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Fitch Affirms Bharti Airtel at 'BBB-'; Outlook Negative
Fitch Ratings has affirmed India-based Bharti Airtel Ltd's (Bharti) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Negative. 
The Negative Outlook reflects Bharti's exposure to adverse regulatory changes in India that could result in higher-than-expected cash outflows compared with Fitch's base case expectations. This is despite Bharti's ability to organically improve its balance sheet due to growing Indian and African operations. Regulatory risk is high for the Indian telecom industry compared with other markets in Asia Pacific. 
"Fitch believes that an evolving regulatory framework, frequent policy changes and 2G licence cancellations by India's Supreme Court in February 2012 could change the industry structure in 2012 and negatively affect Bharti's free cash flow generation," says Nitin Soni, Associate Director in Fitch's Asia-Pacific Telecom, Media and Technology rating team. 
Key regulatory risks for Bharti include a one-time charge for excess spectrum, spectrum refarming and imposition of high spectrum renewal fees as recommended by the Indian telecom regulator, Telecom Regulatory Authority of India (TRAI). Moreover, TRAI's new April 2012 recommendations on spectrum pricing and an early execution of spectrum refarming has further increased the risk of regulatory-led cash outflows for Bharti. 
Bharti's Indian operations, which contributed approximately 50% to both its consolidated revenue and EBITDA during the nine months ended December 2012 (9MFY12), are growing in line with Fitch's expectations, due to easing competition in India. Fitch expects that Bharti's Indian funds flow from operation (FFO) will grow by low double digits in FY13 due to subscriber growth (1.5 to two million monthly) and stable average revenue per minute (INR0.43-0.44 per minute). Fitch believes that the Indian telecom industry will structurally improve in 2012, following the cancellation of 122 2G licences by India's Supreme Court which resulted in the exit of three smaller operators. Further, if TRAI's April 2012 recommendation gets accepted by the Telecom Ministry in principle, this could further weaken smaller operators' market position and could also force them to exit the industry. 
Bharti's African operations contributed about 20% to both its consolidated revenue and EBITDA during 9MFY12. Fitch expects revenue and EBITDA from this region to grow by high teens in FY13, with quarterly average subscriber growth of two million more than offsetting a likely decline in tariffs. During 9MFY12, African revenue and EBITDA improved 57% and 98% to USD3.1bn and USD800m respectively yoy with subscribers growing 21% to 50.9 million. 
However, at the same time, Fitch believes that Bharti faces a number of execution challenges in its African operations including greater competition and a higher cost structure compared with its Indian operations as well as increasing capex requirements. Specifically, in Nigeria, the largest African market, Bharti faces tough competition from MTN Group Limited (MTN, 'AA-(zaf)'/Stable) which estimates its market share at 50% and generates over 60% EBITDA margins mainly from high on-net traffic. MTN also has a significantly larger number of telecom sites and a larger telecom infrastructure in Nigeria, compared with Bharti. 
During 9MFY12, Bharti's total revenue and EBITDA increased 22% and 20% yoy respectively. Its FFO-adjusted net leverage also improved to 2.7x at end-December 2011 from 3.4x at end- March 2011. Fitch expects Bharti to have generated positive FCF in FY12 on lower capex in the absence of spectrum auctions. 
Bharti's ratings could be downgraded if higher-than-expected regulatory charges and/or any M&A activity results in Bharti's FFO-adjusted net leverage remaining above 2.5x on a sustained basis. The Outlook could be revised to Stable if regulatory decisions turn out to be in favour of Bharti, resulting in further deleveraging of its balance sheet. 
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