Global Credit Rating agency, S&P Global Ratings revised its rating outlook on Bharti Airtel Ltd. to negative from stable. S&P has affirmed its 'BBB-' long-term issuer credit rating on the India-based wireless telecom company. It has also affirmed 'BBB-' long-term issue rating on Bharti's senior unsecured notes.
S&P revised the outlook to reflect the risks associated with a recovery in Bharti's financial leverage over the next 12-24 months. The company's financial performance in fiscal 2018 (year ended March 31, 2018) was weaker than S&P's expectations and its capital expenditure (capex) is likely to remain high in fiscal 2019.
S&P views an aggravation in price competition without any meaningful reduction in capex as key risks to a recovery in Bharti's financial performance.
It also expects stabilization in Bharti's India performance supported by bottoming-out of tariffs, the company's cost-cutting measures, and its strong African operations and non-wireless businesses to improve its leverage.
S&P estimates that the ratio of funds from operations (FFO) to debt will be more than 20.0% in fiscal 2019 and about 23.0% in fiscal 2020.
"Bharti's leverage was 18.5% in fiscal 2018, below our downgrade trigger of 20.0% and our estimate of about 21.0%. Bharti's revenues fell by 12.1% in fiscal 2018, mainly underpinned by an 18.2% drop in its India wireless business and reorganization of its Africa and Bangladesh operations. Cut-throat pricing by Indian telecom operators resulted in an industry-wide decline in revenue." it said in a statement.
Although Bharti's reported EBITDA declined by about 14.5% in fiscal 2018, reported margins fell by only about 90 basis points, to 36.4%. Cost cuts, deconsolidation of loss-making businesses in Africa and Bangladesh, and good intrinsic growth in the remaining Africa business and non-wireless operations in India supported margins.
The company's capex in fiscal 2018 was about INR 250.0 billion, against S&P's estimate of around INR 220.0 billion. S&P expects the capex to remain elevated in fiscal 2019, against its previous expectation of INR 210.0 billion, mainly driven by an aggressive push to augment Bharti's pan-Indian 4G network and service capabilities.
S&P affirmed its ratings because it expects Bharti's financial performance to improve over the next 12-24 months owing to the company's stabilizing India wireless business and higher profitability in the Africa business.
S&P also expects Bharti to merge Telenor (India) Communications Pvt. Ltd. and Tata Teleservices Ltd. in fiscal 2019, adding 5.0%-8.0% to its revenue. However, S&P's base case does not consider any synergies from these mergers.
However, in terms of subscriber base as of February 28, 2018, Bharti (combined with Telenor and Tata Tele) had a 31.8% subscriber market share, while Idea-Vodafone had 36.2% and Jio had 15.3%.
Thus S&P believes that the subscriber market share data in India is not reliable, given a significant number of customers with multiple mobile connections.
Price competition in India's wireless market is likely to remain intense with only a slight moderation. S&P believes wireless tariffs in India have hit rock bottom, with entry-level tariffs at INR 50 (less than US$1.0 equivalent). This is roughly 43.0% and 35.0% of Bharti and Jio's average revenue per user (ARPU), respectively, in the fourth quarter of fiscal 2018.
S&P believes any further reduction in tariffs by Jio could be detrimental to its own revenues because its own customers are likely to benefit from the tariff cuts.
Jio's financial performance in the fourth quarter of fiscal 2018 was muted, with sequential fall in ARPU of about 11.0% (compared to less than 6.0% for Bharti), indicating that price-cuts are no longer viable for Jio.
Bharti's sequential decline of only 3.2% in India wireless revenue in the fourth quarter of fiscal 2018, compared to a year-over-year decline of 18.2%, supports our view that Jio's price cuts are having a diminishing impact on Bharti's revenues.
Having said that, S&P expects only a stabilization in tariffs in the next 12-24 months.
S&P believes that Bharti's management is committed to maintaining its financial profile. It is looking at options to monetize its non-core assets and reduce debt.
Bharti has already announced plans to potentially reduce its stake in India-listed tower company Bharti Infratel Ltd. (Infratel) post its merger with Indus Towers Ltd.
Bharti is also evaluating monetizing its Africa business, including going for an IPO, although the timing and extent are unknown.
The credit rating agencies leverage estimates for Bharti do not factor these developments because of some uncertainty. However, such measures, especially the IPO, could restore the company's financial headroom.
The rating agency may lower the rating if: (1) prolonged price competition weighs on Bharti's India business and drags down the reported EBITDA margin to close to 30.0% while the capital spending remains elevated; or (2) any unexpected spectrum bids result in additional debt, causing the ratio of FFO to debt to stay below 20.0%.
S&P may revise the outlook to stable if Bharti arrests the decline in its India mobile business. Moderating competitive intensity resulting in modest growth and capital spending below INR 200.0 billion, such that the FFO-to-debt ratio stays sustainably above 20.0%, would indicate such improvement.
S&P may also revise the outlook to stable if Bharti can meaningfully reduce debt through equity infusion, monetization of the Africa business or any other
non-core asset, resulting in a sustained improvement in leverage.