Fitch Ratings has affirmed India-based Bharti Airtel (Bharti) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook on the IDR is Stable. The agency has also affirmed the ratings on Bharti Airtel International (Netherlands) B.V's bonds.
Market-Leading Position: Bharti's 'BBB-' rating reflects its established market leadership in the Indian wireless services industry. The company has about 35% revenue market share, has diversified and integrated operations and owns a large share of Indian spectrum assets, which are also the most efficient assets. We believe that its established market position and diversified revenue base will help it withstand intense competition in the Indian mobile segment. It gained about 150bp of revenue market share in 2016 as smaller telcos exited due to fierce competition and another 200bp with the acquisition of Telenor India, which is subject to regulatory approvals.
We forecast Bharti's FFO-adjusted net leverage to worsen to 2.0x-2.2x for the financial year ending March 2018 (FY18), from 1.9x in FY17 (excluding USD 6.8 billion deferred spectrum costs). However, we forecast leverage to remain below 2.5x, above which we will consider negative rating action. Bharti is committed to its investment-grade rating. We do not expect large debt-funded acquisitions during FY18-19 given management's strategy to reduce debt through the possible sale of a 10% stake in tower subsidiary, Bharti Infratel or sale of other assets. .
We forecast its FY18 revenue and EBITDA to decline by 2%-3% as growth in non-mobile segments in India and its African operations may not fully offset the fall in the Indian mobile segment's revenue. Indian mobile EBITDA (63% of consolidated EBITDA) could decline by 5%-10% in FY18. Competition is likely to remain intense as new entrant Reliance Jio (Jio), part of Reliance Industries Ltd (BBB-/Stable), will continue to offer cheaper tariffs to gain market share from incumbents. Blended average revenue per user (ARPU) could remain flat at around Rs 160 (USD 2.4) as Bharti is unlikely to be able to raise tariffs, given the price competition.
We have a negative outlook on the Indian telco market as we expect the credit profiles of the top-four telcos to come under pressure from tougher competition and greater capex requirements. We believe that Jio may continue to disrupt the market by offering cheaper tariffs than the incumbents to gain market share. On-going industry consolidation, which will leave only five telcos in the market, will bring back pricing power to incumbents only after one to two years. However, in the medium term, Jio could raise tariffs to start generating return on its massive investment of USD 27 billion-30 billion.
We forecast minimal FCF in FY18 (FY17: FCF deficit of Rs 62 billion) as cash flow from operations of Rs 250 billion-260 billion will be insufficient to fund its large capex requirements and moderate dividends. It will likely invest about Rs 260 billion-280 billion during FY18-19, including its core capex of Rs 250 billion and around Rs 30 billion-40 billion for payments related to deferred spectrum cost. The company needs to continually make investments to support its fast-growing data services.
We believe Bharti has sufficient spectrum assets to expand its data services in the medium term and will not need to acquire more spectrum. It is unlikely to bid for 700MHz spectrum as the efficiency gains from the 700MHz spectrum do not currently justify the high reserve price set by the regulator.
We expect the FY18 EBITDA margin in Bharti's African operations to remain stable at 23%-24% (FY17: 24%) as it could benefit from cost savings and higher market share in key African markets. We believe that Bharti's strategy to be among the top-two operators in each of its African markets by participating in in-country consolidation will improve profitability in the medium term.
Shares of the company declined Rs 1.25, or 0.33%, to trade at Rs 372.45. The total volume of shares traded was 68,831 at the BSE (1.56 p.m., Monday).
