TRAI recommendation impact: Fitch revises outlook of Airtel to negative

Telecom Lead India: Following
TRAI’s controversial spectrum recommendation, Fitch has revised the outlook of
Airtel to negative from stable due to adverse regulatory environment in India
and risks involved in its African operation.

According to Fitch, Airtel’s exposure to adverse regulatory
changes in India may result in higher-than-expected cash outflows compared with
Fitch’s base case expectations. This is despite the operator’s ability to
organically improve its balance sheet.

Regulatory risk is high for the Indian telecom industry
compared with other markets in Asia Pacific.

“Fitch believes that an evolving regulatory framework,
frequent policy changes and 2G licence cancellations by India’s Supreme Court
in February 2012 could change the industry structure in 2012 and negatively
affect Bharti’s free cash flow generation,” said Nitin Soni, associate
director in Fitch’s Asia-Pacific Telecom, Media and Technology rating team.

Regulatory risks for Airtel include a one-time charge for
excess spectrum, spectrum refarming and imposition of high spectrum renewal
fees as recommended by TRAI.

TRAI’s new April 2012 recommendations on spectrum pricing
and an early execution of spectrum refarming has increased the risk of
regulatory-led cash outflows for Bharti.

Airtel’s Indian operations contributed approximately 50
percent to both its consolidated revenue and EBITDA during the nine months ended
December 2012. Its Indian operations are growing in line with Fitch’s
expectations, due to easing competition in India.

Fitch expects that Airtel ‘s Indian funds flow from
operation (FFO) will grow by low double digits in FY13 due to subscriber growth
(1.5 to two million monthly) and stable average revenue per minute
(INR0.43-0.44 per minute).

If telecom ministry accepts TRAI’s April 2012
recommendation, it could further weaken smaller operators’ market position and
could also force them to exit the industry.

Airtel’s African operations contributed about 20 percent to
both its consolidated revenue and EBITDA during the first nine months of FY12

Fitch expects revenue and EBITDA from this region to grow by
high teens in FY13, with quarterly average subscriber growth of two million
more than offsetting a likely decline in tariffs.

During 9MFY12, African revenue and EBITDA improved 57
percent and 98 percent to $3.1 billion and $800 million respectively y-o-y with
subscribers growing 21 percent to 50.9 million.

Fitch said Airtel faces execution challenges in African
operations including greater competition and a higher cost structure compared
with its Indian operations as well as increasing capex requirements.

In Nigeria, Airtel faces competition from MTN Group which
estimates its market share at 50 percent and generates over 60 percent EBITDA
margins mainly from high on-net traffic. MTN also has a significantly larger
number of telecom sites and a larger telecom infrastructure in Nigeria,
compared with Bharti.

During 9MFY12, Bharti’s total revenue and EBITDA increased
22 percent and 20 percent y-o-y respectively. Fitch expects Bharti to have
generated positive FCF in FY12 on lower capex in the absence of spectrum

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