Corporates

www.fitchratings.com 31 January 2013

F Telecommunications / Sri Lanka

Dialog Axiata PLC Update

Key Rating Drivers

Parent Linkages: Dialog Axiata PLC‟s (Dialog) „AAA(lka)‟ National Long-Term Rating factors

in Fitch Ratings‟ expectations that its 83%-parent, Axiata Group Berhad (Axiata) of Malaysia, is

likely to extend support in extreme circumstances, if required. This is underpinned by strong

linkages – including a common brand, board control, as well as Axiata‟s strategic and

operational involvement in Dialog. Support has been forthcoming in the past, and includes

corporate guarantees on debt, shareholder loans, and equity injections.

Strong Standalone Profile: Dialog‟s standalone profile has improved between 2010 and 2012,

helped by a more benign competitive environment and rising usage across most service

segments. This has led us to shift its standalone rating up by a notch, to „AA+(lka)‟. This is also

supported by Dialog‟s leading market share in mobile; evolving position in fixed-line, broadband,

and pay-TV; and its strong balance sheet.

Improving Balance Sheet: We expect Dialog‟s funds flow from operations (FFO) net adjusted

leverage to improve over the medium term, supported by positive free cash flow (FCF)

generation (after dividends and capex). However, sustained increases in FFO net adjusted

leverage over 1.75x (end-September 2012 (9M12): 1.59x annualised) and/or the EBITDAR

margin weakening below 30%, could lead to pressure on Dialog‟s standalone rating.

Stable Industry Outlook: Fitch has a stable outlook for the Sri Lankan telecoms industry for

2013, supported by relatively lower competition, with operators maintaining tariffs above the

regulatory floor of LKR1.50/outgoing minute on local calls to other networks. However, high

competition could persist within revenue segments that are not subject to floor tariffs – such as

international calls, international roaming, and data – as six operators compete for market share

among a 21 million population.

Industry Consolidation is Positive: We believe consolidation among Sri Lankan telecom

operators will be the key to reducing long-term industry risk.

Moderate Organic Revenue Growth: The agency expects high-single-digit growth in Dialog‟s

organic revenue in the medium-term, underpinned by increasing usage and a more benign tariff

environment. Group revenue increased by 24% yoy during 9M12 – helped by a sharp 15%

weakening in the local exchange rate, which increased foreign-currency revenues in Sri Lankan

rupee terms – and also due to the acquisition of Suntel, a fixed-line operator.

Suntel‟s contribution to group revenue and EBITDA (4% on both counts in 9M12) should

increase in 2013 as its full-year results are consolidated. A lower reliance on mobile revenue

will improve Dialog‟s business risk over the long term.

What Could Trigger a Rating Action

Weaker Linkages with Parent: A substantial dilution in Axiata‟s ownership or board control of

Dialog, removal of the common brand name, or a weakening of current operational or strategic

ties between the companies, could result in a downgrade.

Liquidity and Debt Structure

Strong Liquidity: Dialog‟s cash reserves exceeded near-term debt maturities by LKR211m at

end-September 2012. This, and our expectations for positive FCF during FY13-FY15, supports

Dialog‟s strong internal liquidity. Dialog also has sufficient foreign-currency earnings in order to

repay interest and principal on its US-dollar denominated debt through 2016.

Ratings

National

Long-Term Rating AAA(lka)

Outlook

National Long-Term Rating Stable

Financial Data

Dialog Axiata PLC (Consolidated)

30 Sep 12 (9 mths)

31 Dec 11 (12 mths)

Revenue (LKRm) 41,526 45,637 Operating EBITDAR (USDm)

111 152

Operating EBITDAR margin (%)

34.8 37.9

Funds from operations (LKRm)

8,610 15,966

Free cash flow (LKRm)

3,193 5,907

FFO gross interest coverage (x)

40.79 44.38

Total debt with equity credit (LKRm)

25,782 28,863

Gross adjusted debt/EBITDAR

1.34ª 1.67

FFO net adjusted leverage

1.59ª 1.10

LKR/USD month-end 129.7943 113.9013 ª Annaulised

Related Research

2013 Outlook: Sri Lanka Telecommunications Services (November 2012)

Analysts

Hasira De Silva, CFA +941 1254 1900 hasira.desilva@fitchratings.com Nitin Soni +65 6796 7235 nitin.soni@fitchratings.com

Corporates

Dialog Axiata PLC

January 2013 2

Immediate Peer Group – Comparative Analysis

Sector Characteristics Operating Risks

Incumbent operators are generally exposed to market share erosion, especially in the highly

competitive mobile segment. Operators investing heavily in fibre-based data infrastructure may

run the risk of inadequate revenue growth and protracted repayment periods on investment.

Over the longer term, telecom operators in emerging markets run the risk of having their voice

revenue replaced by cheaper data- and IP-based services. The risk to operators with multiple

established service platforms from such a shift is lower.

Financial Risks

The key financial risk for an incumbent operator will be the inability to generate sufficient

operating cash flows to fund growing capex required to build out a robust network in terms of

capacity and coverage, as well as to keep abreast of changing technology. Profitability can also

suffer due to weakening growth in the fixed-wireless and wireline segments, as well as high

competition from an overcrowded industry.

Telcos with high cash reserves are better insulated against the risk of their operating cash

flows falling short of ongoing capex needs during periods of prolonged weak macroeconomic

performance. Such cash shortfalls may then require companies to increase leverage to meet

investments, increasing their financial risk, or fall back in terms of technology leadership.

Peer Group Analysis Issuer

FC IDR/National Rating

Standalone rating

Outlook

Globe

BBB− / n.a.

Stable

XL

BBB / AAA(idn)

Stable

SLT

BB− / AAA(lka)

Stable

Dialog

n.a. /AAA(lka)

AA+(lka)

Stable

EBITDA (USDm) 802 1,005 149 152 EBITDA margin (%) 43.1 48.7 33.7 36.2 FFO gross adj leverage (x) 1.9 1.5 1.0 1.7 FFO fixed-charge cover (x) 6.6 9.6 21.3 15.1 Free cash flow (USDm) 79 41 -1 52

Source: Fitch, companies

Key Credit Characteristics

Regional peers are differentiated mainly via the analysis of competitive position, technology

leadership, product diversification, regulatory risk, quality of network, and scale of operations.

Sri Lankan telcos have considerably smaller operating scale than their regional peers, due to

being limited to the local market. However, the ratings benefit from lower leverage.

Overview of Companies

Globe Telecom, Inc. (Globe, „BBB−‟/Stable) – the Phillipines‟ second-largest operator stands

to benefit from market consolidation in terms of a slower decline in profitability. Higher capex

and low flexibility to cut shareholder distributions will keep FCF negative in the short term.

PT XL Axiata Tbk (XL, „BBB‟/Stable) – Indonesia‟s third-largest mobile operator. XL‟s strategic

importance to its parent Axiata Group Berhad (66.7% beneficial ownership) has resulted in its

rating being more closely aligned with its parent.

Sri Lanka Telecom PLC (SLT, „BB−‟/„AAA(lka)‟/Stable) – Sri Lanka‟s incumbent fixed-line

operator with a strong share in mobile, and evolving broadband and pay-TV segments. SLT‟s

LC IDR of „BB−‟ is constrained at the sovereign level, due to its majority state ownership.

Dialog Axiata PLC (Dialog, „AAA(lka)‟/Stable) – Sri Lanka‟s leading mobile operator, with a

subscriber market share of over 39% at end-September 2012.

Peer Group Issuer Country

BBB− Globe Telecom, Inc. Philippines BBB PT XL Axiata Tbk Indonesia BB− Sri Lanka Telecom PLC Sri Lanka

Issuer Rating History

Date National LT Rating

Outlook/ Watch

8 Oct 12 AAA(lka) Stable 6 Oct 11 AAA(lka) Stable 8 Oct 10 AAA(lka) Stable 2 Mar 09 AA(lka) Negative 5 May 08 AAA(lka) Stable 20 Apr 07 AAA(lka) Stable 5 Dec 06 AAA(lka) Stable 3 Oct 05 AAA(lka) Stable

Snapshot Profile: Major Issuer-Specific Rating Factors and Trends

Rating factor Statusa Trend

Operations Strong Neutral Market position Strong Improving Finances Strong Improving Governance Average Neutral Geography Weak Neutral a Relative to peer group

Source: Fitch

Related Criteria

Corporate Rating Methodology (August 2012)

Corporates

Dialog Axiata PLC

January 2013 3

Leverageincluding Fitch expectations

0.0

1.0

2.0

3.0

4.0

5.0

2009 2010 2011 2012 2013F 2014F

Interest Coverincluding Fitch expectations

0.0

10.0

20.0

30.0

40.0

50.0

2009 2010 2011 2012 2013F 2014F

Debt Maturities and Liquidity at End-2011

Debt maturities (LKRm)

2012 8,562 2013 4,066 2014 4,066 2015 1,278 After 2015 8,067 Cash and equivalents 10,453

Source: Fitch

FCF/Revenuesincluding Fitch expectations

-5%

0%

5%

10%

15%

20%

2009 2010 2011 2012 2013F 2014F

FFO Profitabilityincluding Fitch expectations

0%

5%

10%

15%

20%

25%

30%

35%

40%

2009 2010 2011 2012 2013F 2014F

Capex/CFOincluding Fitch expectations

0%

20%

40%

60%

80%

100%

120%

2009 2010 2011 2012 2013F 2014F

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2009 2010 2011 2012F 2013F 2014F

0

1

2

3

4

Revenue (LHS)

EBITDA (LHS)

FFO net adj leverage (RHS)(LKRm)

Dialog Financial Performance

2008-2014F

10.9%2.3%

86.8%

7.7%

87.1%

5.2%

Mobile

Fixed

TV

9M12 Segmental Split

Outer ring: Revenue

Inner ring: EBITDA

Dialog Axiata PLC———— Telecommunications Median ———— Emerging BB Cat Median ————

Source: Company data; Fitch

Fitch‟s expectations are based on the

agency‟s internally produced,

conservative rating case forecasts.

They do not represent the forecasts of

rated issuers individually or in

aggregate. Key Fitch forecast

assumptions include:

FFO profitability to dip below 30%,

due mainly to expiry of tax holiday;

FCF to remain positive in the medium

term;

capex/revenue to average around

20%;

strong liquidity due to cash reserves,

good access to banks, and spread-

out debt maturities.

Definitions

Leverage: Gross debt plus lease

adjustment minus equity credit for

hybrid instruments plus preferred

stock divided by FFO plus gross

interest paid plus preferred dividends

plus rental expense.

Interest cover: FFO plus gross

interest paid plus preferred dividends

divided by gross interest paid plus

preferred dividends.

FCF/revenue: FCF after dividends

divided by revenue.

FFO profitability: FFO divided by

revenue.

For further discussion of the

interpretation of the tables and

graphs in this report, see Fitch‟s

Interpreting the New EMEA and Asia-

Pacific Corporates Credit Update Format,

dated 25 November 2009 and

available at www.fitchratings.com.

Corporates

Dialog Axiata PLC

January 2013 4

Figure 1 Dialog Axiata PLC - Financial Summary 9 Months - 3rd Quarter Year End

(LKRm) 30 Sep 2012 31 Dec 11 31 Dec 10 31 Dec 09 31 Dec 08

Profitability Revenue 41,526 45,637 41,423 35,774 36,278 Revenue growth (%) 23.70 10.17 15.79 -1.39 6.30 Operating EBIT 6,081 6,218 5,827 -106 719 Operating EBITDA 13,880 16,523 15,631 9,561 8,571 Operating EBITDA margin (%) 33.43 36.21 37.74 26.73 23.63 FFO return on adjusted capital (%) 20.19 27.87 25.00 15.90 13.44 Free cash flow margin (%) 7.68 12.94 17.65 1.53 -56.94 Coverages (x) FFO gross interest coverage 40.79 44.38 15.51 3.54 4.63 Operating EBITDA/gross interest expense 64.14 45.32 16.49 3.56 4.33 FFO fixed charge coverage (inc. rents) 11.98 15.10 8.78 2.90 3.45 FCF debt-service coverage 0.58 0.98 1.31 0.33 -1.16 Cash flow from operations/capital expenditures 1.50 1.86 2.08 1.06 0.30 Debt leverage of cash flow (x) Total debt with equity credit/operating EBITDA 1.15 1.47 1.87 3.74 3.76 Total debt less unrestricted cash/operating EBITDA 0.83 0.84 1.52 3.18 3.57 Debt leverage including rentals (x) Annual hire lease rent costs for long-term assets (reported and/or estimate) 757 757 818 908 952 Gross lease adjusted debt/operating EBITDAR 1.34 1.67 2.08 3.93 3.98 Gross lease adjusted debt /FFO+Int+rentals 2.06 1.70 2.21 3.95 3.75 FCF/lease adjusted debt (%) 16.51 20.46 21.38 1.33 -54.45 Debt leverage including leases and pension adjustment (x) Pension and lease adjusted debt /EBITDAR + pension cost 1.34 1.67 2.08 3.93 3.98 Liquidity (Free cash flow+available cash+committed facils)/(st debt + interest) (%) 170.48 264.41 221.95 84.63 -115.56 Balance sheet summary Cash and equivalents (unrestricted) 5,842 10,452 5,434 5,295 1,646 Restricted cash and equivalents n.a. n.a. n.a. n.a. n.a. Short-term debt 5,631 6,055 5,383 7,237 14,092 Long-term senior debt 15,611 17,018 20,123 24,729 13,631 Subordinated debt n.a. 1,250 3,750 3,750 4,500 Equity credit n.a. n.a. n.a. n.a. n.a. Total debt with equity credit 21,242 24,323 29,255 35,715 32,223 Off-balance-sheet debt 4,540 4,540 4,945 5,446 5,713 Lease-adjusted debt 25,782 28,863 34,201 41,162 37,937 Fitch- identified pension deficit n.a. n.a. n.a. n.a. n.a. Pension adjusted debt 25,782 28,863 34,201 41,162 37,937 Cash flow summary Operating EBITDA 13,880 16,523 15,631 9,561 8,571 Gross cash interest expense -216 -213 -655 -1,828 -1,265 Cash tax -97 -106 -95 -76 -60 Associate dividends n.a. n.a. n.a. n.a. n.a. Other items before FFO (incl. interest receivable) 4,957 -237 -841 24 653 Funds from operations 8,610 15,966 14,040 7,681 7,898 Change in working capital 6,951 257 75 2,611 -1,100 Cash flow from operations 15,562 16,223 14,115 10,292 6,799 Total non-operating/non-recurring cash flow n.a. n.a. -13 n.a. n.a. Capital expenditures -10,373 -8,719 -6,790 -9,745 -23,064 Dividends paid -1,996 -1,597 0 0 -4,392 Free cash flow 3,193 5,907 7,312 548 -20,657 Net (acquisitions)/divestitures -3,365 -11 n.a. n.a. n.a. Net equity proceeds/(buyback) n.a. n.a. n.a. n.a. n.a. Other cash flow items 1,751 4,056 -713 -390 -1,268 Total change in net debt 1,580 9,951 6,598 157 -21,925 Working capital Accounts receivable days 64 46 67 103 104 Inventory days 3 5 4 7 12 Accounts payable days 238 55 49 53 50

Source: Fitch

Corporates

Dialog Axiata PLC

January 2013 5

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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