Medium term risk for telcos -Fitch

Fitch Ratings says 'overcrowding' remains the key medium-term risk to telecom operators (telcos) in Sri Lanka, in a special report.

The agency expects competition among local telcos to remain high through 2011, given the fact that five mobile and four fixed-operators serve an addressable population of less than 21 million. Subscriber acquisition and retention costs are likely to keep operators' profitability under pressure over the medium-term, as subscriber growth in both the mobile and fixed segments has slowed due to high headline penetration (end-2010: mobile 83 percent and fixed 17 percent of population).

Fitch also highlights that direct price competition, which eased thanks to regulatory intervention in 2010, could re-emerge if floor-tariffs on local calls are reduced as indicated by the Government in late 2010, or removed.

The agency notes that some consolidation among operators is likely to prove healthy for the industry. The three larger mobile operators - Dialog, Mobitel and Etisalat - controlled around 82 percent of the subscriber market share at end-2010, which has left the two later-entrants, Hutchison Telecommunications Lanka and Bharti Airtel Lanka with weak economies of scale.

Two stand-alone fixed wireless operators, Lanka Bell Limited and Suntel Ltd, have been offered on sale in the recent past.

Growth is likely to be spearheaded by data (from both mobile and fixed sources) and to an extent by mobile voice, benefiting from relatively low penetration and improving usage, respectively.

Usage volumes are on an improving trend across most segments since 2010, helped by improving economic activity, following the cessation of the war in mid-2009.

Fitch also notes that tax reforms introduced in 2011 could help to improve usage levels.