Fitch Affirms Bharti Airtel at 'BBB-'; Outlook Stable

Fitch Ratings-Singapore: 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 agency has also affirmed the ratings on Bharti Airtel International (Netherlands) B.V's bonds. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Market-Leading Position: Bharti's 'BBB-' rating reflects its established market leadership in the Indian wireless services industry, where it has a 31% revenue market share; its diversified and integrated telecom operations; and its ownership of a large share of India's most-efficient spectrum assets.

Stable Leverage: We expect its FFO-adjusted net leverage to remain around 1.8x-2.0x for the financial year ending March 2017 (FY16: 1.8x, excluding USD5bn deferred spectrum costs), supported by stable cash flow generation and its strategy to sell non-core assets to pay down debt. Its market position is likely to remain intact despite rising competition, as weaker telcos exit the market. The company has been bolstering its spectrum assets and now has the ability to offer 3G/4G services on a pan-India basis, unlike most of its peers.

Competition May Dilute Profitability: We forecast Bharti's FY17 operating EBITDAR margin to decline by 100bp due to higher competition in its Indian operations. Competition could intensify as Reliance Jio (Jio), part of Reliance Industries Ltd (RIL, BBB-/Stable), may offer cheaper and faster data services starting 2HFY17 as it is backed by sufficient spectrum assets and access to funds.

The full effect on Bharti's profitability could materialise only in FY18 when Jio is likely to be able to offer its services on a pan-India basis. Also, we think that Bharti could realise some benefits of higher data usage, which could partially offset the potential tariffs declines.

Lower Revenue per User: We forecast Bharti's revenue to grow by mid-single-digit percentage in FY17 despite blended average revenue per user (ARPU) in its Indian operations could fall by 5%-6% to INR185 or USD2.7 (FY16: INR194) as Jio's entry will arrest the rise in data ARPU. Voice ARPU will continue to fall on cannibalisation by rising data usage.

Limited FCF; High Capex: We forecast Bharti to break even on a FCF basis in FY17 (FY16: FCF deficit of INR40bn) as its cash flow from operations of INR250bn-260bn will be just sufficient to fund its large capex requirements and moderate dividends. We forecast its capex to be around INR220bn-230bn during FY17, which includes its core capex of INR205bn and around INR25bn for spectrum payments. The core capex includes investments to improve its 3G/4G networks to compete effectively against Jio and to reduce the frequency of call drops.

Commitment to Deleverage: We do not expect Bharti to make another large debt-funded acquisition given management's commitment to sell non-core assets to reduce debt. During FY17, we expect Bharti to receive net proceeds from assets sales, including about INR45bn from the sale of towers and African operations for INR58bn. It will likely use these funds to pay for its spectrum acquisition from Videocon Ltd and Aircel Ltd for INR70bn

During FY16, Bharti received about INR105bn from the sale and lease back of towers in eight African countries. We do not expect Bharti to bid in the upcoming auction of 700MHz in India, given the high indicative price for this spectrum, limited device availability and the company's ownership of alternative spectrum (1800MHz/2300MHz) to roll out 4G services.

African Profitability to Decline: We expect the African operations' FY17 EBITDA margin to decline by 100bp-200bp (FY16: 21%) due to divestment of two more profitable operations in Burkina Faso and Sierra Leone, depreciating currencies and potentially lower tariffs due to higher competition. Regulatory risks increased in Nigeria, Bharti's largest African operation, following by the regulator's decision to impose a USD3.9bn fine (originally USD5.2bn) on market leader MTN Group Limited (BBB-/Stable) due to delays in disconnecting mobile lines with improper registration. Bharti's Nigerian operations have so far been unaffected by such developments.

Market Share Gains: Bharti has gained subscriber market share in Nigeria and is now closing in on the second-largest operator, Globacom Ltd, at 23% market share each. However, MTN still has a much greater share at 39%. During FY16, the African operations' EBITDA margin declined to its lowest level since acquisition of 21% (FY15: 22%) due to severe local-currency depreciation and weaker economic growth, which have been affected by the slide in oil prices Blended ARPU fell by 3% to USD4.2 as rising data usage partly offset the 10% fall in voice tariffs.

Adequate Liquidity: At end-March 2016, Bharti's cash and equivalents balance of USD1.6bn was sufficient to cover its maturing debt of USD980m and USD660m in FY17 and FY18 respectively. We expect Bharti to refinance its FY19 and FY20 debt maturities totalling about USD3.2bn. Its access to capital is solid as demonstrated during FY14-FY15 when it tapped capital markets multiple times and raised an aggregate of USD2.3bn.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Revenue to rise by mid-single-digit driven by growing data revenue in Indian operations.

- Operating EBITDAR margin to decline to 34% in FY17 and 31% in FY18 due to increase in competition as Reliance Jio likely offers cheaper data tariffs. (Please refer to 2016 Outlook: Indian Telecommunications Services, dated 20 November 2015 for details on Fitch's view on the industry.)

- Capex/revenue to be around 24%-25% given it needs to invest to bolster its data networks to prevent a potential loss of subscribers to Jio.

- Bharti to receive about INR45bn from sale of towers and African operations for INR58bn and will pay for spectrum acquisitions of INR70bn from Videocon Ltd and Aircel Ltd.

- Effective interest rate of about 5.5%-6%.

RATING SENSITIVITIES

Negative: Future developments that could individually or collectively lead to negative rating actions include:

- A higher-than-expected regulatory charge or M&A activity resulting in FFO-adjusted net leverage remaining above 2.5x on a sustained basis

- A downgrade of India's 'BBB-' Country Ceiling

Positive: Given the company's business profile and investment needs, Fitch currently does not envisage any upgrade to Bharti's ratings in the medium term. Bharti's ratings are not constrained by India's Country Ceiling, so an upgrade in the Country Ceiling will not necessarily lead to an upgrade of Bharti's ratings.

Full List of Rating Actions:

Long-Term Foreign-Currency Issuer Default Rating affirmed at 'BBB-'; Outlook Stable

Senior unsecured rating affirmed at 'BBB-'; Outlook Stable

Rating on 4.375% USD1bn guaranteed senior unsecured notes due 2025 affirmed at 'BBB-'

The following notes issued by Bharti Airtel International (Netherlands) B.V. and guaranteed by Bharti Airtel Limited have also been affirmed:

- 5.35% USD1bn guaranteed senior unsecured notes due 2024 at 'BBB-'
- 5.125% USD1.5bn guaranteed senior unsecured notes due 2023 at 'BBB-'
- 3.375% EUR750m guaranteed senior unsecured notes due 2021 at 'BBB-'
- 3% CHF350m guaranteed senior unsecured notes due 2020 at 'BBB-'
- 4% EUR1bn guaranteed senior unsecured notes due 2018 at 'BBB-'