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Why Moody’s, Fitch Ratings are going gaga over Bharti Airtel?

In the past week, two large ratings agencies Moody’s and Fitch Ratings have issued fresh notes on the Sunil Mittal-controlled Bharti Airtel. These notes have broadly given a positive outlook for Airtel and its subsidiaries following the Supreme Court verdict on the AGR (adjusted gross revenues) matter that has provided relief to the incumbent telcos Airtel and Vodafone Idea. While the Moody’s report has upgraded Airtel’s rating outlook to stable from negative, the Fitch note hasn’t changed the ratings outlook but expects the telco to gain substantial market share at the cost of Vodafone Idea.

For instance, the Moody’s report points out the change in outlook reflects improving profitability at Bharti’s core Indian mobile business, because of a moderation in industry competition, an increase in its 4G customer base, and a tariff hike from December 2019.

“The competition in the Indian mobile segment has moderated over the last nine months as the price war following Reliance Jio Infocomm’s entry in September 2016 has subsided. But the pandemic has resulted in some subscriber contraction (1-2 per cent) over the last few months, which has amplified the impact of a natural attrition of subscribers due to SIM card consolidation in India following the tariff hikes implement in December 2019. However, an increase in the composition of its 4G customers, which comprised nearly 50 per cent of its Indian mobile subscriber base in June 2020, is helping to stabilise profitability,” says the Moody’s report.

As per Fitch Ratings, the Supreme Court’s latest ruling will allow Airtel to pay the remaining outstanding dues in 10 annual payments of about $600 million (Rs 4,410 crore) starting March 2022 instead of a lumpsum. The telco has paid Rs 18,004 crore, and is yet to pay Rs 25,976 crore.

“We expect Jio and Bharti to increase their combined revenue market share to 75-80 per cent from around 70 per cent in the next 12-18 months, at the expense of Vodafone Idea, which will likely lose 50-70 million subscribers in the next 12 months,” Fitch Ratings report said.
Interestingly, the agencies believe that since Airtel is not required to make lumpsum AGR payment to Department of Telecommunications (DoT), the telco can use some of its recently-raised funds to deleverage. For instance, Airtel raised $3 billion in January – a part of which ($2 billion) was raised through a QIP (qualified institutional placement) and $1 billion through FCCB (foreign currency convertible bonds) issue.

“The staggered AGR payment plan will help alleviate pressure on the company’ cash flow. It also means that some of the proceeds Bharti raised earlier this year to fund the AGR liability, can instead be applied to debt reduction. According to management, this is actually already underway. Moody’s also recognizes that around 30-35 per cent of Bharti’s reported debt levels are spectrum liabilities, which are not exposed to refinancing risks,” says the report.

Nevertheless, the AGR dues are going to impact the cash flows of Airtel and Vodafone Idea, and the incumbents would be necessarily required to hike tariffs. As per financial services firm Jefferies, Airtel will have to increase ARPUs (average revenue per user) by 10 per cent to meet its obligations, and it expects around round of tariff hikes in the near term. “With the verdict removing a key uncertainty around the stock, the mobile market moving steadily towards a duopoly and another round of tariff hikes…,” Jefferies said on September 1. Business Today

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