Fitch Ratings has assigned Bharti Airtel International (Netherlands) B.V's proposed Swiss franc senior unsecured notes an expected rating of 'BBB-(EXP)'. The notes will be unconditionally and irrevocably guaranteed by India's Bharti Airtel (Bharti, BBB-/Stable) and are therefore rated at the same level as Bharti's foreign-currency senior unsecured rating of 'BBB-'. The final rating of the proposed notes is contingent upon the receipt of documents conforming to information already received.
Bharti will use the entire proceeds of the notes to refinance its existing debt. The terms and conditions of the proposed bond are identical to Bharti's existing guaranteed bonds of EUR 1 billion due 2018 and USD 1.5 billion due 2023. The notes will rank pari passu with the issuer's existing and future senior unsecured indebtedness
Leverage to Improve: Bharti's funds flow from operations (FFO)-adjusted net leverage will improve to 2.6x-2.7x in the financial year ending March 2014 (FY14) from 3.0x in FY13 following an equity injection of USD1.3bn from Qatar Foundation Endowment. This, along with free cash flow (FCF) generation, will more than offset the addition of debt stemming from the acquisition of Qualcomm's spectrum for USD1bn and the increase in leverage by 0.15x-0.2x due to the 13% depreciation of the rupee during 1HFY14.
"We expect Bharti's FY14 operating EBITDAR margin to remain resilient at 31% (FY13: 30.9%) as the competitive landscape for its Indian operations improves and the company gains market share in its African operations," it said.
Fitch expects the profitability of its Indian operations will improve as industry overcapacity falls following the exit or contraction by smaller operators.
The profitability of its African operations will improve gradually (1HFY14 operating EBIDTAR margin: 26.7%), benefiting from rising economies of scale on a growing subscriber base and traffic minutes. In addition, Bharti's profitability will improve due to the narrowing of the tariff differential between off-net and on-net calls following a cut in mobile termination rates in key African markets.
Fitch believes that Bharti's regulatory payments are manageable given its ability to generate at least USD 700 million-800 million in annual FCF. Regulatory risk has reduced, as evidenced by a lower required price to obtain the pan-India spectrum during regulatory auctions in February 2014 and the introduction of a flexible payment mechanism for regulatory payments. The Indian government now provides an option for regulatory payments to be phased over the life of the licence, instead of upfront lump sums previously.
Fitch believes that capex could rise over FY15-FY16 as data traffic grows significantly in its Indian operations. Indian telcos' average capex/revenue ratio of 15%-17% is much lower than that for their Chinese and Indonesian peers, which invest over 20% of their revenue. This is even though Indian telcos face a greater shortage of spectrum compared with their Asian peers. Bharti's FY14 capex guidance is USD 2.1 billion-2.2 billion (15%-16% of FY14 revenue) of which the company invested USD 1.2 billion during 9MFY14.
Shares of the company gained Rs 1.1, or 0.37%, to trade at Rs 300.90. The total volume of shares traded was 88,756 at the BSE (Thursday).
