher level of regulatory oversight over the competitive practices of operators and some intervention on tariffs is required to ensure the financial health of the industry.
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