Sri Lanka Telecommunications Report Q4 2009

Consolidation of Sri Lanka's mobile market could occur in 2009/10, after Tigo's parent company, Millicom International announced the sale of its Asian assets including Cambodia and Laos. A number of potential investors have revealed their interest in Tigo, which is third ranked in the market with a 17.3% market share. The operator is 100% owned by Millicom International, with a 10-year licence until 2018. Its network coverage extends to 81% of the country, through its 969 cell sites.

The company could be a good fit for latest entrant Bharti Airtel. The Indian operator launched its Sri Lankan services in January 2009 and by H109 had over 1mn subscribers leading to a No4 spot, beating Hutchison Lanka. Its tactic of low pricing, at both peak and off-peak hours, has led to Bharti's success.

However, the acquisition of Tigo Lanka would significantly boost its market share to around 25.2%, overtaking Sri Lanka Telecom (SLT)'s Mobitel unit in second place, while placing pressure on market leader Dialog Telekom, with a 47.1% share. Dialog Telekom's parent company Axiata Group is also said to be one of the bidders, although it could be more of a tactic to oust Bharti Airtel from the tender as it seeks to secure its market position. It is not likely that Axiata Group would be given consent to acquire Tigo in any case on the grounds of its anti-competitive nature.

However, the sale of Tigo could be welcomed by some such as Hutchsion Lanka. The operator's CEO Archie Man stated that the market needed to consolidate in order to stem the tide of price wars. The arrival of Bharti Airtel saw competitors significantly lower their tariffs in order to maintain and build upon their existing market shares.

While this led to strong subscriber growth in H109 with 1.635mn net additions, largely made up of prepaid subscribers, it has impacted the market's ARPU further. In BMI's newly introduced forecast scenario for blended ARPU, we note that, over 2008, this fell by 25.7% y-o-y to LKR309. By the end of 2009, we estimate ARPUs of LKR240, on the back of a 22.3% y-o-y fall, before reaching LKR175 by 2013. Furthermore, the liberation of the Northern Province in Sri Lanka will also lead to a growing proportion of prepaid subscribers in the market, as operators begin to commence the deployment of infrastructure into that area.

Meanwhile, although the government is enjoying a boost to its image following the end of hostilities, the economy has yet to show signs of an improvement. The forecast for economic growth in 2009 remains unchanged at 2.2% real GDP expansion. This relates, in part, to the overall poor global picture, which has impacted elsewhere in Asia. Sri Lanka ended the quarter slumped in 18th place in BMI's latest Business Environment Ratings table, down from 17th.