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Fitch Affirms Bharti Airtel at 'BBB-'; Outlook Stable
May 26, 2017 / 8:16 AM / 6 months ago

Fitch Affirms Bharti Airtel at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE, May 26 (Fitch) Fitch Ratings has affirmed India-based Bharti Airtel Limited's (Bharti) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook on the IDR is Stable. The agency has also affirmed the ratings on Bharti Airtel International (Netherlands) B.V's bonds. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS Market-Leading Position: Bharti's 'BBB-' rating reflects its established market leadership in the Indian wireless services industry. The company has about 35% revenue market share, has diversified and integrated operations and owns a large share of Indian spectrum assets, which are also the most efficient assets. We believe that its established market position and diversified revenue base will help it withstand intense competition in the Indian mobile segment. It gained about 150bp of revenue market share in 2016 as smaller telcos exited due to fierce competition and another 200bp with the acquisition of Telenor India, which is subject to regulatory approvals. Lower Ratings Headroom: We forecast Bharti's FFO-adjusted net leverage to worsen to 2.0x-2.2x for the financial year ending March 2018 (FY18), from 1.9x in FY17 (excluding USD6.8 billion deferred spectrum costs). However, we forecast leverage to remain below 2.5x, above which we will consider negative rating action. Bharti is committed to its investment-grade rating. We do not expect large debt-funded acquisitions during FY18-19 given management's strategy to reduce debt through the possible sale of a 10% stake in tower subsidiary, Bharti Infratel or sale of other assets. . Competition to Lower Revenue: We forecast its FY18 revenue and EBITDA to decline by 2%-3% as growth in non-mobile segments in India and its African operations may not fully offset the fall in the Indian mobile segment's revenue. Indian mobile EBITDA (63% of consolidated EBITDA) could decline by 5%-10% in FY18. Competition is likely to remain intense as new entrant Reliance Jio (Jio), part of Reliance Industries Ltd (BBB-/Stable), will continue to offer cheaper tariffs to gain market share from incumbents. Blended average revenue per user (ARPU) could remain flat at around INR160 (USD2.4) as Bharti is unlikely to be able to raise tariffs, given the price competition. Negative Outlook on Indian Mobile: We have a negative outlook on the Indian telco market as we expect the credit profiles of the top-four telcos to come under pressure from tougher competition and greater capex requirements. We believe that Jio may continue to disrupt the market by offering cheaper tariffs than the incumbents to gain market share. On-going industry consolidation, which will leave only five telcos in the market, will bring back pricing power to incumbents only after one to two years. However, in the medium term, Jio could raise tariffs to start generating return on its massive investment of USD27 billion-30 billion. Minimal FCF; High Capex: We forecast minimal FCF in FY18 (FY17: FCF deficit of INR62 billion) as cash flow from operations of INR250 billion-260 billion will be insufficient to fund its large capex requirements and moderate dividends. It will likely invest about INR260 billion-280 billion during FY18-19, including its core capex of INR250 billion and around INR30 billion-40 billion for payments related to deferred spectrum cost. The company needs to continually make investments to support its fast-growing data services. We believe Bharti has sufficient spectrum assets to expand its data services in the medium term and will not need to acquire more spectrum. It is unlikely to bid for 700MHz spectrum as the efficiency gains from the 700MHz spectrum do not currently justify the high reserve price set by the regulator. Stable African Profitability: We expect the FY18 EBITDA margin in Bharti's African operations to remain stable at 23%-24% (FY17: 24%) as it could benefit from cost savings and higher market share in key African markets. We believe that Bharti's strategy to be among the top-two operators in each of its African markets by participating in in-country consolidation will improve profitability in the medium term. DERIVATION SUMMARY Bharti's 'BBB-' IDR warrants a 4-5 notch difference from Reliance Communication's 'B+' /RWN' rating given Bharti's market leadership, diversified revenue profile and ownership of efficient spectrum assets. Bharti's credit profile has been resilient to intense competition in the Indian mobile market; its market share rose to 33% in December 2016 from 31.6% in end-2015. It will add another 200bp of revenue market share from the acquisition of Telenor India, which is subject to regulatory approval. Relative to other regional investment-graded telcos, Bharti benefits from a larger scale, diversified and integrated operations, and better execution in its Indian market. However, its FCF is likely to decline due to intense price competition in the Indian mobile market, which is likely to remain high in the next one to two years as intense competition is likely to continue in the short term as Jio has the financial resources to keep tariffs low to gain market share from incumbents. Bharti's peer, South Africa-based MTN Group's (BB+/Stable) business profile has weakened due to competitive pressure, slower economic growth, particularly in South Africa, and a regulatory fine in its key market of Nigeria. MTN Group's leverage and operating EBITDA margin are similar to Bharti's. Bharti is a challenger in most African markets of MTN and is slowly gaining market share. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue to decline by 2%-3% as the growth in the non-Indian mobile segment will not be sufficient to offset the fall in mobile revenue in the Indian operations. - Operating EBITDA margin to decline to around 35%-36% (FY17: 37%) due to competition in the Indian mobile segment. - Capex/revenue to be around 27%-29% given it needs to invest to bolster its data networks to prevent a potential churn of its subscribers to Jio. Our capex assumption includes pay-out for deferred spectrum. - Effective interest rate of about 5.5%-6%. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Fitch currently does not envisage any upgrade to Bharti's ratings in the medium term, given the company's business profile and investment needs. Bharti's ratings are not constrained by India's Country Ceiling (BBB-), so an upgrade in the Country Ceiling will not necessarily lead to an upgrade of Bharti's ratings. Developments That May, Individually or Collectively, Lead to Negative Rating Action - A higher-than-expected regulatory charge or M&A activity resulting in FFO-adjusted net leverage remaining above 2.5x on a sustained basis. - A downgrade of India's 'BBB-' Country Ceiling LIQUIDITY Good Access to Capital: At end-March 2017, Bharti's cash and equivalents of INR88 billion were insufficient to pay for the short-term debt of INR129 billion. However, we believe that Bharti will be able to refinance most of its short-term debt, which mainly includes Indian rupee bank loans. It has good access to Indian banks and capital markets. During the last four years, it raised a total of USD6.5 billion in unsecured bonds in three different currencies - US dollars, euros and Swiss francs. We expect it to continue to tap capital markets to refinance its maturing debt. FULL LIST OF RATING ACTIONS Bharti Airtel Limited Long-Term Foreign-Currency Issuer Default Rating affirmed at 'BBB-'; Outlook Stable Senior unsecured rating affirmed at 'BBB-' Rating on 4.375% USD1bn guaranteed senior unsecured notes due 2025 affirmed at 'BBB-' The following notes issued by Bharti Airtel International (Netherlands) B.V. and guaranteed by Bharti Airtel Limited have also been affirmed: - 5.35% USD1bn guaranteed senior unsecured notes due 2024 at 'BBB-' - 5.125% USD1.5bn guaranteed senior unsecured notes due 2023 at 'BBB-' - 3.375% EUR750m guaranteed senior unsecured notes due 2021 at 'BBB-' - 3% CHF350m guaranteed senior unsecured notes due 2020 at 'BBB-' - 4% EUR1bn guaranteed senior unsecured notes due 2018 at 'BBB-' Contact: Primary Analyst Nitin Soni Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd One Raffles Quay, South Tower #22-11 Singapore 048583 Secondary Analyst Steve Durose Managing Director +61 2 8256 0307 Committee Chairperson Isabelle Katsumata Senior Director +65 6796 7226 Summary of Financial Statement Adjustments We have excluded USD6.8 billion of deferred spectrum cost from debt as we treat such costs as capital commitment. We include the annual spectrum payment in our capex forecast. Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email:; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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