Fitch upgrades Dialog to 'AAA(lka)'

Fitch Ratings has upgraded Sri Lanka's Dialog Axiata PLC's (Dialog) National Long-term rating to 'AAA(lka)' from 'AA(lka)', and simultaneously revised the Outlook to Stable from Negative.

The agency has also upgraded the National Long-term rating on Dialog's outstanding Rs 2.5 billion redeemable preference shares to 'AA+(lka)' from 'AA-(lka)'.

While Dialog's ratings factor in support from its parent - Axiata Group Berhad (Axiata, 83 percent ownership) in arriving at the final rating, the upgrade reflects the company's improved stand-alone credit profile, and liquidity position.

This is in turn a result of Dialog's successful cost rationalisation exercise, reduced tariff pressure within the local mobile industry at present (which is likely to allow further balance sheet improvements over the short-term), strong market share within the mobile industry amid improving economic conditions, and its improved operating cash flows.

Fitch assesses Dialog's standalone rating at 'AA(lka)'. A downgrade of the ratings could be precipitated by unfavourable developments within the local regulatory or competitive environment that would result in a sustained increase in Dialog's leverage (net adjusted debt/EBITDAR) of above 2.5x, or by the weakening of Axiata's financial profile.

Conversely, an upgrade of Dialog's standalone rating may result if the company is able to sustain leverage of below 1.5x, while maintaining an evenly spread out debt maturity profile.

Dialog's profitability as measured by EBITDAR margin improved to 41 percent at June 30, 2010 (end-H110), from 26 percent at end-2008 (FYE08), largely due to the 'right sizing' of its operations since early-2009.

This included the centralisation of key administrative functions, better utilisation of network and office infrastructure, staff reductions, and network modernisation. The stronger operating cash flow generation that resulted, combined with lower levels of incremental capex, reduced group leverage to 1.7x in end-H110 (FYE08: 3.8x).