Airtel gets stable BBB- rating from Fitch Ratings

Airtel 3G tower
Fitch Ratings has affirmed Bharti Airtel’s long-term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at BBB-.

The rating agency has also affirmed the ratings on Bharti Airtel International (Netherlands) bonds.

Bharti Airtel’s BBB- rating reflects its market leadership in the Indian wireless services industry with 31 percent revenue market share; its diversified and integrated telecom operations; and ownership of a large share of efficient spectrum assets in India.

Fitch Ratings expects Bharti Airtel’s FFO-adjusted net leverage to remain around 1.8x-2.0x for the financial year ending March 2017 (FY16: 1.8x, excluding $5 billion deferred spectrum costs), supported by stable cash flow generation and its strategy to sell non-core assets to pay down debt.

Airtel’s market position is likely to remain intact despite rising competition, as weaker telcos exit the market. The company has been bolstering its spectrum assets and now has the ability to offer 3G/4G services on a pan-India basis, unlike most of its peers.

Fitch Ratings forecasts Bharti Airtel’s FY17 operating EBITDAR margin to decline by 100bp due to higher competition in its Indian operations.

Competition could intensify as Reliance Jio (Jio), part of Reliance Industries (BBB-/Stable), may offer cheaper and faster data services starting H2 FY17 as it is backed by sufficient spectrum assets and access to funds.

The full effect on Bharti Airtel’s profitability could materialize only in FY18 when Jio is likely to be able to offer its services on a pan-India basis. Bharti Airtel could realize some benefits of higher data usage, which could partially offset the potential tariffs declines.

Bharti Airtel’s revenue will grow by mid-single-digit percentage in FY17 despite blended average revenue per user (ARPU) in its Indian operations could fall by 5 percent-6 percent to INR 185 or $2.7 from INR 194 in FY16) as Jio’s entry will arrest the rise in data ARPU. Voice ARPU will continue to fall on cannibalisation by rising data usage.

Bharti Airtel is expected to break even on a FCF basis in FY17 (FY16: FCF deficit of INR40bn) as its cash flow from operations of INR 250 billion – 260 billion will be just sufficient to fund its large Capex requirements and moderate dividends.

The Capex of Airtel will be around INR 220 billion – 230 billion during FY17, which includes its core capex of INR 205 billion and around INR 25 billion for spectrum payments. The core Capex includes investments to improve its 3G/4G networks to compete effectively against Jio and to reduce the frequency of call drops.

Fitch’s key assumptions within our rating case for the issuer include:

# Revenue to rise by mid-single-digit driven by growing data revenue in Indian operations

# Operating EBITDAR margin to decline to 34 percent in FY17 and 31 percent in FY18 due to increase in competition as Reliance Jio likely offers cheaper data tariffs

# Capex/revenue to be around 24 percent-25 percent given it needs to invest to bolster its data networks to prevent a potential loss of subscribers to Jio

# Bharti to receive about INR45bn from sale of towers and African operations for INR58bn and will pay for spectrum acquisitions of INR70bn from Videocon Telecom and Aircel

# Effective interest rate of about 5.5 percent-6 percent

“We do not expect Bharti Airtel to make another large debt-funded acquisition given management’s commitment to sell non-core assets to reduce debt. During FY17, we expect Bharti to receive net proceeds from assets sales, including about INR 45 billion from the sale of towers and African operations for INR 58 billion,” said Fitch Ratings.

Bharti Airtel will likely use these funds to pay for its spectrum acquisition from Videocon Telecom and Aircel for INR 70 billion.

During FY16, Bharti Airtel received about INR 105 billion from the sale and lease back of towers in eight African countries.

“We do not expect Bharti to bid in the upcoming auction of 700MHz in India, given the high indicative price for this spectrum, limited device availability and the company’s ownership of alternative spectrum (1800MHz/2300MHz) to roll out 4G services,” said Fitch Ratings.

African operations’ FY17 EBITDA margin is expected to decline by 100bp-200bp (FY16: 21 percent) due to divestment of two more profitable operations in Burkina Faso and Sierra Leone, depreciating currencies and potentially lower tariffs due to higher competition.

Regulatory risks increased in Nigeria, Bharti’s largest African operation, following by the regulator’s decision to impose a $3.9 billion fine on market leader MTN Group Limited (BBB-/Stable) due to delays in disconnecting mobile lines with improper registration. Bharti’s Nigerian operations have so far been unaffected by such developments.

Bharti Airtel has gained subscriber market share in Nigeria and is now closing in on the second-largest operator, Globacom, at 23 percent market share each. However, MTN still has a much greater share at 39 percent.

During FY16, the African operations’ EBITDA margin declined to its lowest level since acquisition of 21 percent (FY15: 22 percent) due to severe local-currency depreciation and weaker economic growth, which have been affected by the slide in oil prices Blended ARPU fell by 3 percent to USD4.2 as rising data usage partly offset the 10 percent fall in voice tariffs.