Listed Sri Lanka Telecom Plc (SLT) can expect modest revenue growth as it expands its optical fibre network and 4G mobile coverage, but returns could be low due to the country’s affordable broadband tariffs, Fitch Ratings said in a December 2019 report. SLT aims to expand its fibre network to connect a million households by 2021, up from the 700,000 homes currently connected.

“SLT would typically need to lay fibre for at least two million homes to connect half of that,” Fitch says. Meanwhile, the telco is expanding its 4G coverage to reach 95% of the population by end-2019.

Fitch expected SLT to have negative free cash flow as revenue from operations could be insufficient to fund capex requirements to expand the fibre infrastructure and 4G mobile networks. It expects SLT’s 2019 capex to remain high, at around 28%-30% of group revenue. However, management at SLT expects its capex/revenue to drop to around 18%-20% in 2019, it said.

“We expect SLT’s fibre investments to have low returns due to the country’s low broadband tariffs. Dividends are likely to remain around Rs1.6 billion-1.8 billion in the next two to three years,” Fitch said when it downgraded SLT’s outlook from ‘stable’ to ‘negative’ to reflect the outlook on its parent—the government of Sri Lanka. The state holds a majority stake in SLT directly and indirectly and can exercise significant influence on its operating and financial profile, Fitch noted.

The telco’s second-biggest shareholder, Malaysia’s Usaha Tegas Sdn Bhd at 44.9%, has no special provisions in its shareholder agreement to dilute the government’s significant influence over SLT.

“SLT’s unconstrained standalone credit profile is stronger than that of the government of Sri Lanka, reflecting the company’s market leadership in fixed-line services and second-largest position in mobile, along with its ownership of an extensive optical-fibre network,” Fitch said.

However, the telco has lower exposure to the crowded mobile market and more diverse service platforms than mobile-market leader Dialog, which has a larger revenue base and significantly better-operating margins, Fitch notes. SLT’s revenue will grow at single-digit levels in 2019/20 driven by data and fixed broadband growth. 4G smartphone penetration will improve from the current 25% with the proliferation of cheaper Chinese phones.

SLT’s revenue rose 7.5% in 2018, driven by fixed-broadband and mobile usage after a temporary usage slump in 2017 due to higher taxes on voice and data. The government’s recent announcement to reduce tax on telecommunication tariffs by 25% is expected to boost revenue growth.