Fitch affirms SLT at 'BB-'

Fitch Ratings has affirmed Sri Lanka Telecom PLC's (SLT) long-term foreign currency and local currency issuer default ratings at 'BB-' as well as its national long-term rating at 'AAA(IKA)'. The outlook is stable.

SLTs IDRs are constrained by the sovereign IDRS of 'BB'.

This is principally due to the Government owning, directly and indirectly overs 51 percent of SLT and the absence of any explicit shareholder arrangement between the Government and SLT's 44.9 percent shareholder Malaysia's Usaha Tegas that could potentially dilute the government's influence over SLT's operations. Any future change in the sovereign ratings will lead to a corresponding change in SLT's ratings.

SLT's unconstrained ratings reflect its leading market position in Sri Lankan fixed line and broadband sectors and its second position in the country's mobile segment.

SLT ratings have high headroom due to its existing conservative credit profile, with 2011 funds flow from operations adjusted net leverage and operating EBITDAR margins flat at 0.2 x and 33 percent - 34 percent and its comfortable access to liquidity.

Fitch, however, expects SLT's credit metrics to deteriorate in 2012-2013 due to the company's plans to invest in fibre-to-the node infrastructure greater mobile capacity in the Western Province and coverage improvements in the Northern Sri Lanka.

Fitch expects capex as a percentage of sales to remain high at about 40 percent in 2012-2013, resulting in a negative free cash flow and higher adjusted net average in the medium term.

In 2011, SLT's consolidated revenue and operating EBITDAR grew one percent YOY to Rs. 51 bn and 4 percent YOY to Rs. 17.3 bn, supported by growth in mobile and broadband segments which more than offset the declining fixed voice, CDMA and international traffic revenue. Fitch expects this trend to continue and result in SLT's revenue growth of only low single digits for 2012-2013.