Thursday, February 20, 2020 /02:43
PM / By Fitch Ratings / Header Image Credit: The Statesman
Fitch Ratings has affirmed India-based Bharti Airtel Limited's (Bharti) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' and senior unsecured rating 'BBB-'. The Outlook on the IDR is Stable. The agency has also affirmed Bharti Airtel International (Netherlands) B.V.'s senior unsecured guaranteed bonds at 'BBB-' and Network i2i's subordinated perpetual bond at 'BB'. The Rating Watch Negative is removed from all the ratings.
The Stable Outlook reflects our view that an equity injection of USD2 billion in January 2020 and EBITDA growth for the financial year ending March 2020 (FY20) and FY21 will be more than sufficient to offset the increase in debt to pay regulatory dues of up to USD4.9 billion, which stem from a dispute over adjusted gross revenue (AGR). We estimate that funds from operations (FFO) adjusted net leverage will improve to 2.3x-2.4x in FY20 and to around 2.0x in FY21 - excluding USD6.3 billion in deferred spectrum costs - below 2.5x, the threshold above which we may consider negative rating action.
Key Rating Drivers
Regulatory Dues Payment: Bharti paid USD1.4 billion (INR100 billion) on 17 February 2020 to the Department of Telecommunications (DOT) after the Supreme Court rejected incumbent telcos' petition to ascertain with the DOT the amount and timing of the payment of the regulatory dues related to the AGR dispute. Bharti's management estimates the regulatory dues will not exceed the provision amount of USD4.9 billion.
The Supreme Court's original ruling in October 2020 led the DOT to demand hefty unpaid dues on licence fees and spectrum-usage charges from Indian telcos. The DOT demand relates to a 14-year-old dispute regarding the definition of AGR, which the Supreme Court agreed should include all kinds of income generated by the telcos.
Equity Injection: The USD2 billion equity injection alleviated pressure on the balance sheet resulting from the high regulatory-dues obligations. Management says that Bharti is committed to an investment-grade rating and raised about USD7.6 billion in equity through a rights issue and the sale of equity in its African subsidiary, Airtel Africa Plc, in last 18 months. It also issued USD1 billion of subordinated perpetual bonds, on which Fitch assigns 50% equity credit. The company also raised USD1 billion in convertible debt, which we treat as debt in our analysis.
Strong EBITDA Growth: We estimate Bharti's consolidated EBITDA will increase by 20%-25% a year in FY20 and FY21 due to easing competition in the Indian wireless market and continued strong growth in its African markets and Indian enterprise segment. We expect FY20 EBITDA for the Indian wireless segment to rise by 25%-35%, driven by a 15% increase in blended average revenue per user (ARPU) to INR150-155 (USD2.1) by end-4QFY20 (3QFY20: INR135). The move by all telcos in India to raise tariffs, effective 5 December 2019, by 30%-40% for prepaid tariff plans was the first increase in a decade.
We estimate 9MFY20 revenue and EBITDA rose by 6% and 14% yoy, respectively, mainly driven by the 30% increase in ARPU. The EBITDA figure excludes accounting adjustments due to the introduction of Indian accounting standard 116, which inflated reported EBITDA and finance leases. The Indian mobile segment's profitability is improving, boosted by the addition of 47 million 4G subscribers in 9MFY20 and cost savings from the planned closure of 3G networks by March 2020. We expect FY21 EBITDA to increase, supported by the full impact of the tariff hikes and subscriber additions at the expense of struggling telco, Vodafone Idea Ltd.
Subscriber Growth: We believe that Bharti is poised to gain at least 30 million subscribers from Vodafone idea in FY21. We believe that Bharti and Jio will gain market share, given Vodafone Idea has limited financial flexibility to raise at least USD6 billion in debt to pay regulatory dues in the short term. Vodafone Idea is struggling to improve its EBITDA amid a rapidly shrinking subscriber base and significantly high leverage. The company's chairman publicly stated that it may shut down if it does not receive any relief on regulatory dues from the Supreme Court.
Negative FCF; High Capex: We estimate Bharti's free cash flow (FCF) will be slightly negative in FY20 despite the tariff increases, as cash flow from operations will be insufficient to fund large capex even though core capex fell by 35% in 9MFY20 to INR161 billion and Bharti did not pay any dividends.
We estimate FY20 capex/revenue at 28%-30%, excluding regulatory dues, as Bharti continues to strengthen its 4G network and fibre infrastructure. However, its FCF will improve due to the government's two-year moratorium on payment of existing spectrum dues, which will defer about USD840 million each in FY21 and FY22. Management expects core capex, excluding deferred spectrum payments, to peak and decline significantly in FY20 and FY21.
Strengthening African Operation: We forecast revenue and EBITDA from Bharti's African business to increase by a high-single-digit percentage a year on a constant currency basis in FY20-FY21, driven by revenue growth in the mobile data and mobile money segments. Bharti's market position has improved to the largest or second-largest mobile operator in 11 of its 14 African markets. Revenue and EBITDA in 9MFY20 rose by 12% and 16% yoy, respectively, on a constant currency basis, driven by a 9% increase in subscribers to 107 million, strong growth in mobile data and mobile money services, and stable ARPU of USD2.8.
Philippines' Globe Telecom, Inc's (BBB-/Stable) business risk profile is comparable to that of Bharti, but it faces significantly lower regulatory risk in the duopolistic Philippine market. Bharti has a more diversified business profile and larger scale, which offset weakness at its Indian mobile business segment. We forecast Bharti's FY20 FFO adjusted net leverage to improve towards 2.3x-2.4x on equity injections and tariff hikes, relative to Globe's 3.0x.
MTN Group Limited (BB+/Negative) is rated lower than Bharti because of the South African company's weaker financial profile and deteriorating business profile following competitive pressure, poor economic conditions, particularly in South Africa, and a fine in its key market of Nigeria. The Negative Outlook reflects continuing regulatory pressure in the Nigerian market as well as the change in our Outlook on the South African sovereign rating (BB+/Negative). Our 2019 forecast for MTN's FFO adjusted net leverage is higher than Bharti's at 2.7x and could breach the negative rating sensitivity of 3.0x if MTN paid the USD2 billion fine in Nigeria.
Bharti's business risk profile is comparable with that of Thailand's third-largest telco by revenue, Total Access Communication Public Company Limited (DTAC, BBB/Negative, Standalone Credit Profile: bbb-). The Negative Outlook on DTAC reflects its its FFO adjusted net leverage of 2.8x at end-2019, which is higher than 2.5x threshold above which Fitch may consider negative rating action, following payment of THB9.5 billion to settle a dispute with CAT Telecom Public Company Ltd. Nevertheless, we expect its net leverage to reduce to below 2.5x over the next two years given the anticipated recovery in earnings.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue to grow by 8% in FY20 and 16% in FY21 driven by tariff increases and subscriber addition. Indian mobile blended ARPU to increase by 15% to INR150-155 by end-March 2020 (3QFY20: INR135) and by another 5% in FY21.
- Subscriber addition of 30 million in FY21.
- Operating EBITDA margin to improve to 36% in FY20 and to 37%-39% in FY21 (FY19: 31%) on tariff hikes. The EBITDA margin is based on pre-Indian accounting standard 116 accounting adjustments.
- FY20 capex/revenue at 29% and FY21 at 33%. FY21 capex include 5G spectrum payment of USD1 billion.
- Bharti to pay USD4.9 billion of regulatory dues in 4QFY20 to DOT.
- African revenue to grow by high-single-digit percentage per year during FY20-FY21 driven by growth in subscribers, and the mobile data and mobile money segments. Operating EBITDA margin to remain stable at 34%-35%.
- Effective interest rate of 5.5%-6.0%.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Given the company's business profile and investment needs, Fitch currently does not envisage any upgrade to Bharti's ratings in the medium term. Bharti's ratings are not constrained by India's Country Ceiling of '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
- Higher-than-expected regulatory dues, slower recovery in Indian operations or debt-funded M&A resulting in FFO-adjusted net leverage remaining above 2.5x for a sustained period.
- A downgrade of India's 'BBB-' Country Ceiling
Liquidity And Debt Structure
Adequate Liquidity: At end-December 2019, we believe that the company had cash and equivalents of USD4.4 billion, additional money of USD3.3 billion and undrawn committed facilities, which are sufficient to pay the current portion of long-term debt of USD1.6 billion and regulatory dues of USD4.9 billion. A large part of short-term debt of USD2.5 billion is revolving facilities. Bharti raised USD3.3 billion in 4QFY20, comprising USD2 billion in equity, USD1 billion in convertible debt and USD250 million from the tap on Network i2i's perpetual bond. The company has strong access to Indian and multinational banks and capital markets, as evident from its issuance of around USD7 billion of senior and perpetual bonds over the previous six years in US dollars, euros and Swiss francs.
Summary Of Financial Adjustments
We have excluded USD6.3 billion of deferred spectrum costs from debt, as we treat such costs as capital commitments. We include annual spectrum payments in our capex forecast.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.