Moody's Investors Services says Bharti Airtel second quarter operating performance continues to support its Baa3 issuer rating. ''Total revenues grew 7.1% year on year to Rs 228 billion (about USD 3.8 billion) in 2Q FY2014/15 with India, the largest contributor, growing 12.3% YOY. Reported EBITDA margins increased to 33.7% from 32.2% in 2Q FY 2013/14," says Annalisa Di Chiara, a Moody's vice president and senior analyst, ''as a result credit metrics for first half of year remain broadly in line with our expectations with Bharti maintaining strong momentum in its Indian mobile business.''
In India, top line growth was driven by mobile services which reported a solid YOY 11.3% growth in revenue on the back of continued robustness of voice segment and growing data segment. Mobile data revenue was up 73.8% YOY and now contributes to 14.5% of mobile segment revenues. Key business lines in India all reported healthy year-on-year improvements and contributed to a 23% year-on-year increase in India's reported EBITDA to Rs 60.7 billion.
In Africa, revenue declined by 1.9% YOY owing to a contraction in voice revenue and unfavourable USD appreciation. However, on a constant currency basis-gross Revenues increased 6.4% YOY and net revenues by 7.5% YOY. Reported EBITDA declined 14% YOY to Rs 16.3 billion in 2Q FY2014/15 mainly due to a combination of currency volatility, seasonality, environmental and regulatory factors which reduced revenues. Africa accounts for around 30% and 21% of consolidated revenues and EBITDA, respectively, in 2Q FY2014/15.
While overall revenues remained sluggish in Africa, mobile data revenue grew by 56.8% to USD 115 million during the quarter as compared to USD 73 million in the corresponding quarter last year. Mobile data revenue now represents 10.1% of the total mobile revenue during the quarter as compared to 6.6% in the corresponding quarter last year.
As at Sept. 30, 2014, Bharti's total subscriber base grew 8.4% YOY to 304 million. Building on the positive momentum in Q1 FY2014-15, Bharti's mobile business in India added a further 2.5 million subscribers in 2Q FY2014/15, with the customer base now exceeding 224.7 million.
While the subscriber base remains predominantly prepaid, the company has also made good progress in increasing its data subscriber base, which increased 43% year-on-year. This growth contributed to a year-on-year increase of 3% in its mobile segment's overall average revenue per user (ARPU). Bharti's operations in Africa also reported a healthy year-on-year increase of 7.5% in its subscriber base.
Bharti's overall financial metrics in H1 FY2014-15 improved modestly from FY2013-14. The decrease in reported debt to about Rs 677 million from Rs 759 million at FYE March 2014, combined with higher absolute EBITDA drove a decline in adjusted debt/EBITDA to 2.7x for last twelve months ending 30 September from 3.1x at FYE March 2014. We anticipate continued absolute and relative deleveraging, such that adjusted debt/EBITDA will continue to trend towards 2.5x by Mar. 31, 2015.
Of note, beginning in the Q2 FY 2014/15, spectrum related commitments of around USD 1.2 billion are also included in the total reported debt figure, implying that during this quarter, the company had actually fundamentally de-levered.
Although the company reported strong consolidated growth, reported operating cash flow decreased by 5.2% YOY to about Rs 156 billion for the six months ended September 2014, negatively affected by changes in working capital. Besides, Bharti paid Rs 21.7 billion in dividends on a last twelve months to September 2014 basis, which also impacted reported free cash flow. Moody's adjusted FCF/debt for the 12-month period ended September 2014 decreased to about 2.2% compared to about 3.8% at FYE March 2014.
The rating outlook is stable based on the expectation that Bharti will continue to grow its core Indian and African wireless businesses and that the group will continue to deleverage on both an absolute and relative basis.
The rating may experience upward pressure should Bharti's overall credit profile continue to strengthen; in particular Moody's would like to see Bharti reduce consolidated adjusted debt/EBITDA to below 2.0x and for consolidated adjusted free cash flow to debt to exceed 10%.
We would also like to see a track-record that shows that some of its key markets outside of India (such as Nigeria) demonstrate the ability to upstream cash flows to Bharti, while the operating performance of those subsidiaries remains solid.
Downward pressure could arise should competition intensify in any of its key markets, but particularly for the Indian wireless business, such that its key operations and/or subsidiaries report materially declining margins, or Bharti fails to continue with its deleveraging strategy. Moody's would seek evidence of this trend with consolidated debt/EBITDA remaining above 3.0x, consolidated free cash flow/debt remaining below 5%, or adjusted EBITDA margins falling below 35%.
Furthermore, any unexpected regulatory developments in any of Bharti's key markets will also be negative for the rating.
Given Bharti's recent history of a transformational and debt-fund acquisition, Moody's would also view negatively any event risk associated with a material acquisition or other corporate activity that negatively impacts the company's existing or targeted leverage ratios.
Shares of the company declined Rs 6.15, or 1.55%, to trade at Rs 389.85. The total volume of shares traded was 108,913 at the BSE (10.06 a.m., Wednesday).
