Fitch Ratings last week said it has revised the outlook on Sri Lanka’s telecommunication sector to stable from negative as the new budget, introduced in December 2015, has scrapped the recurring taxes which could have diluted the industry’s Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) margin by an average of 6%-7%.
“We believe that Sri Lanka Telecom’s (SLT) and Dialog Axiata Plc’s 2016 credit profile will now remain intact given the ratings headroom to absorb margin dilution and lower cash generation,” the agency said in a statement.

Accordingly, SLT’s and Dialog’s 2016 EBITDA margin should dilute by only 100bp-200bp following the budget, due to changes in their revenue mix and lower revenue from profitable international gateway operations. The new budget doubled the government’s share in the international telco levy to USD 0.06s from USD 0.03 per minute. The telcos’ strategy to pass on this increased levy to consumers could affect usage, as users will be likely to move to cheaper ‘over the top’ applications like Skype and Facebook.

Fitch estimates that international termination revenues contribute around 12% of SLT’s and Dialog’s revenues.