Sri Lanka Telecommunications Report Q1 2012

In this quarter's update on the Sri Lankan telecoms market, we have extended our mobile, fixed-line, internet, broadband and ARPU forecasts to 2016. In light of new data published by the Telecommunications Regulatory Commission of Sri Lanka, the Central Bank of Sri Lanka and the International Telecommunications Union, we have made several adjustments to our forecast scenarios.Most notably, we have downgraded our expectation for the number of mobile subscribers between 2011 and 2016 on the back of slow growth in the first half of 2011. Similarly, the growth slowdown was experienced in the fixed-line sector. We now expect growth in Sri Lanka's fixed-line market to decline in 2016 afterwards a few more years of sluggish performance. The bright spot in the Sri Lankan telecoms sector is reserved for the internet, exactly the mobile broadband segment. There were 368,000 mobile broadband subscribers in the country at the end of June 2011, representing an impressive 206.5% increase y-o-y. We expect the momentum to remain robust as operators continue to roll out 3G and then generation mobile research networks.Debt-laden alternative fixed-line operator SunTel has been a target for several companies with the latest being Sri Lanka Telecom. A potential US$200mn deal was reported, which would be nearly double the sum offered by India's Mahanagar Telephone Nigam in 2010. We believe that SLT's real attraction to SunTel is its large and comparatively robust enterprise customer base. Should the contingency arise to basic voice services, SunTel offers hosted PABX, broadband internet, virtual mail server, web creation/hosting and managed security services for businesses. By buying SunTel, SLT could substantially increase its own enterprise services business.Sri Lankan telecoms companies have been actively deploying and improving their networks since the civil war ended in May 2009, which would contribute towards the long-term outlook for the telecoms industry. SLT announced in July 2011 that it would invest LKR11bn in the then and there two years to upgrade its mobile and copper networks. This development chimed with similar activities by mobile operators to extend their mobile coverage into rural and underserved regions.But, Sri Lanka remains rooted at the bottom of our Risk Reward Ratings table as we see risks ahead for the country's rapid economic growth in the nearly term. Economic growth in Sri Lanka accelerated to 8.2% year-on-year in Q211 from 7.9% in the previous quarter. All in all, we caution that during the overall economy appears healthy, overheating risks continue to mount. In spite of the apparent supremacy of the ruling United People's Freedom Alliance, which swept the final phase of the local authority elections on October 8, we highlight that its long-running popularity, and hence its position at the top, is by degree looking uncertain. The violent intra-alliance gunfight that ensued in polling day could push the UPFA closer to its own political demise.

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