Introduction
From a financial point of view 2003 was a challenging year
for SLT. The shares of SLT were listed on the Colombo Stock
Exchange (CSE) following the Initial Public Offering in the
latter part of 2002. Trading commenced on 14 January 2003
since then SLT share has been the most liquid share on the
CSE. It has been the highest market capitalised company on
the CSE for most of the time.
With the full liberalisation of the telecommunications market
of Sri Lanka 32 External Gateway licences were issued during
the year. As a result international telephony services have
been under tremendous pressure. International Direct Dialling
rates had to be shed significantly whereas the international
settlement rates were also pruned down. Rebalancing of these
revenue losses was rather late as the Telecommunications Regulatory
Commission approved the fifth tariff revision effective from
September 2003.
SLT was also affected by the inconsistent fiscal policies
of the government. In the budget of 2003 the Investment Tax
Allowances were abolished with effect from 2005 depriving
SLT of a large amount of tax benefits, which would have been
accrued.
Financial Statements at a Glance - Company
(Rs. million)
2003
2002
1st
Qtr.
3 months
2nd
Qtr.
6 months
3rd
Qtr.
9 months
4th
Qtr.
12 months
12 months
Turnover
6,177
12,228
18,385
24,477
25,207
EBITDA (after VRS)
3,643
6,762
10,368
13,743
15,497
Earnings B. Int
& Tax
1,687
2,810
4,426
5,756
7,939
Earnings A. Int
& Tax
768
1,007
1,841
2,383
2,681
Shareholders' Funds
39,202
39,170
40,113
30,790
29,080
Total Assets
74,650
72,475
71,892
68,827
73,872
Revenue
The major contributors to the revenue of the Company in 2003
were domestic revenue 63%, IDD 10% and international in-payments
21%. The total turnover of the Company show a marginal decline
in 2003 compared to 2002.
The IDD rates were significantly reduced in March 2003 following
the liberalisation of telecommunications services. This caused
an immediate reduction in IDD revenue. But, IDD volumes increased
tremendously so that even at lower rates the IDD revenue levels
reached almost the same levels prevailed prior to the reduction
of rates.
International settlement rates were also reduced significantly
causing a drop in ‘international in-payment’ revenue
compared to the previous year.
The comparative reduction was 30% from the previous year amounting
to Rs. 2.1 billion. A further reduction of revenue was prevented
by the timely strategies implemented by SLT to secure traffic
volumes.
Though a tariff rebalancing activity through an increase in
local tariffs was due, the regulator approved that only in
September 2003. Accordingly the local tariff increase, which
was effective only during the last quarter of 2003, was not
sufficient to cover the revenue loss in International telephony.
With the consolidation of full year revenue of the fully owned
subsidiary Mobitel the Group revenue was almost in line with
the previous year. The contribution of revenue to the Group
by Mobitel during the year after eliminating inter-company
transactions was Rs. 1,124 million.
Operating Costs
The operating costs of the Company including cost of VRS were
Rs. 10,734 million (previous year Rs. 9,710 million) and the
depreciation cost was Rs. 7.987 million (previous year Rs.
7,558 million). The cost consciousness and improved productivity
of SLT employees in day-to-day operations contributed to control
the costs. The operating costs of the Company increased only
by 10% compared to the previous year. Increase in employee
costs by Rs. 330 million mainly reflects the increments and
higher bonuses.
During the year Company successfully launched a voluntary
retirement scheme where the cost was Rs. 710 million. This
was the main reason for the increase in total costs.
Increase of Rs. 605 million in payments to other network operators
(international) is a reflection of increase in IDD volumes.
The increase was however controlled to a certain extent by
effectively negotiating the termination rates with overseas
carriers.
Consequent to consolidating the results of Mobitel for the
full year, Group operating costs were 11% higher than the
previous year.
Finance Costs
Interest costs of the Company were reduced mainly due to reduction
in loan capital. Interest on borrowings was Rs. 2,193 million
during the year, which is 22% less than the previous year.
However due to settlement of loans denominated in foreign
currency, an amount of Rs. 609 million of exchange losses
was realised under the treatment of cash flow hedge accounting.
Cash Flow Hedge
Transfer to hedge reserve in 2003 was Rs. 208 million compared
to Rs. 829 million in the previous year. The reduction was
partly due to reduction in foreign currency denominated loans.
Another factor was the stability of Sri Lanka Rupee against
the United States Dollar.
Rs. 609 million was charged back to Income Statement as realised
exchange losses. The figure in the previous year was Rs. 571
million. The increase of this amount is due to two factors.
One is the higher amount of loans settled during the year.
The other is that the amount charged to Income Statement consists
of unrealised exchange losses over the past two years whereas
the previous year amount consisted of unrealised exchange
losses of only one past year as this treatment was commenced
only in 2001.
As a result the hedge reserve decreased only by Rs. 401 million
during the year.
Taxation
The Company is not liable to pay tax in respect of 2003 due
to brought forward losses. The tax charge in the Income Statement
represents the deferred taxes provided in terms of the Sri
Lanka Accounting Standards. The corporate tax rate applicable
in computation of these deferred taxes was 30%.
Previous year tax charge included adjustment of deferred tax
assets due to reduction in tax rates affected in that year.
This was one reason to the comparative reduction of tax charge
during the year. The reduced profits and lower tax rate of
30% (previous year 35%) also contributed to lower amount of
tax charge in 2003 compared to the previous year.
In the budget of the government in 2003, the tax benefits arising
from brought forward investment tax allowances were abolished
with effect from 2005. Accordingly, SLT will not be able to
make use of brought forward investment tax allowances amounting
to Rs. 39,000 million relating to the heavy investments made
in the period between 1998 and 2000. As a result Rs. 9,849 million
representing the unclaimable balance of the related tax asset,
which was recognised at the time of those investments had to
be reversed during 2003. This reversal was affected through
the Statement of Changes in Equity.
Profitability
Earnings before interest, tax, depreciation and amortisation
(EBITDA) were Rs. 14,453 million prior to deducting the cost
of VRS. This is 7% lower than the previous year. The reduction
is mainly due to the reduction in revenue and increase in operating
costs. Depreciation has increased compared to the previous year
because of the incremental capital expenditure. Consequently
earnings before interest and tax after deducting cost of VRS
is Rs. 5,756 million, which is 27% below the previous year.
However, this deficit was eliminated to a large extent by
the reduction in finance costs and taxation. Accordingly,
the final earnings after tax was Rs. 2,383 million, only Rs.
298 million less than the previous year. Prior to deducting
the cost of VRS (net of tax effect), earnings after tax would
have been Rs. 2,880 million, which in effect an increase of
7% compared to the previous year.
Rs. 78 million of ‘goodwill on consolidation’
was amortised in the Group Income Statement. The losses incurred
by the subsidiaries were Rs. 56 million and have been included
in arriving at the Group profit.
Capital Structure
SLT continued its strategy of reducing the gearing levels of
the Company through settlement of borrowings. Borrowings amounting
to Rs. 7,599 million were settled during the year. Out of this
amount 51% represented loans denominated in foreign currency.
Accordingly, the balance of borrowings as at 31 December 2003
was Rs. 17,490 million compared to Rs. 25,415 million a year
ago. The debt portion of the Company as at 31 December 2003
was 36% of total capital compared to 47% a year ago.
The low gearing of SLT is being effectively leveraged for
the Group as a whole. The fully owned subsidiary, Mobitel
borrowed Rs. 3,324 million during the year for its expansion
activities.
Performance Measurement
Basic Earnings per Share (EPS) of SLT (Group) for the year was
Rs. 1.25 compared to Rs. 1.49 of the previous year. However
based on the profit prior to deduction of the cost of VRS which
is a non-recurring item EPS would have been Rs. 1.52 which would
have been a growth of 2% from the previous year.
Return on Equity was 7.3% in 2003 based on the Group figures
as at 31 December 2003. Based on the profit prior to deduction
of the cost of VRS it would have been 8.8%. With the positive
market sentiments SLT share price was increased to Rs. 30/-
per share. As at 31 December 2003 it was trading at Rs. 18
per share. Market capitalisation at year-end was Rs. 32.4
billion, which accounted for 12.3% of total market capitalisation
on the CSE. During the year a total of 279,750,200 shares
of SLT were traded, generating a value of Rs. 5.5 billion.
Dividends
SLT has proposed a dividend of 5% in respect of 2003. This
amounts to Rs. 903 million, which is 38% of the earnings after
tax. The dividend cover is 2.64 times compared to 2.47 times
in the previous year.
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 ‘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 2002 the runner-up
in the Services sector. This is a creditable achievement 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.
