Fitch affirms SLT at 'BB-'/Stable

SLT's ratings reflect its market-leading position in Sri Lanka's fixed-line services underpinned by its monopoly in wireline and fixed-broadband.

They also reflect its number two position in mobile and its evolving share in paid-TV, making the company one of two 'quadruple-play' providers in the country. SLT's ratings benefit from its strong balance sheet with low funds flow from operations (FFO) adjusted net leverage of 0.64x at end-2012.

Sovereign constraints: SLT's IDRs are constrained by Sri Lanka's IDRs, due to the government directly and indirectly holding a majority stake in SLT. Malaysia's Usaha Tegas - which owns 44.9% of SLT - does not have any special provisions in its shareholder agreement to dilute the government's significant influence over SLT. Therefore any future changes to Sri Lanka's IDRs will lead to a corresponding change to SLT's IDRs.

Revenue grows, margins fall: SLT's revenue grew 10% in 2012, driven by strong growth in mobile and broadband operations, which was partly offset by weak performance in its fixed-wireless segment.

Revenue growth was also supported by a sharp weakening in the exchange rate in early 2012, which increased SLT's foreign currency revenue in local currency terms. Operating EBITDAR margins fell to 31.9% in 2012 from 33.3% in 2011, due to increased competition and cost inflation. Fitch expects moderate pressure on SLT's EBITDAR margins to continue in 2013, particularly if domestic energy tariffs increase.

Network investments rise: SLT will continue to invest heavily in the expansion of its broadband and mobile infrastructure in 2013 and 2014, with capex/revenue expected to increase to about 42% in 2013 (2012: 33%).

This includes SLT's plans to provide broadband at speeds of over 20Mbps to over 90% of its wireline subscriber base by end-2014.