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  Financial Review
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

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.

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.

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.

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.
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