Fitch Ratings estimates that Airtel will have annual negative free cash flow of $600 million-$800 million during FY18-19, as Airtel’s cash flow from operations will be insufficient to fund large Capex requirements.
Airtel has increased its Capex guidance by $1 billion to around $4 billion to strengthen its network infrastructure, particularly 4G, and to compete against Reliance Jio.
Airtel India has deployed 32,000 broadband sites in the third quarter and achieved growth of 544 percent in data traffic and 50 percent in voice traffic.
Telecom regulator TRAI’s decision in January 2018 to extend deferred spectrum liability payment to 16 years from 10 will only partially ease cash flow pressures on Airtel, the largest telecom operator in India.
Idea Cellular, one of the main competitors of Airtel, has recently announced its decision to mobilize more funds for network expansion. Reliance Jio recently said its 4G network will cover India’s 99 percent population by the end of 2018.
Telecom operator Bharti Airtel’s rating headroom will narrow due to lower cash generation and high Capex requirements in the financial year ending March 2018, says Fitch Ratings.
However, some of the pressure on Bharti Airtel and other incumbent Indian telcos should begin to fade this year, as the intense competition sparked by Reliance Jio’s 2016 market entry begins to ease.
Reliance Jio recently announced more cost effective plans to enhance the number of active mobile data users on its telecom network. Reliance Jio has also posted its first net profit after starting telecom business in 2011 and commercial operation in September 2016.
Airtel’s FFO-adjusted net leverage will deteriorate to around 2.1x-2.3x in FY18, from 1.9x at FYE17 – excluding $7.2 billion in deferred spectrum costs. This would move it closer to the threshold of 2.5x, above which Fitch would consider negative rating action.
Bharti remains committed to maintaining an investment-grade rating and plans to sell a larger stake in its tower arm, Bharti Infratel, in FY19. Over the last 12 months, it has sold a total of 18.5 percent in Infratel for about $1.9 billion.
Airtel’s revenue and EBITDA will rebound in FY19 driven by a likely improvement in the blended average revenue per user (ARPU) in the Indian mobile sector as data usage and tariffs rise.
Airtel’s FY18 revenue and EBITDA are likely to decline by 10 percent and 15 percent, respectively, reflecting unprecedented competition that pushed down blended ARPU by 29 percent to an all-time low of INR123 or $1.9 in the quarter ended December 2017.
Consolidated EBITDA at Rs 7,587 crore fell 11.5 percent with EBITDA margin of 37.3 percent (++0.6 percent). Consolidated EBIT dipped 26.5 percent to Rs 2,701 crore. Net income dropped to Rs 306 crore compared to Rs 504 crore in corresponding quarter last year and Rs 343 crore in Q2 fiscal 2018.
Lower EBITDA along with rising spectrum costs and continued investments in India have resulted in deterioration of Return on Capital Employed to 4.9 percent from 7.1 percent in the corresponding quarter last year.
Airtel’s total revenue fell 12.9 percent to Rs 20,319 crore in Q3 fiscal 2018. India revenues of Airtel dipped 15.1 percent to Rs 15,294 crore — primarily impacted by mobile drop of 17.6 percent due to competition.
The slide in ARPU of Airtel was driven by the regulator’s decision to reduce voice mobile termination rate by 57 percent, and was despite a 37 percent increase in voice usage per user per month and a fivefold increase in per user data usage to 5.3 GB per month (9M2016: 972 MB).
Airtel’s strategy to be either the number one or a strong number two in Africa telecom market will boost its position and profitability over the long term. Airtel’s African operation is already growing strongly, with EBITDA in the region up by 24 percent in 9MFY17, and higher voice and data usage are likely to drive further gains in 2018.
Fitch Ratings said the outlook for the Indian telco sector is improving, which could mean that the results in the quarter ended December 2017 marked a low point for Bharti and other incumbents.
“We revised the sector outlook to Stable in 2018 from Negative in 2017, as we expect competition to ease now that industry consolidation is all but completed,” said Nitin Soni, director – Corporates at Fitch Ratings.
Three large telcos – Bharti Airtel, Reliance Jio and merged entity of Vodafone-Idea – have emerged from the shake-out. Their combined revenue market share will increase to around 90 percent in 2018, from 80 percent in 2017, as smaller telcos continue to exit.
Fitch Ratings said India’s telecom industry revenue growth is likely to be in the mid-single-digits, after a decline in 2017. “The low industry tariffs are unsustainable, and we expect they rise in 2018, as Jio switches its focus from gaining customers to making reasonable returns on its $31 billion investment in the sector,” Fitch Ratings said.