sri lanka telecom plc (sltl.n0000)...sri lanka telecom plc 3 a capital market development initiative...

Sri Lanka | Telecommunication EQUITY RESEARCH

Initiation of coverage 20 December 2013

Sri Lanka Telecom PLC (SLTL.N0000)

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A capital market development initiative by the Colombo Stock Exchange in association with Amba Research

Backbone of the nation Sri Lanka Telecom PLC (SLTL) is Sri Lanka’s largest fixed telephony operator, with a market capitalization of LKR67bn as at 19 December 2013. The company operates in fixed telephony (FT) – which comprises broadband and pay-TV – and mobile telephony (MT). We believe SLTL’s future revenue growth will stem from its FT segment, driven by the shift towards increasing data usage from voice, and the company’s focus on migrating its fixed voice customer base to broadband and pay-TV services, as both these segments have low penetration in Sri Lanka. We also expect the MT segment to contribute to revenue growth despite the country’s high penetration rates. We believe high levels of price competition in the local market (compared with those of its regional peers) will pressure EBITDA margin growth, with our estimates increasing modestly over 2013E-2015E. However, SLTL has strong balance sheet metrics, which should support its dividend payout despite high capex. Our DCF valuation (with a scenario analysis) and our EV/EBITDA analysis suggest a share price range of LKR34-45, versus a share price of LKR37 as of 19 December 2013.

We forecast SLTL’s revenue to grow at a 6.6% CAGR through 2015E. We expect

revenue growth to be driven by increasing data usage in FT operations as the company focuses on migrating its subscribers towards the next-generation network (NGN) and cross-selling its triple play services (primarily broadband and pay-TV to its enterprise and household subscribers) through its Megaline connection. We also believe that the MT segment (comprising SLTL’s mobile arm Mobitel, which has a subscriber market share of 21%) still has revenue growth potential despite near 100% penetration levels, given that regional peer analysis, as discussed in report, shows Sri Lanka has further headroom for growth. However, any significant revenue growth in MT would be capped due to intense price competition in the domestic market.

We forecast the EBITDA margin to increase 32bps over 2013E-2015E. We have

maintained a conservative view on EBITDA margin expansion on the back of the company’s network infrastructure expansion projects currently underway. We believe that these investments are yet to pay-back in terms of significant subscriber additions and economies of scale; these projects should yield returns once a sufficient proportion of the FT (triple play) Megaline customer base adopts broadband and pay-TV services. Intense price competition in MT operations, together with the shift from voice to lower-margin data usage, should continue to pressure margins. Cost inflation, industry rivalry and delayed pay-back could result in downward pressure to our EBITDA margin forecasts.

Higher capex could pressure FCF generation. We believe SLTL’s current capex

cycle (which should phase out in 2015E) will see approximately LKR55.7bn spent through 2015E, resulting in negative FCF over 2013E-2014E, with FCF returning to positive levels only in 2015E. These outflows are primarily centered on the company’s network modernization program, including NGN migration and the i-Sri Lanka project (discussed later on in the report). However, we believe SLTL’s strong balance sheet, supported by sound liquidity and low financial leverage, should allow the company to maintain its dividend payout (at approximately 35%) to shareholders.

We establish a valuation range of LKR34-45. Our DCF valuation includes a bull-

and bear-case scenario analysis that factors in potential upside and downside risks to our base-case assumptions, yielding a range of LKR34-42. Our EV/EBITDA analysis estimates that SLTL currently trades at a 2014E multiple of 3.9x – a 7.4% discount to its normalized average one-year historical EV/EBITDA multiple. Applying a 10% premium and discount (warranted by several positive and negative factors that could affect our base-case estimates) to the normalized multiple gives a range of LKR36-45.

Key statistics CSE/Bloomberg tickers

Share price (19 Dec 2013)

No. of issued shares (m)

Market cap (USDm)

Enterprise value (USDm)

Free float (%)

52-week range (H/L)

Avg. daily vol. (shares,1yr)

Avg. daily turnover (USD

‘000)

SLTL.N0000/SLTL SL

LKR37

1,805

511

605

5.5%

LKR50/37

14,212

5

Source: CSE, Bloomberg Note: USD/LKR=129.1 (average for the one year ended 19 December 2013)

Share price movement

Source: CSE, Bloomberg

Share price performance

3m 6m 12m

SLTL -7.5% -10.0% -14.9%

S&P SL 20 0.4% -7.5% 6.5%

All Share Price Index 0.9% -5.5% 6.2%


Summary financials

LKRm (year end 31 December) 2012 2013E 2014E

Revenue 56,771 58,683 63,312

EBITDA 17,964 18,271 20,091

EBIT 6,170 6,020 7,368

Net profit 4,036 4,798 5,059

Recurrent EPS 2.24 2.66 2.80

ROE (%) 7.6 8.5 8.5

EV/EBITDA (x) 4.8 4.3 3.9

Source: SLTL, Amba estimates

90%

110%

130%

Dec-12 Mar-13 May-13 Aug-13 Nov-13SLTL ASPI S&P SL 20

Sri Lanka Telecom PLC

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Table of Contents

SLTL to post a revenue CAGR of 6.6% over 2013E-2015E ................................................................................................ 3

Fixed telephony (FT) operations to drive revenue growth, supported by favorable industry trends ...................................................... 3 Mobile telephony (MT) revenue to post a 6.5% CAGR over 2013E-2015E .......................................................................................... 5 International gateway operations remains a steady source of revenue for SLTL ................................................................................. 7 Factors that warrant a potential upside to top-line growth .................................................................................................................... 8 Downside risks to top-line growth ......................................................................................................................................................... 8

We forecast EBITDA margin growth of 32bps over 2013E-2015E ...................................................................................... 9

FT segment EBITDA margin to expand by 29bps through 2015E ...................................................................................................... 10 MT segment’s EBITDA margin to grow by 59bps over 2013E-2015E; margin pressure anticipated .................................................. 10 Other factors that can provide potential margin upside and downside ............................................................................................... 12

Sound liquidity to stem gearing, despite higher capex pressuring short-term FCF ........................................................... 13

SLTL’s stable cash reserves to curb gearing and improve interest cover ........................................................................................... 13 SLTL’s capex program to phase out in 2015E .................................................................................................................................... 14 Dividend payout over 2013E-2015E maintained at historical average ................................................................................................ 14

We arrive at a valuation range of LKR34-45 for SLTL’s shares ........................................................................................ 16

DCF analysis yields a valuation range of LKR34-42 per share........................................................................................................... 16 EV/EBITDA used as the relative valuation technique to support our DCF analysis ............................................................................ 18

Share price performance .................................................................................................................................................... 21

Earnings release focus areas ............................................................................................................................................. 22

Appendix 1: The Sri Lankan mobile telecommunications industry .................................................................................... 23

Industry overview ................................................................................................................................................................................ 23 Competitive landscape in the mobile telecommunications industry .................................................................................................... 23 Broadband industry in Sri Lanka ......................................................................................................................................................... 25 Pay-TV industry in Sri Lanka .............................................................................................................................................................. 26 Industry regulation .............................................................................................................................................................................. 26

Appendix 2: Company overview......................................................................................................................................... 28

SLTL’s business segments ................................................................................................................................................................. 29 Management strategy, transparency and governance ........................................................................................................................ 29 Shareholding structure ....................................................................................................................................................................... 30 Board of directors ............................................................................................................................................................................... 31 Corporate holding structure ................................................................................................................................................................ 32

Appendix 3: Key financial data ........................................................................................................................................... 33

Summary group financials (LKRm) ..................................................................................................................................................... 33 Segmental summary ........................................................................................................................................................................... 35

Appendix 4: SWOT analysis .............................................................................................................................................. 36

Fact Sheet .......................................................................................................................................................................... 37


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SLTL to post a revenue CAGR of 6.6% over 2013E-2015E

We believe SLTL’s revenue growth will stem primarily from its FT business (comprising double- and triple-play services), which is continuously undergoing a mix shift from fixed voice to data usage. This should be supported by the mobile telephony (MT) segment’s performance (both voice and data) as SLTL focuses on gaining market share in the domestic market. Furthermore, we believe SLTL’s continuing investments in its backbone infrastructure will continue to provide the company with a competitive position over its main domestic rival Dialog Axiata PLC (DIAL).

Figure 1: SLTL’s revenue to grow at a 6.6% CAGR over 2013E-2015E


Fixed telephony (FT) operations to drive revenue growth, supported

by favorable industry trends

We expect SLTL’s FT operations (57% of 2012 revenue) to generate a revenue CAGR of 7.2% over 2013E-2015E, supported by macroeconomic factors indicating a growing trend towards higher data usage, compared to voice, together with changing consumer dynamics and low fixed broadband penetration rates in Sri Lanka. We believe SLTL’s sound infrastructure network will enable it to maintain its market leadership in the FT market, which includes fixed wireline and wireless CDMA services (and accounted for 44% of fixed access services subscriber market share in 2012), while enabling the company to also further grow its market share at a steady pace.

Figure 2: FT operations to post a revenue CAGR of 7.2% over 2013E-2015E


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FT operations' revenue (LHS) FT operations' revenue YoY growth (RHS)

Macro-economic growth and favorable consumer trends to spearhead FT growth


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Favourable macroeconomic developments and changing consumer

dynamics to spur demand for fixed broadband

We believe growth in SLTL’s enterprise subscriber base will be driven by the Sri Lankan government’s plans to make the country a knowledge hub, the increasing importance of the growing BPO/KPO industries, ongoing economic/commercial developments (within the tourism and ports industries, for example), together with infrastructure development programs within the country. These would all require larger volumes of data transfer, and we expect these to support our FT ARPU forecasts.

Furthermore, we believe increased data-sharing, social networking and a shift in consumer preferences (a growing middle class, who will be able to pay higher rates for faster speeds and uninterrupted services) could fuel growth in household subscriber numbers.

We forecast higher net FT subscriber additions as the Sri Lankan fixed broadband market shows further headroom for growth.

Figure 3: SLTL’s fixed broadband subscribers to increase to approximately 572,000 by 2015E, from roughly 332,000 in 2012

Source: SLTL, Central Bank of Sri Lanka, Amba estimates

We expect both enterprise and household FT subscribers (triple play) to increase at an 8.6% CAGR over 2013E-2015E, supported by an increase in FT broadband penetration rates (with SLTL reporting broadband rates at approximately 30% of Sri Lankan households as of September 2013), as well as stable pricing. We also estimate blended ARPU levels (for both voice and data customers [Megaline and Citylink]) to decline at a CAGR of 1.3% over 2013E-2015E as we believe that the pace of broadband adoption (even though subscribers switch over to triple play, we expect low usage) over our explicit forecast period will be rather slow, owing to the nature of SLTL’s consumer base. In addition, fixed broadband tariff rates in Sri Lanka are extremely low due to tough price competition (see Figure 29), making it difficult for SLTL to charge higher rates.

PEO TV operations to contribute to revenue growth, but continue to face

competition from local ‘free-to-air’ entertainment

We believe that a growing middle-class population, supported by rising GDP per capita and higher levels of disposable income, together with improving penetration rates (from the low level that is currently prevalent in the industry), would contribute to SLTL’s FT operations’ revenue growth. We estimate a 23.5% CAGR over 2013E-2015E in SLTL’s PEO TV subscriber numbers (from a low subscriber base) to reach 128,000 by 2015E, with pay-TV penetration levels in Sri Lanka increasing to 10.0% in 2015E (based on our estimates) from roughly 8.0% in 2011.

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2010 2011 2012 2013E 2014E 2015E

Market share '000s

SLTL's fixed broadband subscribers (LHS) SLTL's fixed broadband market share

Commercial developments in Sri Lanka and greater content sharing amongst consumers to drive broadband growth

Penetration levels in the pay-TV industry to increase to 10% by 2015E, from roughly 8% in 2012


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Figure 4: PEO TV subscriber numbers to reach 128,000 in 2015E (representing a 23.5% CAGR over 2013E-2015E)


It should be noted, however, that while low penetration indicates that the industry is still in its infancy with material revenue growth potential, the Sri Lankan TV entertainment industry is dominated by almost 20 domestic private and state-owned analog ‘free-to-air’ television channels, which are still favored by the majority of the population. These channels primarily cater to daily primetime local-language entertainment requirements. SLTL also faces stiff competition from its closest rival DIAL, which also has a pay-TV offering, with a similar range of content.

In addition, there could be further downside risks to pay-TV revenue stemming from the large number of illegal pay-TV connections (particularly in the north of Sri Lanka, according to industry sources), with subscribers receiving signals from neighboring India. Although the Telecommunications Regulatory Commission of Sri Lanka (TRCSL) has recently issued legislation making such connections illegal, these regulations are not strictly enforced, resulting in several such connections in Sri Lanka, and thereby the loss of potential subscribers for SLTL.

SLTL’s national backbone network (NBN), 4G LTE and other investment

projects to support its fixed broadband growth

SLTL secured a 10-year license from the TRCSL to provide a backbone infrastructure network to the entire country. We believe the NBN infrastructure (see Appendix 2) should assist SLTL in increasing its revenue flow within the FT segment, by leasing out lines to other telecommunication operators.

In addition, the i-Sri Lanka project, together with the next generation network (NGN) migration (a network modernization program [refer Appendix 2]), should lead to improved broadband speeds for SLTL’s customers. This should assist in greater fixed broadband penetration rates, as it becomes simpler for fixed voice or SLTL’s CDMA customers to migrate onto the new platform and enjoy high-speed broadband services.

Mobile telephony (MT) revenue to post a 6.5% CAGR over

2013E-2015E

We expect SLTL’s MT operations (42% of 2012 revenue, and operated through its 100% owned subsidiary Mobitel) to generate a revenue CAGR of 6.5% over 2013E-2015E (from a relatively higher base) despite near 100% penetration rates. This growth would be driven by increasing penetration rates, particularly in the fast-growing mobile data segment. Although we believe it will be difficult for SLTL to gain market share in the MT market due to the presence of DIAL, the market leader, we forecast a modest 3.8% CAGR in subscriber numbers over 2013E-2015E, with market share estimated to increase by 150bps to reach 22.5% by 2015E. We forecast a slight increase in ARPU levels, with blended ARPU estimated to grow at a 2.6% CAGR over 2013E-2015E, as the Sri Lankan mobile telecommunications market approaches maturity.

-70

30

130

230

330

430

530

2010 2011 2012 2013E 2014E 2015E

Subscribers (000s)

Estimated pay-TV market size SLTL's PEO TV subscriber base

Competition from domestic free-to-air content could hamper revenue growth

MT segment to see 6.5% revenue CAGR over 2013E-2015E despite near 100% penetration levels

Investments in infrastructure expansion and network modernization should help to capture greater market share


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Figure 5: MT operations to post a revenue CAGR of 6.5% over 2013E-2015E

Source: SLTL, World Bank, Amba estimates

Voice revenue driven by higher penetration rates and MoUs

We believe MT ARPU levels should increase on account of the growing spending power among the domestic mobile subscriber base, supported by GDP per capita growth. In the voice segment, ARPU should mainly be driven by increasing minutes of use (MoUs) and incremental revenue per minute (RPM), through the introduction of more value-added services (VAS), such as voicemail and call conferencing, for example. We believe VAS will become increasingly important for SLTL going forward to both attract new users and get existing subscribers to use more of its services, thereby increasing customer stickiness. Due to the intensity of competition in the industry, it is unlikely that SLTL will be able to grow ARPU solely through tariff increases. Furthermore, we believe the relative inelastic demand for telecommunications services, which has now become an essential service in Sri Lanka, and the growing need among mobile users to stay connected, should contribute to higher ARPU levels.

Figure 6: Mobile ARPU growth supported by anticipated boost in GDP per capita

Source: SLTL, World Bank, Amba estimates

Although the level of mobile voice penetration is expected to pass the 100% mark this year, we believe the cellular market in Sri Lanka can be penetrated further. In comparison with regional peer countries, statistics show that there is room for further penetration within the Sri Lankan market (see Figure 25), as countries such as Singapore and Malaysia, for example, had penetration levels of 150% and 127%, respectively, in 2011. We believe there is headroom for further subscriber growth, mainly due to SLTL’s established brand name, customer service quality, nationwide coverage and its widespread service center network, together with increasing affordability of hardware devices.

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Blended mobile telephony ARPU (LHS) GDP per capita growth rate (RHS)

Rising GDP levels and increasing MOUs lead to higher mobile ARPU


7


Figure 7: Mobile penetration rates in Sri Lanka to surpass the 100% mark in 2013

Source: Central Bank of Sri Lanka, Amba estimates

Growing middle-class spending and the launch of 4G LTE to fuel mobile

data growth

We believe the increasing adoption of smartphones (and hence greater usage) will contribute positively to higher mobile data subscriber numbers. We believe this will be supported by the country’s low broadband penetration rates – approximately 30% at the end of September 2013, as reported by SLTL and the TRCSL. Although Sri Lanka is regionally a much smaller market (in terms of volume), the emerging market trend of rapid growth in smartphone usage (see Appendix 1) can be identified, with smartphones accounting for approximately 13% of mobile handset shipments to Sri Lanka in 2Q13, compared with just 9% in 2012 (according to CyberMedia Research, a South Asian market research, consultancy and advisory firm).

To increase the pace of adoption and to compete with DIAL, SLTL has also started selling hardware devices; this, together with enhanced 3G and 4G connectivity across the island that is supported by SLTL’s investments in network coverage and infrastructure, should only serve to fuel growth. SLTL launched its mobile 4G-LTE services in June 2013 and although coverage is only available in a few key cities at present (namely Colombo, Hambantota, Matara, Galle, Kalutara, Kandy and Jaffna), we believe SLTL will roll out this new technology across the island over the next few years, supported by its investments in infrastructure.

We believe mobile ARPU will be driven up by the growing adoption of small-screen data usage, which should increase MoUs, and the willingness of subscribers to pay slightly higher tariffs (compared with those of voice operations) for faster speeds and better quality of service. Furthermore, Sri Lanka’s broadband tariffs – which are among the lowest in the world – should encourage higher usage (MoUs) among subscribers, thereby supporting revenue growth.

International gateway operations remains a steady source of

revenue for SLTL

SLTL receives a sizeable portion of total revenue (roughly 17% on average historically) from levies paid by other telecommunications operators on any international incoming call minutes into Sri Lanka through SLTL’s international gateways. While separate revenue disclosure is not available in SLTL’s recent financial reports for this segment, we still believe that these international call termination fees will continue to provide a noteworthy source of revenue. However, a significant downside risk that could be of concern would be the loss of DIAL as a customer; post-commissioning of DIAL’s Bay of Bengal undersea cable network, DIAL would not be dependent on leasing bandwidth from SLTL, as it would now be able to do so from international telecommunications operators, such as those in Singapore and the Middle East.

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2010 2011 2012 2013E 2014E 2015E

Penetration '000s

Population (LHS) Mobile subscribers (LHS) Penetration rates (RHS)

DIAL commissioning the Bay of Bengal cable network could lower SLTL’s international gateway operations’ revenue

Increasing adoption of smartphones and low broadband penetration rates to support mobile data growth


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Factors that warrant a potential upside to top-line growth

Possible industry consolidation in the mobile operations segment – With five operators in the mobile telecommunications industry battling to gain market share, industry consolidation appears to be the only way to go forward. Although there have been some acquisitions in the recent past, we believe there is still room for a few more mergers, which would leave only two or three large established operators in the industry. This would put these remaining operators in a more favorable position to compete and grow market share as well as revenue. However, the smaller competitors appear reluctant to dispose of their holdings, as recently indicated by Bharti Airtel officials, who denied rumors of a possible sell-off of Airtel’s Sri Lankan operations.

Better-than-anticipated penetration rates in FT (broadband) services – Current FT (broadband) penetration rates in Sri Lanka are estimated at approximately 30% of households (based on our calculations). SLTL may see significant upside to its revenue growth if its recent investments in broadband infrastructure and technology are supported by higher-than-expected subscriber penetration rates.

Downside risks to top-line growth

Increase in telecommunication levy to 25% – The 2014 budget proposal saw a 5% increase in taxes on telecommunication services (including voice calls), which would increase charges and consequently cause a slowdown in customer usage (MoU). This could lower our ARPU forecasts.

Lower-than-expected economic growth – SLTL’s business model is driven by higher consumer spending and a growing middle-class in Sri Lanka (GDP per capita projected by the CBSL to reach USD4,000 in 2016 – a 37% increase from 2012 levels) and the subsequent increase in disposable income levels would benefit SLTL. However, the downside risk to SLTL, in the event of lower-than-forecasted periods of economic growth, could be consumers’ reluctance to pay for non-essential product offerings, such as pay-TV and broadband, which, in turn, could negatively impact revenue growth.

Implementation of the number portability rule (NPR) – The NPR will allow subscribers of a particular operator to switch over to any other domestic telecom provider, while still maintaining the same number. Most subscribers are currently reluctant to switch over to other providers due to the hassle involved in informing their contacts of the number change. Instead, they opt to maintain multiple SIMs from different operators, but in most cases will use the additional connections sparingly. The TRCSL has been contemplating the implementation of this rule since 2010. However, if this rule comes into play, we believe SLTL could stand to lose out, as smaller network operators could use this as an opportunity to entice subscribers from SLTL through more competitively priced offers.

Damage to the cable lines used to provide broadband services – The optical fiber submarine communication cables (e.g., SEA-ME-WE 4) connecting Sri Lanka to Southeast Asia, the Middle East and Western Europe have been damaged on various occasions in the past, resulting in network outages and limited usage and connectivity during periods of repair. The most recent incident on 27 March 2013 reported a cut in the cable that ran from Pakistan through to Alexandria, Egypt, and this disrupted Internet connectivity for over a month. A similar incident that affects Sri Lanka could impact SLTL’s revenues, as its global coverage depends on its undersea optical fiber links (SEA-ME-WE 3, SEA-ME-WE 4, Bharat Lanka submarine cable [between India and Sri Lanka] and Dhiraagu [the SLT undersea cable between Sri Lanka and the Maldives]).

Inability to grow customer base in the pay-TV segment – This is one of the key growth areas that SLTL has introduced to support future revenue streams. However, the tendency of Sri Lankan subscribers to prefer local free-to-air channels that offer a wide variety of local-language content is a threat to SLTL.

Negative macroeconomic factors, NPR and possible damage to cable lines could hamper revenue growth in future

Industry consolidation and better-than-anticipated broadband penetration rates in FT operations could lead to incremental top-line growth


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We forecast EBITDA margin growth of 32bps over

2013E-2015E

We estimate a 32bps increase in SLTL’s EBITDA margin over 2013E-2015E to 32.0% in 2015E. We expect the company’s FT and MT segments (which represented roughly 59% and 39% of the EBITDA mix in 2012, respectively) to post modest EBITDA margin expansion over 2013E-2015E, and we believe that any margin upside over our explicit forecast period will be restricted due to reasons discussed below.

Figure 8: SLTL’s EBITDA margin to grow 32bps over 2013E-2015E


Our guarded view on margin expansion is backed by the fact that Sri Lankan telecommunication operators face intense price competition amid some of the lowest tariff rates in the world. Moreover, our analysis shown in Figure 9 indicates that, historically, SLTL’s EBITDA margin has been lower than those of its regional peers and we expect this trend to continue.

Figure 9: SLTL’s EBITDA margin lower than its regional peers, a trend we expect to continue

Source: SLTL, Bloomberg, Amba estimates

Note: Our regional peer sample includes a domestic peer (Dialog Axiata PLC), India-based peers (Reliance Communications, Bharti Airtel, Idea Cellular), Indonesia-based peers (Indosat Tbk PT, PT XL Axiata Tbk), a Singapore-based peer (Singapore Telecom) and a Philippines-based peer (Globe Telecom Inc.)

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2010 2011 2012 2013E 2014E 2015E

SLTL EBITDA margin FT EBITDA margin MT EBITDA margin

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2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Peer average EBITDA margin SLTL's EBITDA margin


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FT segment EBITDA margin to expand by 29bps through 2015E

Our conservative view on this segment is mainly on the back of the network expansion programs underway with SLTL expanding its fiber optic cable lines. The focus is to migrate nearly all its customers (across the island) onto the Megaline connection, with the aim of cross-selling triple-play services and converting more fixed line users to fixed broadband (shift from voice to data) and support top- and bottom-line growth.

However, as this network modernization project is still underway, we believe that it would lead to margin pressure over our explicit forecast period, as currently, only 33% of the Megaline subscriber base comprises broadband customers. Therefore, until such time that a sufficient proportion of the subscriber base adopts broadband usage (and economies of scale set in), and ARPU starts to pick up, we believe SLTL will face squeezed margins as the company seeks to cover its network rollout costs. A downside risk to margin expansion would be the pace of adoption of broadband services. This would be a problem if the majority of the subscriber base are households (with a fixed line connection), as most of the users might be within older age groups, and therefore, could be less likely to convert to a broadband line.

Figure 10: Fixed broadband customers to represent a larger proportion of the subscriber base by 2015E


Another avenue for margin expansion is the NBN infrastructure, where SLTL has a 10-year license, which means it is the sole licenser of backbone infrastructure to other domestic telecom operators. We believe that these leased lines provide a noteworthy source of income to SLTL and can therefore contribute towards EBITDA margin growth. However, a potential downside risk to this is the loss of business from DIAL, one of its key customers, with the commissioning of the Bay of Bengal gateway in end-2014, as mentioned earlier on page 7.

MT segment’s EBITDA margin to grow by 59bps over 2013E-2015E;

margin pressure anticipated

We expect the mobile operations segment to yield slight EBITDA margin growth of 59bps to reach 30.0% in 2015E, on the back of intense price competition prevalent in the industry as well as the shift toward increasing data usage from voice.

SLTL undoubtedly faces immense price competition from its closest domestic rival, and market leader in the mobile telecommunications market in Sri Lanka, DIAL. We believe that the economies of scale achieved by DIAL (with 8.5m mobile subscribers, versus Mobitel’s 4.5m) will continue to put pressure on SLTL’s MT segment margins, which historically have remained below DIAL’s levels.

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Fixed access penetration rates (CDMA and fixed wireline)

On-going network upgrades and a slower pace of broadband adoption could pressure FT segment EBITDA margin


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Figure 11: SLTL’s mobile segment EBITDA margin has been lower than DIAL

Source: SLTL, DIAL, Amba estimates

We also believe that there is a shift toward greater data usage from voice, with current trends indicating higher mobile data usage by subscribers. This could exert additional pressure on margin growth as mobile data services yield lower margins than voice services (likely due to the lower penetration levels in mobile broadband in Sri Lanka), and also incur relatively higher costs in rolling out the required infrastructure.

We believe the segment’s margin could be further impacted by the following factors:

The previously mentioned intense competition from SLTL’s closest domestic rivals – While SLTL is behind the market leader DIAL in the mobile market in Sri Lanka, it still faces intense price competition from other mobile operators such as Etisalat, Airtel and Hutch. Furthermore, SLTL could face higher marketing and operational costs if it aims to compete agressively to maintain its market position.

Cost inflation – Unlike most other consumer spending-driven industries, where cost escalations can partially or wholly be passed on to customers, SLTL operates in a highly competitive industry where cost escalations must be borne by the industry operators. Any high cost escalations would exert pressure on EBITDA margins in the future.

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2010 2011 2012 2013E 2014E 2015E

SLTL MT operations' EBITDA margin DIAL mobile segment EBITDA margin

SLTL’s MT segment EBITDA margin to face pressure on account of intense price competition and the mix shift from voice to data


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Other factors that can provide potential margin upside and

downside

Organisational efficiencies – The migration to the NGN platform (from the older legacy platform) is anticipated to bring about improved efficiency through cost savings and consolidation. Further, as a majority state-owned organisation, we believe SLTL is likely to have some level of operational inefficiencies. Therefore, we believe a conscious effort to increase organisational productivity and efficiency would bode well for margin growth.

Higher personnel costs – SLT has much higher personnel (staff and pension) costs compared to its closest domestic peer DIAL. We believe that this could place additional pressure on margins, and should it continue, stem margin expansion.

Figure 12: SLTL’s personnel costs higher than that of DIAL

Source: SLTL, DIAL

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2008 2009 2010 2011 2012

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SLTL's personnel cost/revenue DIAL's personnel cost/revenue


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Sound liquidity to stem gearing, despite higher capex

pressuring short-term FCF

SLTL’s stable cash reserves to curb gearing and improve interest

cover

SLTL has historically maintained stable cash balances, with cash and cash equivalents (including short-term investments) at LKR7.2bn at the end of 3Q2013 (with the same measure averaging LKR9.6bn over 2009-2012). SLTL’s net debt position has been much more favorable than its closest domestic rival, DIAL, as shown in the graph below.

Figure 13: SLTL’s net debt position is lower than that of DIAL

Source: SLTL, DIAL

We believe SLTL’s capital investments are largely funded by internal cash reserves as, despite increased capex (as discussed below), gearing levels have remained largely stable at an average of 24.0% over 2008-2012, coming in at 25.5% at the end of 3Q2013. We expect gearing to remain at these levels over our explicit forecast period. Further analysis supports our expectation, indicating that SLTL has the lowest gearing level among its domestic and regional peers (DIAL had gearing of 41.0% at the end of 3Q13).

Figure 14: SLTL’s gearing level is lower than peers

Source: SLTL, Bloomberg

We believe this strong liquidity position, together with SLTL’s conservative capital structure, has helped SLTL to maintain its AAA credit rating by Fitch Ratings (with a stable outlook).

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Bharti Airtel SingaporeTelecom

Sri LankaTelecom

DIAL PT XL AxiataTbk

Idea Cellular RelianceCommunications

Gearing Regional peer average


14


SLTL’s capex program to phase out in 2015E

In the dynamic telecommunication industry, service providers need to invest in new technology and supporting infrastructure to maintain and expand their subscriber base and product and service offerings. These companies, including SLTL, go through capex cycles, where essential investments are made to remain up-to-date with the latest technologies, keep pace with competition and possibly to reap the resulting benefits in the following years.

SLTL’s last capex cycle was during 2008-2009, where SLTL invested approximately LKR36.2bn (LKR15.3bn in 2008 and LKR20.9bn in 2009), with investments linked to network modernization, focusing on the NGN migration.

We expect the latest capex cycle (which commenced in 2011) to continue over our explicit forecast period, with LKR53.1bn spent up to 3Q13. We expect cumulative capex of approximately LKR55.7bn through 2015E and we believe these investments will be linked to infrastructure development and network modernization and expansions, such as the company’s fiber optic cable network program (NGN migration and the i-Sri Lanka projects – see Appendix 2).

The above mentioned capex cycles generally result in very low/negative FCF figures during the period incurring capital investments, followed by an upturn in FCF in the following years (as the capital investments yield benefits to these companies). After SLTL’s initial capex cycle over 2008-2009, the company generated positive FCF in 2010 of LKR8.6bn.

In line with these trends, we believe that the new round of capex plans could continue to pressure SLTL’s FCF in the short to medium term, as evident by the cumulative negative FCF of LKR4.8bn from 2011 up to the end of 3Q2013. We expect 2013E and 2014E to also post negative FCF, moving into positive territory only in 2015E (with our 2015E FCF estimate at LKR728m), as the company’s capex program phases out and investment benefits begin to materialize.

Figure 15: High capex to pressure SLTL’s FCF through our explicit forecast period


Dividend payout over 2013E-2015E maintained at historical average

Since 2008, SLTL has maintained a dividend payout ratio averaging 35%, despite capital investments on network upgrades. We believe that this trend is likely to continue going forward given the sound cash reserves SLTL maintains, and therefore we estimate a dividend payout of approximately 35% throughout our explicit forecast period.

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LKR55.7bn of capex projected over our explicit forecast period, linked to network modernization projects

We expect FCF to turn positive in 2015E


15


Figure 16: Dividend payout to shareholders to continue through 2015E


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16


We arrive at a valuation range of LKR34-45 for SLTL’s shares

Based on our current earnings outlook for SLTL’s shares, we establish a 12-month valuation range of LKR34-45, compared with the current share price of LKR37 as of 19 December 2013. We arrived at our valuation range after conducting a scenario analysis to a DCF valuation, and using an EV/EBITDA relative valuation approach. For factors that will provide an upside/downside to these suggested valuation ranges, please refer to pages 8 and 12 of the report.

Figure 17: Valuation range analysis provides a range of LKR34-45 per share (current share price of LKR37)

Source: SLTL, Bloomberg, Amba estimates

DCF analysis yields a valuation range of LKR34-42 per share

For SLTL, our base-case assumptions of a risk-free rate of 9.8% and a market risk premium of 5.0% yield a value per share of LKR37. Adjusting these assumptions (to allow for bull- and bear-case scenarios) implies a valuation range of LKR34-42.

Other elements of our valuation approach include the following:

SLTL’s current capital structure comprises 22% debt and 78% equity. We have assumed a 30% debt and 70% equity target capital structure.

Our base-case valuation assumes a terminal growth rate of 1.0%.

Figure 18 reflects our DCF assumptions for SLTL. We have estimated the following:

EBIT and FCF figures throughout the explicit and fade periods.

We have assumed a nominal effective tax rate of approximately 28.0% (the statutory corporate tax rate in Sri Lanka) from 2014E onwards.

Terminal value at 2022E, calculated by applying a terminal growth rate to unleveraged FCF as of 2022E.

Finally, we arrived at our enterprise value (EV) by discounting the unleveraged FCF values over the explicit and fade periods at WACC.

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17


Figure 18: Amba DCF assumptions schedule (base-case)

WACC assumptions

2014E

Target capital structure 30/70

Cost of equity 15.1% EBIT total (1-t) 5,305

Cost of debt 12.5% FCF (143)

Terminal growth rate 1.0% Terminal value (undiscounted) 134,387

WACC 13.2% EV 66,812

Source: Amba estimates Note: All figures are in LKRm unless otherwise stated

Taking into consideration the upside and downside risks discussed on pages 8 and 12, we arrive at bull- and bear-case scenarios (shown in Figure 19) to establish our valuation range of LKR34-42. These assumptions yield the following scenarios:

Bull-case scenario: Here, we assume that SLTL performs better than our estimates and achieves a 5.0% increase in net subscriber additions each year, over and above our base-case assumptions, across all segments. This scenario also assumes ARPU to be 2.0% higher than base-case YoY growth rates across all segments. This leads to revenue growth of 3.9% YoY in 2013E (compared to the base-case YoY growth rate of 3.4% in 2013E), and translates to a 7.5% CAGR over 2013E-2015E (compared to our base-case estimate of 6.6%). This scenario also assumes a 0.5% expansion (above our base-case estimates) in the EBITDA margin across all segments, leading to a 82bps increase through 2015E (compared to our base-case estimate of 32bps over the same period).

Bear-case scenario: The potential downside assumes a 5.0% decline in subscriber net additions and a 2.0% decline in ARPU across all segments over our explicit forecast period, compared to our base-case estimates. This results in a YoY revenue growth rate of 3.0% in 2013E (compared to the base-case YoY growth rate of 3.4%) and a 5.9% CAGR over 2013E-2015E (compared to our base-case estimate of 6.6%). Here, we also assume a 0.5% contraction in the EBITDA margin (below our base-case estimates) across all segments, resulting in a flat EBITDA margin through 2015E (compared to our base-case estimate of 32bps over the same period).

Our scenario analysis is driven by changes to subscriber additions, ARPU levels and EBITDA margin estimates


18


Figure 19: SLTL scenario analysis assumptions

Base-case Bull-case Bear-case

2012 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E

FT operations

Revenue 32,179 33,523 36,202 39,594 33,701 37,042 40,731 33,344 35,368 38,470

YoY growth 12.9% 4.2% 8.0% 9.4% 4.7% 9.9% 10.0% 3.6% 6.1% 8.8%

Blended ARPU 21,285 20,742 20,435 20,435 20,846 20,812 20,844 20,638 20,058 20,026

YoY growth 5.1% -2.6% -1.5% 0.0% -2.1% -0.2% 0.2% -3.0% -2.8% -0.2%

Subscribers 1,512 1,616 1,772 1,938 1,617 1,780 1,954 1,616 1,763 1,921

Net adds 41 104 155 166 105 163 174 104 148 158

EBITDA margin 32.9% 32.5% 33.0% 33.2% 32.7% 33.5% 33.7% 32.4% 32.5% 32.7%

MT operations

Revenue 23,819 24,774 26,715 28,732 24,879 27,306 29,464 24,771 26,659 28,578

YoY growth 12.9% 4.0% 7.8% 7.6% 4.4% 9.8% 7.9% 4.0% 7.6% 7.2%

ARPU 5,293 5,452 5,597 5,708 5,472 5,704 5,823 5,455 5,601 5,708

YoY growth -0.9% 3.0% 2.6% 2.0% 3.4% 4.2% 2.1% 3.0% 2.7% 1.9%

Subscribers 4,500 4,544 4,774 5,033 4,546 4,788 5,060 4,541 4,759 5,006

Net adds 553 44 230 260 46 241 273 41 218 247

EBITDA margin 29.4% 29.6% 29.8% 30.0% 29.7% 30.3% 30.5% 29.6% 29.8% 30.0%

SLTL group

SLTL revenue 56,771 58,683 63,312 68,728 58,971 64,750 70,605 58,498 62,413 67,442

YoY growth 9.9% 3.4% 7.9% 8.6% 3.9% 9.8% 9.0% 3.0% 6.7% 8.1%

SLTL EBITDA margin 31.6% 31.1% 31.7% 32.0% 31.3% 32.2% 32.5% 31.0% 31.4% 31.7%


EV/EBITDA used as the relative valuation technique to support our

DCF analysis

SLTL’s 12-month forward EV/EBITDA has ranged from 3.8x to 6.8x since 2010. We have used SLTL’s normalized average one-year historical EV/EBITDA multiple (which stands at 4.3x) and have applied a 10% premium and a 10% discount to this historical average to arrive at a range of LKR36-45.

Figure 20: SLTL has traded at a forward EV/EBITDA range of 3.8x-6.8x since 2010

Source: SLTL, Bloomberg

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19


SLTL currently trades at a 2014E multiple of 3.9x – a 7.4% discount to its one-year normalized EV/EBITDA average.

In determining an EV/EBITDA valuation range, we apply two scenarios:

Optimistic scenario: Under this scenario, we applied a potential upside to subscriber net additions resulting from SLTL’s strong fixed operations network and established market presence. We also assume that the company’s capex investments (particularly on the NGN migration and the i-Sri Lanka project) will reap better-than-expected results over our forecast period. We applied a 10% premium to the one-year normalized EV/EBITDA average and arrived at a forward multiple of 4.7x. Applied to our forecast EBITDA of LKR20.1bn in 2014E, this leads to a share price of LKR45 per share.

Conservative scenario: Here we assume a 10% discount to the one-year normalized EV/EBITDA average, implying that SLTL will trade at a forward multiple of 3.8x. This could be justified mainly by lower-than-estimated net subscriber adds, as well as by a fall in ARPU levels (primarily in the broadband and mobile segments). Here, we also assume that cost escalations could erode margins further. Applying this multiple to our 2014E EBITDA estimate, we arrive at a share price of LKR36 per share.

Further comparison with regional peers indicates that SLTL trades at a 38.6% discount to its peer average. We believe this is likely due to the competitive pressures facing SLTL within the domestic telecommunications industry, largely due to the intense price competition prevalent in the market, which has led to the company reporting lower EBITDA margins compared with its regional peers.


20


Figure 21: SLTL trades at an EV/EBITDA of 3.9x 2014E – a 38.6% discount to its domestic peer DIAL

Company name

EV/EBITDA EBITDA CAGR

2010 2011 2012 2013E 2014E 2013E-2015E

Sri Lanka Telecom PLC 5.5x 5.2x 4.8x 4.3x 3.9x 10.0%

Domestic peers

Dialog Axiata PLC 9.5x 5.1x 4.6x 4.7x 4.3x 11.1%

International peers

Reliance Communications 5.9x 7.9x 8.9x 8.4x 8.0x 14.6%

Indosat Tbk PT 5.4x 5.6x 5.1x 3.9x 3.7x 5.1%

China Mobile 4.4x 3.6x 4.2x 3.3x 3.3x 0.8%

Bharti Airtel 9.9x 8.2x 7.2x 7.1x 6.2x 12.3%

Idea Cellular 8.8x 9.1x 8.5x 7.8x 6.7x 23.7%

Singapore Telecom 10.4x 11.1x 12.4x 12.7x 12.6x -0.2%

PT XL Axiata Tbk - Indonesia 5.9x 5.3x 6.4x 6.6x 6.0x 4.3%

Globe Telecom Inc - Phillipines 4.2x 5.6x 5.5x 7.6x 7.0x 5.5%

Mean 6.6x 6.8x 7.0x 6.9x 6.4x 8.6%

Median 5.9x 5.6x 6.4x 7.1x 6.2x 5.5%

High 10.4x 11.1x 12.4x 12.7x 12.6x 23.7%

Low 4.2x 3.6x 4.2x 3.3x 3.3x -0.1%

Source: SLTL, Bloomberg, Amba estimates Note: All of the selected peers have the majority of their business focused on mobile operations


21


Share price performance

SLTL shares closed at LKR37 on 19 December 2013 – LKR7 lower than 12 months earlier and down 14.9% YoY – compared to a 6.5% increase in the S&P SL 20, a 6.2% increase in the All Share Price Index (ASPI) and a 9.8% increase in DIAL over the period.

Figure 22: Overall, SLTL has underperformed the local indices as well as its closest domestic peer DIAL


As shown in Figure 23, over the past two years, SLTL has underperformed the ASPI and the S&P SL 20 indices as well as its closest domestic rival DIAL.

Figure 23: SLTL versus key indices

3m 6m 1 year 2 years 3 years

SLTL -7.5% -10.0% -14.9% -18.1% -22.4%

DIAL 9.8% 3.4% 9.8% 15.4% -20.4%

S&P SL 20 0.4% -7.5% 6.5% 7.3% -11.1%

ASPI 0.9% -5.5% 6.2% 0.3% -8.0%


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22


Earnings release focus areas

Here is a checklist of items that investors should track in the next – and subsequent – quarterly earnings release. We will closely track the performance of SLTL across these key areas, and will revise our forecasts and update our valuation range in upcoming earnings notes.

For the firm as a whole

1. Has the group taken on any new debt, which has resulted in a change to the credit rating or credit outlook for SLTL?

2. Have there been any new telecommunication regulations imposed by the government of Sri Lanka or the TRCSL?

FT operations segment

1. What is the progress of the fiber optic expansion program?

2. Is there an increase in broadband penetration rates in Sri Lanka?

3. Have SLTL’s broadband subscriber numbers increased?

4. Has PEO TV seen an increase in subscriber numbers?

MT operations segment

1. How have penetration rates changed?

2. Any updates on industry consolidation in this segment?

3. Has the TRCSL made further revisions to the minimum floor tariff rule?

4. Has the number portability rule come into effect?


23


Appendix 1: The Sri Lankan mobile telecommunications

industry

The Sri Lankan telecommunications sector’s value (LKR147bn in 2012) is set to increase to LKR167bn by 2015, according to SLTL’s annual report and Telecommunications Regulatory Commission of Sri Lanka (TRCSL) estimates. The market includes mobile phone operators that provide triple- and quad-play services.

Figure 24: Licensed telecommunication operators

Category of service

Number of operators

Fixed-access telephone service 3

Cellular mobile phones (DIAL, SLTL, Etisalat, ALL, Hutch) 5

Data communications (facility-based) 6

Data communications (non-facility based) and ISPs 9

Trunk mobile radio 1

Leased circuit providers 1

Licensed payphone service providers 1

External gateway operators 10

Direct-to-home satellite broadcasting service 3

Cable TV distribution network 4

Source: TRCSL Note: Data as of June 2013

Industry overview

The Sri Lankan mobile telecommunications industry comprises five main licensed players (as highlighted below in Figure 24). Sri Lanka Telecom PLC (CSE ticker: SLTL) and Dialog Axiata PLC (CSE ticker: DIAL) are the only two listed operators, dominating the industry with an estimated combined revenue market share of approximately 80%. Of the two, DIAL has the higher market share in the mobile operations segment as well as a larger mobile subscriber base of over 8.5m (compared with SLTL’s 4.5m).

DIAL, like SLTL, is a quad-play (mobile, fixed, data and TV) services provider. It is currently the market leader in mobile operations in Sri Lanka. Etisalat, in Sri Lanka is a fully owned subsidiary of Emirates Telecommunications Corporation of the United Arab Emirates. It commenced operations in Sri Lanka in February 2010, after acquiring a 100% stake in Tigo (a subsidiary of Millicom International Cellular [MIC]). Tigo was Sri Lanka’s first mobile network provider when it launched operations in 1989 under the brand name Celltel, which was later rebranded as Tigo in 2007 (following its acquisition by MIC). Airtel Lanka Ltd (ALL), a subsidiary of Bharti Airtel Limited (India), commenced its Sri Lankan operations in January 2009. Entering the industry as the fifth player, ALL became the fastest operator to reach 1m customers in Sri Lanka and has now achieved island-wide coverage. Hutchison Telecommunications Lanka (Pvt) Ltd (Hutch) launched operations in Sri Lanka in 2004, initially under the brand name Call Link. It is a member of Hutchison Asia Telecom, a subsidiary of the Hutchison Whampoa Group.

Competitive landscape in the mobile telecommunications industry

The domestic mobile telecommunications industry is highly saturated, with penetration levels of over 98% in 2012 (versus 55% in 2008), according to statistics issued by the Central Bank of Sri Lanka (CBSL). However, despite this, we believe the domestic mobile market has further headroom for penetration, similar to other regional markets, as indicated in Figure 25.


24


Figure 25: Sri Lanka has more headroom for mobile penetration similar to other regional markets

Source: The Global Information Technology Report 2013 (GITR 2013)

Note: Data as of 2011 (most recent data available from this source). As per statistics released by the CBSL, mobile penetration in Sri Lanka stood at 98% in 2012.

As mobile penetration in the country nears 100%, growth in the industry would slow, thereby increasing competition, as the five incumbent operators battle for a larger share of the approximately 21m potential subscribers through tariff reductions (although not below floor rates) and value additions. Incumbents have different subscriber bases, mostly operating on similar technology platforms (offering triple- and quad-play services) and have sufficient parent company backing to invest further, if required.

Sri Lankan operators have seen robust growth since the civil war ended in 2009, and we believe further growth would be limited, unless it comes through diversified offerings such as quad-play, the adoption of new technology (such as fourth-generation long-term evolution [4G-LTE] mobile and fixed broadband services, which have recently been introduced in Sri Lanka), or industry consolidation to eliminate competition and increase market share (such as DIAL’s acquisition of Suntel Limited [one of Sri Lanka’s leading fixed-line and broadband telecommunications operators] in May 2012).

We believe over 80% of the current national subscriber base uses prepaid connections; while prepaid ARPU is lower than postpaid ARPU, we believe that most new subscriber additions would fall into this segment. Furthermore, price increases (currently above the minimum stipulated floor rate, as set by the TRCSL) may not be practical, given the intense competition within the industry and the fact that Sri Lanka already has one of the lowest mobile tariff rates in the region.

Figure 26: Mobile cellular tariffs (average per-minute cost) in Sri Lanka is among the lowest in the region

Source: GITR 2013

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Investments in technological infrastructure are also a key component of growth, as firms need to set up the foundation to prepare for the adoption of new technology. SLTL and DIAL have already identified this need, as evidenced by their capex averaging 32% of total revenues since 2008.

Figure 27: Capex/revenue averaged roughly 32% for SLTL and DIAL since 2008

Source: SLTL, Dialog Axiata PLC

A key success factor in this industry is network coverage, which is supported by increasing infrastructure spending, and leads to economies of scale through a higher resulting subscriber base. The recent rollout of 4G LTE services has brought on higher capex for the largest companies in the industry; however, this is a much needed investment.

Global smartphone trends highlight the dominance of emerging markets

Over the past few years, global smartphone penetration has increased substantially due to changing consumer dynamics (moving from the need for simple voice telephony to data consumption and creation) and greater affordability. According to Gartner Inc. (a global information technology research and advisory company), smartphone sales accounted for approximately 52% of total mobile phone sales in 2Q13, exceeding sales of feature phones for the first time. International Data Corporation (IDC) – a global provider of market intelligence and advisory services for the information communications technology [ICT] sector – forecasts global smartphone shipments to grow 40% YoY to reach over 1.0bn units in 2013 and 1.7bn units in 2017. In addition, global average selling prices (ASPs) are estimated to decline to USD372 in 2013, according to IDC statistics, from USD407 in 2012 and USD443 in 2011.

IDC expects emerging markets to drive demand and growth in smartphone adoption, with smartphone shipments expected to grow at a 15.7% CAGR over 2013-2017 in emerging markets compared with an 8.3% CAGR in developed markets. In addition, IDC expects emerging markets to dominate the global smartphone market, accounting for approximately 71% of all smartphone shipments in 2017. The ASPs in emerging markets should decline at a 4.2% CAGR over 2013-2017 – down to USD259 in 2017 from an expected USD307 in 2013. Vendors in these markets are compelled to lower their price points, as emerging markets generally have lower average per capita income levels than developed nations. Furthermore, smartphones have now become the preferred choice for affordable access to computing in these markets, further driving demand for low-cost devices.

Broadband industry in Sri Lanka

Sri Lanka’s fixed and mobile broadband subscriber base grew at an 88.5% CAGR over 2008-2011, off a small subscriber base. As shown in Figure 28, at the end of 2011, according to he Global Information Technology Report (GITR) 2013, Sri Lanka’s broadband subscriber base was 4.0% of the total population, well below its regional peer average of approximately 11.1%. This lag indicates that Sri Lanka’s broadband and data usage market is still at its infancy and has immense potential for growth. The growing use of smartphones is likely to drive additional broadband growth, as these devices enable much larger volumes of data transfer, requiring higher usage speeds and larger

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26


data packages. Sri Lanka also has the lowest broadband tariff rates in the region (and one of the lowest in the world), which could encourage faster and higher penetration.

Figure 28: Sri Lanka’s broadband penetration rates come in at 4.0%, lower than its regional peer average of 11.1%

Figure 29: Fixed broadband internet tariffs in Sri Lanka are the lowest in the region

Source: GITR 2013

Note: The regional average excludes Hong Kong, an outlier with 55.2% mobile penetration. SLTL states that 7% of the country’s population and 29% of total households have broadband access as of September 2013

Source: GITR 2013

Note: The regional average excludes Hong Kong, an outlier with 55.2% mobile penetration. SLTL states that 7% of the country’s population and 29% of total households have broadband access as of September 2013

Pay-TV industry in Sri Lanka

As of June 2013, there were three direct-to-home (DTH) satellite broadcasting service providers and four cable TV distributors in Sri Lanka’s pay-TV market. SLTL’s key competitors in the pay-TV arena include Dialog TV (from DIAL) and Lanka Broadband Networks (LBN). DIAL dominates the market, with a 78% market share (based on subscriber numbers) in 2012.

Figure 30: Pay-TV operators in Sri Lanka

Name Technology Established

Dialog TV Digital satellite 2005

Digital Pay TV (TV Lanka) Digital signals 2012

PEO TV (SLT Visioncom) IPTV (ADSL and WiMAX) 2008

Lanka Broadband Networks (LBN) Analog/digital cable 2000

Source: Online journal articles

Pay-TV is an avenue of growth for Sri Lankan telecommunication operators, particularly as the mobile market has near-100% penetration. However, the TV entertainment industry in the country is dominated by free-to-air (terrestrial) television broadcasting, which does not use satellites or transmission cables. In Sri Lanka, the terrestrial broadcasting network comprises approximately 20 private and state-owned operators, providing a variety of free entertainment programs, thereby limiting demand for pay-TV in Sri Lanka. This is one of the main reasons for the low penetration (8.2% in 2012) of pay-TV operators in the country.

Industry regulation

Entry into Sri Lanka’s mobile industry is regulated by the TRCSL through additional licenses. Although the industry is highly competitive, the TRCSL has the authority to issue a further license, if necessary, at its discretion. The actions of this regulatory body could either ease or increase competition among operators.

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For example, the TRCSL imposed a minimum tariff of LKR1.50 per outgoing minute to ease price competition among operators. Despite this floor tariff, operators try to charge above this rate to meet their rising fixed and maintenance costs.

Another potential regulatory impact on the country’s telecom operators could be the approval of number portability – this would allow a subscriber to switch operators without changing their phone number, thus minimizing switching costs, and possibly encouraging higher churn rates.


28


Appendix 2: Company overview

Sri Lanka Telecom PLC (SLTL), a majority (49.5%) state-owned subsidiary of the government of Sri Lanka, is the largest fixed line and fixed broadband operator in Sri Lanka, with 1.5m subscribers as of 31 December 2012. It is the frontrunner in the provision of backbone infrastructure services in Sri Lanka and is one of only two listed telecommunications operators in Sri Lanka. As of 19 December 2013, SLTL’s market capitalization stood at LKR66.8bn.

Figure 31: SLTL’s revenue mix is seeing a gradual shift towards mobile operations

Figure 32: Fixed telephony operations contributes approximately 60% to group EBITDA

Source: SLTL

Note: Post 2010, international gateway operations’ revenue was not reported separately

Source: SLTL

Note: Post 2010, international gateway operations’ EBITDA was not reported separately

SLTL recorded LKR56.8bn in revenue in 2012, at a 5.1% CAGR over 2008-2012. EBITDA came in at LKR18.0bn (based on our calculations), representing a -2.7% CAGR over 2008-2012.

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2008 2009 2010 2011 2012

LKRm

Fixed telephony operationsMobile telephony operationsInternational gateway operationsOther segments

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Figure 33: SLTL’s revenue posted a 5.1% CAGR over 2008-2012

Figure 34: SLTL’s EBITDA declined at a -2.7% CAGR over 2008-2012

Source: SLTL

Source: SLTL

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29


SLTL’s business segments

Fixed telephony (FT) operations

SLTL’s FT operations (57% of SLTL’s 2012 revenue, and 59% of group EBITDA) are provided through two main connections – SLT Megaline and SLT Citylink. The segment has a subscriber base of approximately 1.5m and focuses on a range of voice, data and video service offerings to both household and enterprise customers. These services include domestic and international voice calls, advanced data transmission services, IP services, complete corporate solutions, satellite uplink services, as well as international voice traffic transit services to international telecom operators and businesses.

SLT Megaline – a wireline telephone connection that allows users to receive triple-play (voice, data and pay-TV) services. The data (broadband) services now offer both wireline and wireless (Wi-fi) services and has seen a 6% increase in subscriber numbers YoY to reach 1m in 2012.

Pay-TV services are operated under the brand name PEO TV, using internet protocol television (IPTV) technologies, such as ADSL and WiMAX. SLTL’s PEO TV offers around 70 channels (as at end-2012), providing a range of local (about 20 channels) and international entertainment options to customers. Special features offered to customers include rewind TV – to play and pause live TV and video on demand with content such as movies, music and education, for example.

SLT Citylink – this is SLT’s wireless telephone service, which utilizes CDMA technology, and it also provides a range of value-added services to its subscriber base. Citylink allows users who do not have access to SLT Megaline services to remain connected across Sri Lanka. However, the gradual expansion of SLTL’s infrastructure network is allowing Citylink subscribers to gradually migrate to SLT Megaline connections, thereby allowing them to enjoy the benefits of double- and triple-play offerings.

Mobile telephony (MT) operations

The MT segment (42% of 2012 group revenue and 39% of 2012 group EBITDA) operates under SLTL’s fully owned subsidiary, Mobitel Pvt Ltd (Mobitel) which was fully-acquired from Telstra Holdings Pvt Limited in October 2002 (prior to this, Mobitel was an associate to the SLTL group), and is the second-largest mobile telecommunications provider in Sri Lanka (after Dialog Axiata PLC) with a subscriber base of 4.5m as at 2012.

Mobitel offers mobile telephony, mobile broadband as well as mobile enterprise solutions, including 2.5G, 3G and 3.5G mobile services. The company recently carried out a successful trial of 4G LTE technology, making it the first operator in South Asia to do so and now offers 4G LTE mobile services to its customers.

Mobitel also plans to launch new services on its data network to increase revenue streams for the mobile telephony segment. In November 2013, Mobitel launched mCash, its mobile money (electronic money transfer) service, allowing its customers pay utility bills and purchase goods and services using their mobile phones. While some new services have already been launched, such as mCash and mTicketing, plans are in progress to launch several other platforms on the network as well to enhance service provisions to mainly enterprise customers – e.g., mAdverstising, mHealthcare, and mEducation. The company aims to rollout content-based platforms to attract retail consumers – for example, for data sharing and gaming.

Management strategy, transparency and governance

As Sri Lanka’s market leader in fixed communications, SLTL continues to focus on pioneering information communications technology (ICT) services in Sri Lanka, concentrating on network upgrades, improving operational efficiency and maintaining its market leader position in the fixed line (including broadband) business.

Being the largest national backbone network (NBN) provider in Sri Lanka, SLTL secured a 10-year license from the TRCSL in June 2013, making the company the sole provider of backbone infrastructure to the country (to assist the Government of Sri Lanka (GoSL) in achieving its objective of high broadband speeds for the whole country). The NBN will also allow SLTL to continue to lease-out its infrastructure network lines to other telecommunication operators in Sri


30


Lanka in order for them to provide high-quality broadband services to their household and enterprise customers (backhaul their traffic), whilst at the same time, eliminating the heavy investment costs needed to set up such networks.

In conjunction with the NBN operations, SLTL is in the midst of two significant network modernization projects, the next-generation network (NGN) migration and the i-Sri Lanka project. The NGN project involves converging all access networks into a single platform capable of providing triple- and quad-play services through one network and thereby replacing the previous legacy platforms. This would result in cost savings, improved efficiency and faster service speeds and quality. By the end of 2012, almost 39% of the total SLT Megaline subscriber base (roughly 400,000 subscribers) migrated to the NGN platform, with a target of over an additional 250,000 subscribers expected to switch over in 2013 (approximately 66% of the Megaline subscriber base).

i-Sri Lanka, in conjunction with the NGN transformation, targets to achieve broadband speeds of 20MBPS for over 90% of its existing fixed customer-base of 1m by end-2013 (by which time the company expects the project to be completed). This is possible through an upgrade of the existing fixed access network by expanding the fiber optic cables to bring it closer to customers (within a 2km distance) through fiber to the node (FTTN) deployment. With the reduction in the length of the copper cable, the quality and speed of the broadband services can be largely improved. By the end of 2012, approximately 14,700km of the fiber optic-based network had been built, with a further 3,400km planned for 2013.

In terms of transparency and governance, SLTL provides a fair level of detail with management commentary on an annual basis considered sound by local standards. However, we believe that further levels of detail could be provided to increase comprehensiveness, for example, market share figures and comprehensive segmental revenue data.

On a segmental level, disclosure is insufficient to arrive at accurate calculations and forecasts. For example, the revenue breakdown for fixed broadband and pay-TV services are not disclosed. Similarly, on a quarterly basis, subscriber, market share or ARPU numbers are not disclosed. Forecasting quarterly results and drilling down to achieve a greater level of granularity on industry and business trends and trajectories is challenging given the lack of adequate segmental disclosure. We believe providing these additional details on a quarterly basis would be of greater value to analysts and current and potential investors.

Shareholding structure

SLTL is owned by two main shareholders: the GoSL (49.5%) and Global Telecommunications Holdings NV, which owns 45.0%. Other institutional and retail investors hold the remaining stake.

Figure 35: Only 4.4% of SLTL’s shares are held by retail and other institutional investors

Source: SLTL (as at 30 September 2013)

Note: None of SLTL’s shares are held by management

Secretary to the Treasury 49.5%

Global Telecommunications

Holdings NV 45.0%

Other investors 5.5%


31


The top five shareholders as of September 2013 are presented below.

Name of shareholder Description Stake

Secretary to the treasury The government of Sri Lanka 49.50%

Global Telecommunications Holdings NV A wholly owned subsidiary of Usaha Tegas Sdn Berhad (UTSB), a Malaysian-based investment holding company

44.98%

Employees Provident Fund A state-controlled pension fund in Sri Lanka 1.16% Sri Lanka Insurance Corporation Ltd – life fund Life fund of the state-owned insurance company 0.98% Bank of Ceylon A/C Ceybank Unit Trust

Sri Lanka’s largest equity linked unit trust fund 0.82%

Source: SLTL

Board of directors

As of December 2012, SLTL’s board comprised nine directors. Their details are provided below.

Name of Director Description

Mr. Nimal Welgama Chairman and director. A member of the board since May 2010. Also a director/chairman of Mobitel Private Ltd.

Mr. Sandip Das A member of the board since June 2008. He is also a member of the board of Mobitel Private Ltd.

Mr. Chan Chee Beng Appointed to the board in June 2008, and also a member of the board of Mobitel Private Ltd; he is also a member of the audit committee of SLTL. Currently serves as an executive director of UTSB.

Mr. Jeffrey Jay Blatt Appointed to the SLTL board in June 2008, Mr. Blatt is an attorney-at-law.

Mr. Shameendra Rajapaksa Joined the board in May 2010. An engineer by profession, Mr. Rajapaksa is also the private secretary to the ministers of finance and planning and ports and aviation in Sri Lanka.

Mr. Jayantha Dharmadasa Appointed to the SLTL board as a non-executive director in May 2010. Mr. Dharmadasa holds chairmanship of several subsidiaries of his domestic, family owned conglomerate, Nawaloka Group of Companies.

Mr. Kalinga Indatissa An attorney-at-law by profession, Mr. Indatissa was appointed to the SLTL board in May 2010, and currently serves as an independent non-executive director. He also serves on SLTL’s audit committee.

Mr. Lawrence Paratz Appointed to the board as an independent non-executive director in May 2010. Mr Paratz counts over 30 years’ experience in the telecommunications industry.

Ms. Pushpa Wellappili With over 30 years of experience in public service, Ms. Wellappili is currently the deputy secretary to the treasury in the ministry of finance and planning.

Source: SLTL


32


Corporate holding structure

Figure 36: SLTL corporate holding structure

Source: SLTL

National back-bone network (NBN)/ wholesale services


Other services

Fixed telephony operations

Citylink - wireless CDMA

SLT Megaline - fixed voice, fixed broadband and PEO TV (triple play)

Mobile telephony operations

Others - intelligent business solutions, global services

Mobitel (Pvt) Limited - 100%


33


Appendix 3: Key financial data

Summary group financials (LKRm)

INCOME STATEMENT 2010 2011 2012 2013E 2014E 2015E

(For the year ended 31st December)

Revenue 50,250 51,644 56,771 58,683 63,312 68,728

EBITDA 16,723 17,063 17,964 18,271 20,091 21,965

EBIT 5,144 5,169 6,170 6,020 7,368 8,393

Interest expense (1,012) (591) (1,021) (738) (780) (765)

Net profit 3,943 4,505 4,036 4,798 5,059 6,173

BALANCE SHEET 2010 2011 2012 2013E 2014E 2015E

(As at 31st December)

Current assets

Cash and cash equivalents 4,830 3,134 3,887 3,122 3,265 4,288

Short term investments 3,617 9,459 7,381 6,190 6,190 6,190

Accounts receivable 11,053 9,733 11,417 10,199 11,019 11,517

Inventories 1,281 1,741 2,601 2,858 3,099 3,233

Total current assets 21,238 24,341 25,712 22,460 23,664 25,319

Non-current assets

Property, plant and equipment 61,258 66,153 72,165 77,514 83,871 89,783

Goodwill 141 141 141 141 141 141

Intangible assets 1,444 1,561 2,278 3,058 2,338 1,753

Total non-current assets 65,792 70,710 77,361 83,772 89,408 94,736

Total assets 87,030 95,051 103,073 106,232 113,072 120,055

Current liabilities

Short term debt 4,542 5,326 6,275 5,789 5,789 5,789

Accounts payable 15,882 16,067 19,023 14,820 16,070 16,766

Income tax payable 287 237 392 353 353 353

Total current liabilities 22,691 23,931 28,091 23,596 24,846 25,542

Non-current liabilities

Long term debt 6,774 9,383 11,577 13,283 12,977 12,751

Postretirement benefit obligation 1,796 2,090 2,494 2,832 2,832 2,832

Total non-current liabilities 14,490 18,995 20,432 24,499 26,793 29,067

Equity

Common share capital 18,049 18,049 18,049 18,049 18,049 18,049

Retained profit 31,463 33,694 36,065 39,602 42,899 46,911

Total equity 49,849 52,125 54,550 58,137 61,434 65,446

Total liabilities and equity 87,030 95,051 103,073 106,232 113,072 120,055


34


CASH FLOW STATEMENT 2010 2011 2012 2013E 2014E 2015E

(For the year ended 31st December)

Operating activities

Net cash flow from operating activities 15,260 20,250 16,094 16,637 17,680 19,629

Investing activities

Purchase of PPE and intangible assets (6,680) (18,655) (18,775) (18,440) (18,360) (18,900)

Net cash flow from investing activities (7,975) (22,968) (15,362) (16,556) (14,688) (15,455)

Financing activities

Debt issuance/(repayment) (3,488) 2,620 1,755 1,151 (306) (225)

Dividends paid to common shareholders (451) (1,083) (1,534) (2,795) (1,762) (2,161)

Net cash flow from financing activities (3,965) 1,494 174 (1,841) (2,849) (3,151)

Net increase/(decrease) in cash and cash equivalents 3,320 (1,224) 906 (1,759) 143 1,023

KEY RATIOS 2010 2011 2012 2013E 2014E 2015E

Growth

Revenue growth (%) 4.5 2.8 9.9 3.4 7.9 8.6

EBITDA growth (%) 16.6 2.0 5.3 1.7 10.0 9.3

EBIT growth (%) 102.0 0.5 19.4 (2.4) 22.4 13.9

Net profit growth (%) 411.4 14.3 (10.4) 18.9 5.4 22.0

Recurrent diluted EPS growth (%) 411.4 14.3 (10.4) 18.9 5.4 22.0

Margins

EBITDA margin (%) 33.3 33.0 31.6 31.1 31.7 32.0

EBIT margin (%) 10.2 10.0 10.9 10.3 11.6 12.2

Net profit margin (%) 7.8 8.7 7.1 8.2 8.0 9.0

ROCE (%) 5.0 5.2 5.3 5.2 5.8 6.2

ROE (%) 8.2 8.8 7.6 8.5 8.5 9.7

Liquidity and Efficiency

Current ratio (x) 0.9 1.0 0.9 1.0 1.0 1.0

Total asset turnover (x) 0.6 0.5 0.6 0.6 0.6 0.6

Gearing and Cash Flow

Debt/Capital (%) 0.2 0.2 0.2 0.2 0.2 0.2

Interest cover (x) 5.1 8.7 6.0 8.2 9.4 11.0

Free cash flow (FCF) yield (%) 9.7 1.8 (3.3) (2.7) (1.0) 1.1

Net debt/FCF (x) (0.3) (1.3) 2.5 5.4 13.7 (11.1)

Valuation

P/E (x) 22.4 19.2 19.9 13.9 13.2 10.8

P/BV (x) 1.8 1.7 1.5 1.1 1.1 1.0

EV/EBITDA (x) 5.5 5.2 4.8 4.3 3.9 3.6

EV/Sales (x) 1.8 1.7 1.5 1.3 1.2 1.2

EV/FCF (x) 10.6 55.6 (32.4) (43.9) (116.2) 108.5

PER SHARE DATA 2010 2011 2012 2013E 2014E 2015E

Recurrent diluted EPS 2.18 2.50 2.24 2.66 2.80 3.42

Common dividend per share (LKR) 0.60 0.85 0.85 0.70 0.98 1.20

Book value per share (BVPS) 27.62 28.88 30.22 32.21 34.04 36.26

Net operating cash flow per share 8.45 11.22 8.92 9.22 9.80 10.88

Net cash flow per share 1.84 (0.68) 0.50 (0.97) 0.08 0.57



35


Segmental summary

(For the year ended 31 December)

Fixed telephony operations 2011 2012 2013E 2014E 2015E

Revenue 29,788 32,179 33,523 36,202 39,594

EBITDA 11,241 10,589 10,908 11,930 13,145

YoY growth

Revenue 78.9% 8.0% 4.2% 8.0% 9.4%

EBITDA NM -5.8% 3.0% 9.4% 10.2%

Margin

EBITDA 37.7% 32.9% 32.5% 33.0% 33.2%

Mobile telephony operations 2011 2012 2013E 2014E 2015E

Revenue 21,089 23,819 24,774 26,715 28,732

EBITDA 6,644 7,006 7,339 7,961 8,620

YoY growth

Revenue 35.8% 12.9% 4.0% 7.8% 7.6%

EBITDA 10.8% 5.4% 4.8% 8.5% 8.3%

Margins

EBITDA 31.5% 29.4% 29.6% 29.8% 30.0%


FX rates (USD/LKR): Y/E 31 December 2012 = 127.66

Y/E 31 December 2011 = 110.54

Y/E 31 December 2010 = 113.02


36


Appendix 4: SWOT analysis

Strengths Weaknesses

Strong brand recognition

Perceived as the leading fixed telecom operator in Sri Lanka

AAA stable Fitch credit rating

Backing by the government of Sri Lanka

Strong cash reserves and stable gearing

Pressured FCF due to capex

Opportunities Threats

Industry consolidation in the mobile operations segment

Rising GDP per capita and disposable income in Sri Lanka

Increasing smartphone adoption and usage in Sri Lanka

Increasing competition from its domestic rivals DIAL, Etisalat, Airtel and Hutch

Penetration rates in the pay-TV industry growing less than expected due to macroeconomic pressures, such as a slowdown in economic growth and disposable income levels

Number portability legislation coming into effect

High rate of technological obsolescence

Damage to submarine cable lines causing disruptions to operations


37


Fact Sheet

Sri Lanka investment environment overview

Sri Lanka’s economy has been on an upward trajectory since the end of the three-decade civil war in May 2009. Sri Lanka currently boasts South Asia’s highest GDP growth, conducive fiscal and monetary policy, and favorable socio-economic conditions, which together create an attractive investment destination.

Figure 37: Sri Lanka's GDP projected to increase at a 7% CAGR 2012-2016E

Figure 38: GDP per capita to increase 33% by 2016E

Source: Central Bank of Sri Lanka, Department of Census and Statistics Source: Central Bank of Economic and Social Statistics of Sri Lanka 2012, Road Map 2013 - Central Bank of Sri Lanka

Figure 39: Annual core inflation post-war has averaged 6.7%, government targeting mid-single digit levels in the medium term

Figure 40: CBSL expects the rupee to stabilize in the medium term despite recent volatility

Source: Department of Census and Statistics, Central Bank of Sri Lanka Source: Bloomberg

Figure 41: Fiscal deficit target of 5.2% of GDP for 2014E Figure 42: Debt-to-GDP to fall to 71% by 2015E

Source: Central Bank of Sri Lanka Source: Central Bank of Sri Lanka

6.8 6.0

3.5

8.0 8.2

6.4 7.5

8.0 8.3 8.5

0

2

4

6

8

10

2007

2008

2009

2010

2011

2012

2013E

2014E

2015E

2016E

%

0

1,000

2,000

3,000

4,000

5,000

2005

2006

2007

2008

2009

2010

2011

2012

2016

E

USD

8.5

7.7

13.6

7.0 7.0 6.9 5.8

0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011 2012

%

100

150

200

250

Jan-07 May-08 Oct-09 Mar-11 Jul-12 Dec-13

LKR/USD LKR/EUR LKR/GBP

0%

4%

8%

12%

0

200

400

600

2006

2007

2008

2009

2010

2011

2012

2013E

2014E

LKRbn

Fiscal deficit LKRbn As a % of GDP

102 102 91 88 85 81 86 82 79 79 78 75 71

0

20

40

60

80

100

120

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013E

2014E

2015E

%


38


The Sri Lankan equity market offers a rare and attractive alternative to investors in an investment era impacted by economic growth worries. Backed by the country’s robust economic growth, the Sri Lankan capital market is well set to offer attractive returns to investors who are keen to be a part of this emerging market success story. There are several strong incentives for entering the Sri Lankan capital market.

Figure 43: Post war, the ASPI has significantly outperformed global and developed market indices

Figure 44: Post war, the ASPI has also outperformed some of the best-performing regional indices

Source: Bloomberg *Note: All figures re-based to 1 July 2009

Source: Bloomberg *Note: All figures re-based to 1 July 2009

Figure 45: The CSE’s market capitalization has doubled since 2009

Figure 46: The government anticipates FDI inflows to reach USD2bn in 2013, a 19% CAGR 2009-2013E

Source: Bloomberg, Central Bank of Sri Lanka Source: Ministry of Finance and Planning, Board of Investment of Sri Lanka

Figure 47: Most sector P/Es are below market average and historical valuations

Figure 48: Trend is similar on a P/BV value

Source: Colombo Stock Exchange Source: Colombo Stock Exchange

0

80

160

240

320

400

Jul-09 May-10 Apr-11 Mar-12 Jan-13 Dec-13

ASPI Dow Jones FTSE 100

MSCI World DAX

0

100

200

300

400

Jul-09 May-10 Apr-11 Mar-12 Jan-13 Dec-13

ASPI Bombay (BSE 500)

Jakarta (JCI) Philippines (PASHR)

Thailand (SET) Hanoi (VNINDEX)

MSCI Emerging Market Index

1,092

2,211 2,214 2,168 2,418

0

1,000

2,000

3,000

2009 2010 2011 2012 2013(December)

LKRbn

827 601 516

1,066 1,338

2,000

0

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011 2012 2013E

USDm

0

30

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2011 2012 2013 Average market P/E 2010-2013

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39


IMPORTANT DISCLAIMER

This document has been prepared on behalf of the Colombo Stock Exchange (“CSE”) by Amba Research Lanka Private Limited (“Amba”) and is sponsored by the CSE. The views expressed in this document are those of the authors based on available and accessible information from the public domain and do not represent those of the CSE. Please note, inter alia, that with the publication of this document on the CSE website, www.cse.lk, neither Amba , as author, nor CSE (as sponsor) intend to assume and are not assuming any responsibility or liability (including under contract, common law or tort) to any party arising out of or with respect to this document. This document is not intended to, and does not form part of any contract with anyone (including a contract between author and reader/recipient) and no one shall have any right (contractual or otherwise) to enforce any claim in relation to the document either directly or indirectly.

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This document does not contain any investment advice nor does it constitute an offer to buy, sell or hold any of the investment product(s)/asset class (es) mentioned herein. Prospective investors are required to possess sufficient knowledge when evaluating the advantages and risks inherent to such investment product(s)/asset class(es) mentioned herein and to take into consideration their circumstances and financial position when assessing the suitability of such investments.. Prior to making an investment decision, prospective investors are strongly advised to obtain independent advice from competent legal, financial, tax, accounting and other professionals. Amba and CSE shall not be held liable in any manner for any direct, indirect or consequential loss that may arise as a result of investing in the investment product(s)/asset class (es) mentioned herein. Amba and CSE expressly disclaim any fiduciary responsibility or liability for any consequences, financial or otherwise from any reliance placed on the information in this document. The investment product(s)/asset class (es) described in this document may not be eligible for sale or subscription within a particular jurisdiction or to particular categories of investors. This document is not intended for distribution to a person or, within a jurisdiction where such distribution would be restricted or illegal. It is the responsibility of any person reading this document to observe all applicable laws and regulation of the relevant jurisdiction. Neither Amba, nor CSE, shall be responsible for any error which may have occurred at the time of printing of this document. The information set out in this document is subject to change without notice.

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