Fitch Ratings last week said that profitability of Sri Lanka’s top telecommunications service provider, Dialog Axiata PLC’s (Dialog) is expected to decline while revenue will stagnate as a result of the recent tax increase.

“We forecast Dialog’s revenue to decline by the low-single-digits as voice and data usage could ease off following the tax increase. Its 2016 operating EBITDAR margin could narrow by 100bp to 33% (2015: 34%) due to lower usage and decline in profitable international voice business. This would more than offset the improving margin on data segment revenue and savings from its new Bay of Bengal undersea cable,” Fitch ratings said in a statement that affirmed the operator with a ‘AAA (lka)’ National Long-Term Rating and a Stable Outlook.

Fitch Ratings however noted that Dialog’s revenue is expected to grow by the mid-single-digits during 2017-2019, driven mainly by higher data revenue and a gradual recovery in usage. Dialog’s mobile data revenue grew by 64% in 2015, and accounted for around 15% of mobile revenue.

“The tax increases might accelerate industry consolidation to reduce the number of telcos to three from five. Two smaller, unprofitable operators – Hutchison Lanka and Bharti Airtel Limited’s (BBB-/Stable) Sri Lanka subsidiary, Airtel Lanka – may exit the industry,” the rating agency predicted.

It further noted that regulatory risks have risen for telcos since the new government assumed office in 2015.

The government has increased taxes on telcos in an effort to shore up revenue. Effective from May 2016, the government imposed a value-added tax (VAT) of 15% and nation building tax (NBT) of 2% on telecom services which will increase tax on voice and data services to 50% and 32%, respectively (earlier: 28% and 12%).

“Dialog would receive potential support from its 83%-parent, Axiata Group Berhad (Axiata) of Malaysia, if its standalone credit profile were to weaken. Dialog and its parent continue to have strong operational and strategic linkages which include sharing key management personnel, a common brand name and common creditors, which could result in reputational risk to Axiata should Dialog fail,” the rating agency further mentioned.