Fitch affirms Bharti Airtel’s ‘BBB-‘ rating

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 Stable. Fitch 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’.

The Stable Outlook reflects Fitch’s expectations that Bharti’s diversified cash flow generation will continue to grow and fund high 5G-related capex investments and support a solid balance sheet. A strong market position in the growing and fast-consolidating Indian wireless market and integrated operations will continue to support profitability and support high ratings headroom.

Bharti’s foreign-currency ratings are not directly constrained by India’s sovereign rating (BBB-/Stable), but cannot exceed the Country Ceiling (BBB-), which reflects the transfer and convertibility risks associated with foreign-currency obligations. If India’s Country Ceiling were to be raised to ‘BBB’, we would be likely to change the Outlook on Bharti’s IDR to Positive, reflecting our view that the underlying credit quality of Bharti is currently ‘BBB-‘/Positive.

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 debt obligations and senior only to Bharti’s ordinary shares. This is in line with Fitch’s Corporate Hybrids Treatment and Notching Criteria.

Key rating drivers
Improving Ratings Headroom: We expect Bharti’s net debt/EBITDA to improve to 1.1x-1.3x in the financial year ending March 2023 (FY23) and around 1.0x by FY24 (FY22: 1.6x) on strong cash flow generations, which will fund its high capex to roll out 5G networks and shareholder distributions. Bharti is committed to retain its balance sheet’s strength. Bharti raised over USD11 billion in total equity over 2019-2022 to keep its balance sheet healthy. It has an option to raise additional equity of about USD1.9 billion during FY23-25 from its undrawn, but fully underwritten rights issue.

Strong EBITDA Growth: We expect Bharti’s EBITDA to grow by around 20% in FY23 and 10%-12% in FY24 (FY22: 29%), driven by subscriber growth and a rise in monthly average revenue per user (ARPU) in the Indian wireless segment. We expect Bharti’s EBITDA margin to expand by 100-150bp, as it will not have to pay usage charges on the spectrum bought in the latest auction

We expect another headline tariff increase in Indian wireless market to boost ARPU in next 12-18 months, following a gradual increase in industry-wide tariffs from a low base. Bharti has stated that the industry needs to have monthly ARPU of around INR200 (USD2.5) in the short term and INR300 in the medium term.

Consolidating Wireless Market: Market leader Reliance Jio (subsidiary of Reliance Industries Ltd (BBB/Stable, Local-Currency IDR: BBB+/Stable) and Bharti will continue to consolidate market share as they will garner 80%-85% (March 2022: 78%) of the revenue of private telcos during 2023-2024. Bharti will retain its 35% active subscriber market share, while Vodafone Idea, the third largest telco, will continue to lose market share given its extremely weak financial position.

High capex, Low FCF generation: We forecast Bharti will generate limited free cash flow (FCF) during FY23-FY24 (FY22: -10% FCF margin, after prepayment for deferred spectrum) as it embarks on a high 5G-capex cycle. We expect core capex (excluding spectrum outlay) to remain high at 23%-25% over FY23-FY24 (FY22: 24%), while spectrum payments may decline to around 9% of revenue in FY23 and 6% in FY24 (FY22: 16%). Bharti aims to roll out 5G networks across all towns in urban and key rural areas in India.

5G Capex Upcycle: We believe that diverging 5G network strategy of Bharti and Jio will create competitive and market share uncertainties in the medium to long term. Fitch expects Bharti to invest about USD3 billion-4 billion in rolling out 5G networks, based on a non-standalone network, while Reliance Jio is likely to invest USD13 billion-14 billion to roll out 5G on a standalone network, in the next 3 years. A non-standalone network sits over the existing 4G network infrastructure, compared to a standalone network, which requires a new 5G network core and therefore demands higher investment.

However, we believe that the 5G business case could be limited in the short term, as most of the current applications are comfortably served by 4G speeds. Device ecosystem also needs to rapidly evolve for higher 5G adoption in the price-sensitive Indian market, given low penetration of 5G devices of below 5%. Jio’s and Bharti’s network positions are significantly better as they have larger sub-1GHz spectrum and about three times Vodafone Idea’s high-frequency 5G spectrum.

Favourable Regulatory Environment: The Indian government’s continued policy support has eased regulatory risk for telcos. The government’s decision to defer the amount of adjusted gross revenue (AGR) and spectrum dues for four years, the prospective exclusion of non-telecom revenue from the definition of AGR and the abolition of spectrum usage charges in recent spectrum auctions will boost telcos’ cash flows.

Solid African Growth: We forecast Airtel Africa’s revenue and EBITDA to rise by 10%-15% in FY24, on growth in subscribers, mobile data and mobile-money services. An improvement in market position and strong EBITDA growth will support FY24 pre-dividend FCF generation of over USD500 million and keep net debt/EBITDA well below 1.0x during FY23-FY24. Competition is likely to remain subdued in key markets, such as Nigeria, Uganda and Democratic Republic of Congo, due to the weakening of rivals.

CT Bureau