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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.
Derivation Summary
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.
Key Assumptions
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%.
Rating Sensitivities
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.
ESG Considerations
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.
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