The agency has also confirmed SLT's long-term local currency rating at 'BB-' and its national long-term rating at 'AAA(lka)' with a stable outlook for both.
The foreign currency rating of SLT, which is 51 percent owned by the government, is capped by Sri Lanka's country ceiling of 'B+' and the positive outlook reflects that on the sovereign rating.
"SLT's ratings continue to be supported by its position as the fixed-line incumbent in Sri Lanka and by its adequate market share, through subsidiary Mobitel, in a moderately growing mobile telecom market," Fitch said.
At end-September 2010, the firm had 40.6 percent and 24.4 percent of the country's fixed line and mobile subscribers.
"The company also has a dominant market share of international long-distance and IP (internet protocol) and data-related services," Fitch said.
SLT's consolidated revenues and EBITDA (earnings before interest, taxes, depreciation, and amortization) improved four percent and eight percent during the nine months to September 2010.
This was after the Telecommunications Regulatory Authority of Sri Lanka (TRCSL) introduced floor pricing with off-net calls at two rupees a minute and on-net calls at one rupee a minute and established an interconnection regime in the country.
"The mobile and broadband segments are largely responsible for driving the growth in SLT's consolidated revenue profile," Fitch Ratings said.
"Despite the positive measures adopted by the regulator in terms of floor-pricing and the interconnection regime in 2010, Fitch notes that regulatory uncertainty continues to prevail," it added.
"Given the overcrowded nature of the local mobile industry, there is a risk that price competition will intensify if the regulatory tariff floor is removed."
The government has announced intentions to lower the floor tariff on local off-net calls to 1.50 rupees in mid-2011, from the current two rupees.
SLT's capital expenditure is expected to increase during 2011 to expand coverage and capacity, as well as to make the transition to an IP-based next generation network (NGN).
"However, barring any substantial increase in cash returns to shareholders, SLT should be able to return to positive FCF (free cash flow) generation in 2012 once capex moderates," Fitch said.
Fitch expects SLT to maintain a strong financial profile and credit metrics appropriate for its current ratings.
SLT had total adjusted debt of 7.5 billion rupees including vendor financing of 3.5 billion at end-September 2010 and a low net adjusted debt to operating EBITDAR of 0.44 times.
Fitch said expects SLT to maintain its net leverage below 1x over the short- to medium-term.
"SLT's liquidity is comfortable with cash and equivalents of 7.8 billion rupees at end-September 2010 and ready access to banks for funding, against maturities of 1.8 billion in 2011."
A negative rating action may result if net leverage (net adjusted debt/EBITDAR) exceeds 2.5x and 1.5x for foreign currency and local currency ratings on a sustained basis, the agency said.
As the foreign currency rating is constrained by the country ceiling, an upgrade of the sovereign rating will result in an upgrade of SLT's foreign currency rating.
The possibility of an upgrade in SLT's local currency rating will depend on the agency's view on the extent to which the presence of a large minority shareholder, Malaysia's Usaha Tegas holding 44.9 percent in SLT, is able to offset the influence by government.
"This is because a high level of government ownership would normally constrain the ratings at the sovereign level."
source - www.lbo.lk
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