Fitch revises Bharti’s outlook to stable

Fitch Ratings has revised the Outlook on Bharti Airtel Limited’s (Bharti) Long-Term Foreign-Currency (FC) Issuer Default Rating (IDR) to Stable from Negative, and affirmed the FC IDR and senior unsecured bond rating at ‘BBB-‘. 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 bonds at ‘BB’.

The Stable Outlook follows the revision in the Outlook on India’s Long-Term Foreign- and Local-Currency IDRs to Stable from Negative on 10 June 2022. Bharti’s FC ratings are not directly constrained by India’s sovereign rating, but cannot exceed the Country Ceiling (BBB-), which reflects the transfer and convertibility risks associated with FC obligations.

Bharti generates most of its cash flows from India, while its cash flow generation outside India from countries rated above ‘B+’ cannot cover its hard-currency debt servicing requirements. Bharti generates significant EBITDA and cash flow from its non-Indian operations but these are located in countries with Country Ceilings of ‘B+’ or below.

Key rating drivers
Strengthening Balance Sheet: We forecast Bharti’s funds from operations (FFO) net leverage at around 1.6x by the end of the financial year to March 2023 (FY23), versus 1.9x at FYE22, providing sufficient ratings headroom on its underlying credit profile. Bharti raised a substantial USD11.3 billion in equity in total over 2019-2021 to keep its balance sheet healthy. The equity was raised via several transactions, including direct equity issuances, issuances of perpetual debt (to which Fitch assigns 50% equity credit), stake sales in its subsidiaries, Airtel Africa and Airtel Money, and sales of assets such as spectrum.

Robust Growth: We expect the group’s revenue and EBITDA to increase by 12%-13% and 14%-15%, respectively, in FY23 on continued improvement in the Indian wireless market and strong growth in the African markets. Revenue rose by 16% in FY22 and EBITDA by 20%. Growth was broad-based with a strong performance in the enterprise and home broadband segments.

Higher Tariffs in Indian Market: We forecast the Indian wireless segment’s FY23 EBITDA to increase by 15%-20% on 15 million subscriber additions and monthly average revenue per user (ARPU) growth of 10%-15%. EBITDA for this segment rose by 29% in FY22 as it added 5 million subscribers and monthly ARPU climbed by 23% to IN178 (USD2.9). We expect 4G subscribers to increase by 3 million-5 million each quarter, from 201 million at end-March 2022. 4G subscribers increased by 12% in FY22 to form 64% of the subscriber base, while average monthly data consumption per user rose by 14% to 19GB.

More Industry Consolidation: We expect Bharti and closest rival Reliance Jio to increase their combined revenue share of the private telecom market to 82%-85% in 2022-2023. Rival Vodafone Idea has rapidly lost market share because of its weak balance sheet and limited financial flexibility. Vodafone Idea’s market share is likely to continue to shrink because of its inability to invest in its networks.

Regulatory Risk Improving: The Indian government has undertaken several reforms to reduce regulatory risk for Indian telcos. These include the 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, the abolition of spectrum usage charges on future spectrum auctions, and the increased tenor of future spectrum assets to 30 years from 20 years. These actions will boost Bharti’s cash flow.

High Capex: We forecast Bharti’s FY23 capex/revenue ratio (including any one-time payments for 5G spectrum assets) to remain elevated at 35%-40% (FY22: 37% including voluntary one-time prepayment of spectrum of INR180 billion).We believe that capex for 5G infrastructure in 2023-2024 will replace current 4G capex, as 4G coverage is largely complete. We believe the company will also seek to strengthen its fibre infrastructure by connecting towers with fibre and backhaul infrastructure to prepare its network to launch 5G services in 2023-2024.

Solid African Growth: We forecast Bharti’s revenue and EBITDA from Africa to rise by 12%-15% in FY23, on growth in subscribers, mobile data and mobile-money services. African revenue and EBITDA rose by 21% and 29% yoy, respectively, in FY22. We expect competition to remain low in a number of key African markets, such as Nigeria, Uganda and Congo, due to the weakening of rivals.

CT Bureau