We assess Bharti's financial risk profile as "significant" because of the company's high debt. For the six months ended Sept. 30, 2012, Bharti's debt-to-capital ratio remained high at about 61.6%, and its ratios of annualized funds from operations (FFO) to total debt and debt to EBITDA were at 23% and 3.5x, respectively. The company's financial ratios were marginally weaker than in the previous year. This was because of: (1) consolidation of US$450 million of debt at Qualcomm India, the India broadband wireless business of Qualcomm Inc. (not rated), which is 49% owned by Bharti; (2) a depreciation of the Indian rupee (INR); and (3) weaker-than-expected operating performance. However, increasing cash flows from revenue growth and an equity offering at Bharti's majority-owned subsidiary Bharti Infratel Ltd. have mostly offset the effects of the above factors.
We expect Bharti's financial ratios to be susceptible to regulatory developments in India, especially related to changes in the costs for past and future spectrum, and the company's response to such changes. The impact of such changes on Bharti's cash flows is hard to determine because cash flows are linked to prices derived from the spectrum auction and regulation. However, our projected positive free operating cash flow could more than offset such impact, especially with the lowering of the auction price in key regions. This, combined with growing revenue, could help offset the limited headroom in Bharti's financial ratios at the current rating level. We expect Bharti's FFO-to-debt ratio to stay about 25% and its debt-to-EBITDA ratio at close to 3x in the fiscal year ending March 31, 2014.
Bharti's "fair" business risk profile reflects the company's good market position as well as above average regulatory and country and macroeconomic risks in its key markets, particularly India. While regulatory uncertainty in India has somewhat reduced with recent regulatory changes, policy is still evolving. The uncertainty is regarding a one-time spectrum charge for spectrum above 4.4 megahertz (MHz) from July 2008, spectrum re-farming in the 900MHz frequency band, and license renewal over the next two to three years. Also, we believe that the company's established position in India makes it less vulnerable to regulatory uncertainty than some newer entrants.
Bharti's operating performance has been weaker than our expectations in the past six months. But we believe the company's India business will gradually improve over the next two to three years as competition moderates and pricing pressure declines. This is on account of: (1) high penetration; (2) evolving regulation, which has reduced the number of players; and (3) telecom operators focus on improving profitability, especially with high spectrum costs, rather than garnering market share. Bharti's EBITDA margins fell to 31% in the six months ended Sept. 30, 2012, from 35% in fiscal 2012. The weaker performance is despite revenue growing by 14%--led by the Africa business--during the same period. Ongoing intense competition in India and slower-than-expected improvement in the Africa business were key contributors to the decline in EBITDA margins.
Bharti has a good market position as India's largest wireless operator. As of June 30, 2012, the company has a subscriber market share of about 20%, population coverage of more than 86%, and revenue market share of about 30%. We expect Bharti to benefit from its strong market position in most African markets. The company has 193.2 million subscribers in South Asia and 58.7 million in Africa as of Sept. 30, 2012. Bharti also benefits from good diversity, with operations across South Asia and Africa in diverse business lines.
Bharti Group owns more than 35% of Bharti, while Singapore Telecommunications Ltd. (SingTel; A+/Stable/A-1; axAAA/axA-1+) owns 32.25%.
We assess Bharti's liquidity as "adequate," as defined in our criteria. We expect the company's sources of liquidity to exceed its uses by more than 1.2x over the next 12 months. Our liquidity assessment is based on the following factors and assumptions:
-- Liquidity sources include cash and short-term investments of INR35 billion and unused credit facilities of about INR55 billion as of Sept. 30, 2012.
-- Sources also include our projected FFO of about INR190 billion over the next 12 months and proceeds from Bharti Infratel's equity issuance of about INR30 billion.
-- Uses of liquidity include debt of about INR146 billion maturing in the next 12 months (including short-term debt that we expect the company to roll over).
-- Maintenance and other capital expenditure of about INR80 billion and projected dividend of about INR4.5 billion, even in case of stress.
-- We anticipate that net liquidity sources will remain positive even if EBITDA declines by 20%.
Bharti has adequate headroom in its covenants.
We believe Bharti has good financial flexibility because of its strategic relationship with SingTel, its investments in tower companies, and access to financial markets and bank lines.
Bharti's foreign currency risk exposure is high, in our view. As of March 31, 2012, two-thirds of the company's debt is in foreign currency.
Correspondingly, only one-third of Bharti's revenue is in foreign currency. This exposes the company to currency depreciation risk. However, most of Bharti's debt matures in the second half of the loan period. Such a maturity profile, along with the company's access to foreign currency funds from capital markets and bank lines, somewhat offsets the risks of refinancing foreign currency debt maturities. Bharti is also exposed to interest rate risk, although it currently benefits from a low interest rate environment.
The stable outlook reflects our expectation that Bharti will maintain its good market position in India and improve its operating performance in Africa. We anticipate that the company's ratio of debt to EBITDA will be below 3.5x in the next 12 months.
We could lower the rating if: (1) Bharti's business risk profile deteriorates due to regulatory changes, competitive pressures, or an increase in country risk, particularly in Africa; or (2) the company's financial risk profile weakens. A material increase in debt because of an acquisition or spectrum auction, any other regulatory change, or a depreciation of the rupee could weaken Bharti's financial risk profile. A ratio of debt to EBITDA of 3.5x or more on a sustainable basis could indicate such weakening.
We could raise the rating if Bharti significantly improves its operating performance, particularly in Africa, or undertakes strategic measures, such as raising equity, that significantly improve its financial performance. A ratio of debt to EBITDA of less than 2.5x on a sustainable basis could indicate such improvement.