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Management
Discussion and Analysis - Financial Review |
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Introduction
From a financial point of view 2004 was a year with mixed results
for SLT. The shares of SLT continued to be the most liquid share
in the Colombo Stock Exchange.
SLT went into record a landmark transaction by issuing USD 100
million notes in the international market to become the first
Sri Lankan company to do so. In the process SLT became the first
Sri Lankan company to be rated internationally.
The revised domestic tariff structure, introduced in September
2003, resulting from the fifth tariff rebalancing exercise continued
throughout the year. Despite the resulting top line growth the
Group ended up with a declined profit during the year compared
to 2003.
The effects of liberalisation continued with the margins narrowing
particularly in relation to the international call revenues.
During the year Mobitel, our fully owned subsidiary and mobile
arm, layed the foundation for future growth. Negative operational
result of Mobitel during this initial stage has affected the
total results of the Group.
Introduction of International Telecommunication Levy and comparatively
a larger proportion of doubtful debts were the other major contributors
to the reduction in profitability compared to 2003.
The ‘Tsunami’ effect towards the end of the year
caused further negative impact on the results of the Group.
Revenue
Group revenues in 2004 increased by 15% from 2003. This was
mainly due to 21% increase in local revenues resulting from
the tariff revision introduced in September 2003. Local revenue,
which mainly consist of rental and call charges, accounted for
67% of total revenue.
IDD revenues, which were drastically reduced in 2003, recovered
during the year. Compared to 2003 there was a 33% increase largely
due to increased volumes. IDD revenues represented 8% of the
total revenue in 2004.
Revenue from data transmission and IP services also increased
by 36%.
International settlements were however almost static during
the year. The increase in traffic volumes was offset by the
reduction in settlement rates.
The contribution of revenue to the Group by Mobitel during the
year after eliminating inter-company transactions was Rs. 2.8
billion. This represents 10% of the total Group revenue and
is a 150% increase compared to Rs. 1.1 billion in 2003.
Operating Costs and Depreciation
The operating costs
of the Group were Rs. 14.1 billion compared to Rs. 10.9 billion
in the previous year which is a 29% increase.
Operating costs of Mobitel increased from Rs. 877 million in
2003 to Rs. 2.8 billion in 2004. This increase has been mainly
due to increase in marketing related costs and provisioning
of doubtful debts. Depreciation of Mobitel also increased from
Rs. 253 million in 2003 to Rs. 921 million due to accelerated
amortisation of old network and additional depreciation resulting
from recent heavy capital expenditure on GSM roll out.
Operating costs of SLT increased from Rs. 10 billion in 2003
to Rs. 11.3 billion in 2004. This was largely due to increase
in repair and maintenance costs and provisioning of doubtful
debts. Apart from them almost all other costs have been maintained
at levels as same as the previous year. The cost consciousness
and improved productivity of SLT employees in day-to-day operations
have contributed to control the costs. The employees have been
rewarded with enhanced benefits derived from the savings accrued
from the Voluntary Retirement Scheme introduced in 2003.
Depreciation of SLT increased only marginally in line with the
incremental capital expenditure.
Finance Costs
Group interest costs were reduced by 12% from Rs. 2.9 billion
in 2003 to Rs. 2.5 billion in 2004. Eventhough interest costs
of Mobitel increased due to the borrowings in respect of GSM
roll out, that was overshadowed by the reduced interest costs
of SLT resulting in an overall decrease.
Interest costs of SLT decreased to Rs. 2 billion from Rs. 2.8
billion in the previous year largely due to repayment of loans.
Cash Flow Hedge
Transfer to hedge reserve in 2004 was Rs. 408 million compared
to Rs. 208 million in the previous year. The increase was mainly
due to depreciation of Sri Lanka Rupee against the United States
Dollar and other foreign currencies during the year.
Rs. 476 million was charged back to income statement as realised
exchange losses. The figure in the previous year was Rs. 609
million. The reduction of this amount is due to the comparative
reduction in the amount of foreign currency denominated loans
settled during the year. As a result the hedge reserve decreased
by Rs. 68 million during the year.
International Telecommunication Levy
During the latter part of the year Finance Act No. 11 of 2004
was enacted by the Parliament. A Levy was imposed thereby on
International Telecommunication Operators with retrospective
effect dating back to 3 March 2003. Accordingly, the Group had
to recognise an expense of Rs. 2.5 billion out of which Rs.
1.1 billion is in respect of 2003. On account of rural telephony
roll out 2/3 of the levy payable is likely to be refunded to
the operators. However, regulations with regard to this refund
are yet to be formulated by the Telecom Regulator and according
to the Sri Lanka Accounting Standards such refund has not been
accounted for.
Taxation
The brought forward tax losses and Investment Tax Allowances
of SLT have been fully utilised and as such the Company is liable
to pay tax on account of 2004. After utilisation of the tax
losses and Investment tax allowances to partly offset the taxable
profits, the tax liability is Rs. 798 million. After deducting
Advanced Company Taxes and Economic Service Charges amounting
to Rs. 501 million already paid a further Rs. 297 million has
to be paid in 2005.
Along with deferred tax effects and a change of estimation made
in the previous year the net tax charge in the income statement
in 2004 is Rs. 148 million.
Profitability
Return on Assets for 2004 was 4.6% compared to 7.8% in 2003.
Operating margins dropped as explained in the introduction while
Asset turnover saw a marginal increase compared to 2003.
 Earnings
before interest, tax, depreciation, amortisation and provisions
for International Telecommunication Levy and Tsunami damages
(EBITDA) of the Group were Rs. 15.5 billion. This is 5% higher
than the previous year mainly due to the increase in revenue
resulting from tariff revision in 2003. With increased depreciation
compared to the previous year earnings before interest and tax
before deducting International Telecommunication Levy and Tsunami
damages is Rs. 6.4 billion which is almost as same as the previous
year.
However, a large proportion of this profit has been eliminated
due to provisions amounting to Rs. 2.8 billion in respect of
International Telecommunication Levy and Tsunami damages. After
recognising finance costs and other income the final earnings
before tax was Rs. 1.4 billion which is Rs. 1.8 billion less
than the previous year.
Capital Structure
SLT during the year successfully completed an international
bond issue of USD 100 million. Approximately half of this amount
was utilised to settle part of the existing loans. This has
brought the Group borrowing levels from Rs. 21 billion (31 December
2003) to Rs. 25 billion increasing the Group gearing to 45%
(31 December 2004). Net increase in SLT borrowings was Rs. 1
billion and that in Mobitel was Rs. 3 billion.
The unutilised proceeds of the bond issue has been temporarily
invested in short term foreign currency fixed deposits until
it is utilised for Mobitel expansion.
Total settlements of borrowings by the Group during the year
was Rs. 17 billion out of which Rs. 13 billion relates to SLT
while Rs. 4 billion relates to Mobitel. The debt portion of
the Group as at 31 December 2004 was 45% of total capital compared
to 41% a year ago.
The low gearing of SLT has been effectively leveraged for the
Group as a whole.
Performance Measurement
Basic Earnings Per Share (EPS) of SLT (Group) for the year was
Rs. 0.72 compared to Rs. 1.25 of the previous year. Return On
Equity was 4.1% in 2004 based on the Group figures as at 31
December 2004. The comparative ratio for 2003 was 7%.
Since disclosure of the 2004 results in the Colombo Stock Exchange
at end of February 2005 SLT share was trading between Rs. 16
and Rs. 17 per share.
Excellence in Reporting
 SLT
is committed to adopting the best practices in financial reporting
in its relationship with investors and other users of financial
statements. The Company also gives high priority to provide
quarterly financial information in a timely manner. Relevant
information is disseminated through the ‘Investor’
magazine published on a quarterly basis.
The Institute of Chartered Accountants of Sri Lanka adjudged
the Annual Report of SLT for the financial year 2003 as the
winner in the Services sector at its Annual Report Awards Competition.
Further it was adjudged as the Runner-Up of Communication and
IT Category at the SAARC Regional Competition. These are creditable
achievements gained by the Company in the Corporate Financial
world. The criteria of selection prove the Company’s high
standards in ensuring transparency, good governance and compliance
with statutory and best accounting practices.
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