Questions are being raised over the craving by Mobitel, which is listed for sale by the Government, for Hutch Sri Lanka’s operations at an exorbitant price.
In the unity Government’s maiden Budget presented a fortnight ago, Mobitel was included among state companies which will be divested via the Colombo stock market.
Despite pending state divestiture, Mobitel via its parent Sri Lanka Telecom, is apparently pursuing plans initiated under the previous regime to buy the loss-making operations of Hutch and consolidate its position in the highly competitive mobile telecom industry.
For want of better pricing, the previous administration at the Treasury halted SLT-Mobitel’s overtures on Hutch. The move is being pursued with greater zeal too despite the promise of good governance and prudence by the President Maithripala Sirisena-Prime Minister Ranil Wickremesinghe Government. It is claimed that SLT-Mobitel is keen on buying Hutch at $ 130-140 million whereas when Dialog did a due diligence, the latter’s valuation was put at around $ 60 million.
Industry analysts have emphasised that for SLT-Mobitel, the Hutch proposition could be at $ 80-90 million and not at the exorbitant valuation of $ 140 million.
Last week Fitch Ratings maintained a negative outlook on Sri Lanka’s telecom sector. This is based on uncertainty over proposals to increase taxes, which are likely to lower profitability and increase leverage for telcos, if implemented.
“We expect the industry’s 2016 revenue to grow by the mid-single digit percentage, driven by data services as cheaper smartphones proliferate. Yet, apart from the tax impact, profitability may still decline in 2016 as low margin data services replace traditional, more profitable voice/text revenue,” Fitch said.
“Two smaller, unprofitable telcos Hutchison Lanka and Bharti Airtel Limited’s SriLankan subsidiary, Airtel Lanka may exit the industry amid competition and the uncertain tax regime,” Fitch added.
Given the negative outlook for the industry, analysts are questioning SLT-Mobitel’s move on Hutch as well as exorbitant price of $ 140 million to be paid if the Yahapalanaya Government turns a blind eye.
Acquiring a loss-making operator such as Hutch at such a cost is expected to impose a heavy burden on SLT, which styles itself as the national telecom service provider.
In the first nine months of 2015, the SLT Group recently reported revenue of Rs.50. 8 billion, up by 6% with both fixed and mobile telephone segments contributing to the success.
In a statement SLT said the group had reported a healthy EBITDA margin of 32.3% during the period under review against the 30.9% a year earlier due to maintenance of higher revenue growth than the rate of operating cost escalation. The operating cost of the group was reported at Rs. 34.4 billion with a year on year growth of 4%, while the EBITDA grew by 11% to Rs. 16.4 billion during the first nine months of 2015. Depreciation and amortisations remain at the same level of Rs. 9.8 billion.
SLT said the bottom-line of financials of the group was largely negated by provisions for foreign currency translation losses relating to foreign currency denominated borrowing due to the sudden depreciation of the LKR against the USD.
Most of the borrowings of the group are dollar denominated as to gain low interest costs. Since the repayments are going through the internally generated foreign denominated revenues, provisions for translation losses are generally not impacting the group cash flows.
These factors saw SLT group profit before tax and profit after tax declining by 18% and 19% to Rs. 5.4 billion and Rs. 4.1 billion respectively.
Mobitel in first nine months continued to grow despite intensifying competition in the market. Revenue rose by 8% to Rs. 24.4 billion mainly driven by the increase in Broadband and Value Added Services.
Mobitel was able to record a growth in EBITDA and EBIT for the first nine months of 2015 which grew by 9% and 36% respectively YoY. It was aptly supported by operational efficiencies and lower costs due to reduction in input prices such as fuel and electricity expenses. Mobitel’s profit after tax for the first nine months was Rs. 2.7 billion, up by only Rs. 100 million from a year earlier.
The SLT statement said the exchange rate fluctuation in the third quarter of the year triggered a considerable reduction in profits of the company. However, it is noteworthy that Mobitel excelled in reporting a profit after tax growth by 5% despite these external challenges.
At company level, SLT’s profit before tax dipped by 27% to Rs. 2.2 billion and after tax profit by 29% to Rs. 1.4 billion.