Editorial

Editorial

The SLT IPO and the feel good factor

The success of the Sri Lanka Telecom initial public offering (IPO) of shares is a clear commentary on the revival of business confidence in Sri Lanka. If big foreign funds had grabbed the majority of the shares, it could have been said that investors abroad were seeing the light at the end of the tunnel and were willing to risk their money on a perception of the success of a public utility that had shown spectacular growth since the 1997 privatization. While there was welcome foreign interest, preliminarily estimated at around US dollars 7 - 8 million (Rs. 800 million), much of the Rs. 3.6 billion that poured in enabling the offer to close the day after it opened, came from domestic investors. Certainly some of them like the EPF, ETF and the Sri Lanka Insurance Corporation were big institutions, but there was also a good-sized retail scramble for the shares.

In a news release announcing the close of the IPO, SLT said: "What is evident is the overwhelming response from domestic retail investors from all parts of the country including the North and East signifying their confidence in SLT in particular and the peace and economic prospects of the country in general. As a group, they have collectively contributed more than any other to the success of this offering....." The interest in the SLT share by middle class investors, many of whom burned their fingers in share speculation in the past, is an index of the fact that they see an upside in the country prospect both in the short and medium term. A company like SLT, although its dividend track record post-privatization is nothing to crow about (5% and 3% in nearly five years), undoubtedly has the potential to rise to great heights given the yet unsated demand for telephones.

Time was when getting a telephone was more difficult than finding the proverbial needle in a haystack. Would-be subscribers waited in a queue for literally years without getting a connection. An MP who could ‘fix’ a phone for a supporter commanded as much gratitude as he would today if he could find a job for that supporter’s son or daughter. But things changed in recent years with the breaking up of the government’s telecommunication monopoly. Wireless loop operators opened shop and mobile phones proliferated like mushrooms after the rain. Getting a phone today is no big deal and SLT which has in recent years spectacularly increased the number of lines it has provided to over 700,000 subscribers surely deserves the many accolades it has received on this score. But it cannot rest on its laurels and has a lot of ground to cover in improving its billing services, ensuring that recorded messages proclaiming line congestion when there’s none do not irritate customers and ironing out other wrinkles in a vastly improved telecommunications picture.

Given the present demand for phones from those sections of the population who didn’t even dream of being connected a few years ago, SLT undoubtedly has the capacity to grow in the short and medium term. That should mean greater profit for the company. It is desirable that a public utility has a broadbased shareholding and the number of people who have sought to invest in SLT - over 20,000 according to the figures that have been released up to now — is good both for the company as well as the country. Since August, the agreement that gave Nippon Telephone and Telegraph (NTT) which owned slightly over 35% of SLT the right to manage the company had ended. That means that the hefty Rs. 500 million management fee is no more and NTT will be much more interested in the company’s dividend payout than before. That certainly would be good for the Silvas, Pereras and Fernandos as well the Gunadasas, Ponniahs and Mohameds who will now be the small shareholders of SLT.

At a press conference promoting the SLT share, a representative of the DFCC Bank that managed the issue said that one reason for the low dividends paid since the privatization was that the company was ploughing its earnings into capital spending. With much of that already completed, the distributable surpluses will rise and better dividends will be possible, he said. Given the fact that investors paid five rupees more than the par value of the share for their stake, they will certainly want a reasonable return and, hopefully, growth-fuelled capital appreciation. Although the government’s stake in the company will now come down to below 50%, it must be noted that the government and NTT will still own the controlling stake and can together call the shots if they want to. The small people who put their money into SLT will certainly want this muscle democratically used for the benefit of all stakeholders including the phone-users, employees and the shareholders. If the company can swim against the tide and reduce domestic call charges, as it is hoping to do according to the IPO prospectus, it may well increase its profits thanks to greater phone use and give its customers a pleasant shock.

Despite the many risk factors set out in black and white in several pages of the IPO prospectus, a large number of people have chosen to invest in SLT. The stated risks included "significant political uncertainty" in the country, ethnic conflict and the recent terrorist history. Investors were also told that there was no assurance that the present economic liberalization policies will be continued in the future. These and dozens of other risks were clearly declared in accordance with international practice. Yet the "feel good" factor evident since the war stopped in February has induced people to look forward to a brighter future. They have certainly invested in the expectation of profit. What is important is that they also have the confidence that country conditions are conducive to economic growth and they are willing to put their money behind that conviction.

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