Fitch affirms Bharti Airtel at ‘BBB-‘; Outlook Negative

Fitch Ratings has affirmed India-based Bharti Airtel Limited’s (Bharti) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at ‘BBB-‘. The Outlook on the IDR is Negative. The agency has also affirmed Bharti Airtel International (Netherlands) B.V.’s senior unsecured guaranteed bonds at ‘BBB-‘ and Network i2i Limited’s subordinated perpetual bond at ‘BB’.

Network i2i’s subordinated perpetual note is rated two notches below Bharti’s IDR. This reflects the notes’ deeply subordinated nature, ranking junior to all existing and future debt obligations and senior only to Bharti’s ordinary shares. This approach is in accordance with Fitch’s Corporate Hybrids Treatment and Notching Criteria.

The Negative Outlook does not reflect our view of Bharti’s underlying credit profile – which has been improving, benefiting from strong growth in the Indian and African wireless operations – but rather the heightened probability that India’s Country Ceiling (BBB-) could be lowered to ‘BB+’. Such an action would constrain Bharti’s IDR and senior issue ratings to ‘BB+’.

KEY RATING DRIVERS
Outlook Sovereign Driven: The Negative Outlook on Bharti’s IDR reflects the Outlook on India’s Long-Term Foreign- and Local-Currency IDRs (BBB-), which were revised to Negative from Stable on 18 June 2020. Bharti’s IDR and senior issue ratings are not directly constrained by India’s sovereign rating but cannot exceed the Country Ceiling, which reflects the transfer and convertibility risks associated with foreign-currency obligations.

Robust Growth Defying Pandemic: We forecast Bharti’s financial year ending March 2021 (FY21) funds from operations (FFO) net leverage to be 2.2x-2.4x, below the threshold of 2.5x above which we will take negative rating action. We expect Bharti’s FY21 revenue and EBITDA to rise by around 17%-25%, on improvement in the Indian wireless market and continued strong growth in African markets, despite the economic slowdown caused by the coronavirus pandemic. Consolidated revenue and EBITDA in 1HFY21 rose by 19% and 37% yoy, respectively, defying the pandemic-led slowdown.

Improving Tariffs in Indian Market: We forecast Bharti’s Indian wireless EBITDA to rise by around 40%-50% in FY21, led by 15 million subscriber additions and monthly average revenue per user (ARPU) improvement of 10%-12%. Indian mobile revenue increased by 22% yoy in 1HFY21 and EBITDA by 60% yoy, on a pre-Indian AS 116 basis, supported by a 27% rise in monthly ARPU to INR162 (USD2.2) and high monthly data usage of around 16 GB per user, one of the highest globally.

Regulatory Dues Factored: Bharti has so far paid about USD2.4 billion out of its previously unpaid total dues of USD6.4 billion owed to India’s Department of Telecommunications (DOT) for a dispute over the amount of adjusted gross revenue (AGR) dues. We have factored in a balance of USD4 billion for AGR dues in our FY21 leverage, despite the Supreme Court allowing the balance to be paid over 10 years starting March 2022.

The court’s original ruling in October 2019 led the DOT to demand large unpaid dues on licence fees and spectrum-usage charges from incumbent Indian telcos. The DOT demand relates to a 14-year-old dispute on the definition of AGR, which the court ruled should include all income the telcos generate.

Positive FCF on Flat Capex: We expect Bharti to generate small positive free cash flow in FY21 on flat core capex, lower interest costs and the government’s two-year moratorium on the payment of existing spectrum dues, which will defer about USD840 million in each of FY21 and FY22. We expect FY21 as absolute core capex will most likely be flat at INR210-220 billion (FY20: INR221 billion), ignoring one-time payments for spectrum assets.
Bharti will continue to invest in expansion of its 4G and fibre networks across Indian and African markets. We have assumed USD500 million in FY21 and USD1 billion in FY22 to fund the upfront spectrum investments. Bharti has completed the shutdown of its 3G network across India and has redirected its 900MHz and 2100MHz spectrum for 4G usage. Management has publicly stated its intention to not participate in 5G spectrum auctions, at existing high prices.

Solid African Growth: We forecast African FY21 revenue and EBITDA to rise by 6%-8%, on growth in subscribers, mobile data and mobile-money services. African revenue and EBITDA in 1HFY21 increased by 11% and 13% yoy, respectively, on a reported currency basis, and management expects 2HFY21 growth to be higher than 1HFY21, which was lower due to pandemic. We expect mobile data and mobile money segments to expand by 10%-15%, which together contribute around 40% of the group’s revenue. We forecast FY21 EBITDA margin to remain at around 39% (post IFRS-16 of 44%-45%), as we expect rising contributions from higher-margin 4G services and mobile money will offset foreign-exchange losses.

Indian Wireless Industry to Consolidate: We expect Bharti and Reliance Jio to increase their combined revenue market share to 80% (September 2020: around 74%) in the next 12-18 months as the third-largest telco, Vodafone Idea, is rapidly losing market share given its weak balance sheet and limited financial flexibility. We believe that Vodafone Idea could lose 50 million-70 million subscribers in the next 12 months, after losing about 155 million subscribers in the last nine quarters. We think Reliance Jio could gain more than half of Vodafone Idea’s subscriber losses, with the balance going to Bharti. In 2QFY21 Bharti added 14 million subscribers, double than that of Jio’s seven million.

We believe that Vodafone Idea’s plan to raise about USD3.4 billion through a mix of equity and debt, is unlikely to restore its competitive position and reverse subscriber losses, as the amount would be insufficient for capex. It has so far paid about USD1.1 billion of its total unpaid dues of USD8.9 billion it is required to pay to the DOT for the AGR dues dispute.

DERIVATION SUMMARY
Philippines-based Globe Telecom, Inc. (BBB-/Stable) has smaller scale and a less diversified revenue base, which is offset by lower competition and regulatory risk in the duopolistic Philippines market. However, we expect competition to increase with the impending entry of Dito Telecommunity. Globe is also likely to increase capex investment given regulatory pressure to improve 4G coverage in anticipation of Dito’s entry in the market. We forecast Bharti’s FY21 FFO net leverage to be around 2.2x-2.4x, relative to Globe’s 2.5x-2.7x.

Bharti has a stronger business profile than Indonesian telcos PT Indosat Tbk (BBB/Stable; SCP: bb) and PT XL Axiata (BBB/Stable; SCP: bb+) because of its larger scale, better market position and integrated operations. Both Indosat and XL have a weaker market position, with revenue market shares below 20%, as they compete with a much financially and operationally stronger leader, PT Telekomunikasi Selular, which has a market share of over 50%. Bharti has a stronger FFO net leverage compared with our forecast for Indosat of 3.0x-3.5x, but at a similar level with XL in 2020.

Singapore Telecommunications Limited (A/Stable; SCP: a-) has a stronger business risk profile than Bharti, given its position as an integrated telecom service provider with market leadership in Singapore, the second position in Australia via SingTel Optus Pty Limited (A-/Stable) and leading positions in Indonesia, India, Thailand and the Philippines through its associates. Singtel’s rating benefits from a one-notch uplift for government support. Singtel is facing competitive pressure in its core Singapore and Australian markets, while having to spend more on capex to launch 5G services in Singapore. However, Singtel’s FY21 FFO net leverage is broadly similar to Bharti’s at around 2.3x-2.5x.

KEY ASSUMPTIONS
Fitch’s Key Assumptions Within Our Rating Case for the Issuer:
– Revenue to increase by 15%-20% in FY21 and 10-15% in FY22;
– Indian mobile blended ARPU to increase by 10%-12% to around INR170 by end-March 2021 (1HFY21: INR162);
– Subscriber additions of 15 million each in FY21 and FY22;
– Operating EBITDA margin to remain at 36%-37% in FY21-FY22 (FY20: 36%) on monthly ARPU hikes. The EBITDA margin is based on pre-Indian AS 116 accounting adjustments.
– FY21 capex/revenue around 23%-25%. FY22 capex includes spectrum payment of USD1 billion;
– African revenue to grow by the high single-digit percentage in FY21 on growth in subscribers and the mobile data and mobile money segments. Operating EBITDA margin to remain at 38%-40%;
– Effective interest rate of 5.5%-6.0%.

RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– A revision of the Outlook on the Indian sovereign to Stable would indicate that the Country Ceiling is likely to remain at ‘BBB-‘ and therefore our Outlook on Bharti would be stabilised, provided that Bharti’s FFO net leverage remains below 2.5x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– A downward revision of the Country Ceiling;
– Higher regulatory dues than Fitch expects, slower recovery in Indian operations or debt-funded M&A resulting in FFO net leverage remaining above 2.5x for a sustained period.
Rating Sensitivities for the Indian sovereign, from the rating action commentary dated 18 June 2020:
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– A structurally weaker real GDP growth outlook, for instance due to continued financial-sector weakness or reform implementation that is lacking.
– Failure to reduce the fiscal deficit after the pandemic recedes, and to put the general government debt/GDP ratio on a downward trajectory.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– Implementation of a credible strategy to reduce general government debt after the pandemic that would put it on a path towards the ‘BBB’ peer median.
– Higher sustained investment and growth rates in the medium term without the creation of macroeconomic imbalances, such as from successful structural reform implementation and a healthier financial sector.

BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: The company had sufficient liquidity with cash and equivalents of INR225 billion (USD3 billion) at end-September 2020 and undrawn committed facilities of INR61 billion, which are sufficient to pay the short-term debt maturities of INR248 billion (USD3.4 billion). A large part of the short-term debt is in the nature of revolving facilities. 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 INR433 billion of deferred spectrum costs from debt, as we treat such costs as capital commitments. We include annual spectrum payments in our capex forecast.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Should the Indian sovereign IDRs be downgraded, the Country Ceiling may also be revised down in tandem, which would constrain Bharti’s IDR and senior issue ratings to ‘BB+’. If the Outlook on the sovereign’s IDRs is stabilised, the Country Ceiling is likely to remain at ‘BBB-‘ and therefore Bharti’s Outlook would be stabilised.

ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means 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. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg. Fitch Ratings