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May 13 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has revised India-based Bharti Airtel Limited's Outlook to Stable from Negative. Its Long-term Foreign Currency Issuer Default Rating (IDR) has been affirmed at 'BBB-'.
Simultaneously, Fitch has assigned a foreign-currency senior unsecured rating of 'BBB-. The agency has also affirmed Bharti Airtel International (Netherlands) B.V's USD1.5bn 5.125% guaranteed senior unsecured notes due 2023 at 'BBB-'.
Key Rating Drivers
Improved balance sheet: Bharti's funds flow from operations (FFO)-adjusted net leverage will improve to below 2.5x in 2014 (end-March 2013: 3.0x) following an equity injection of USD1.26bn from Qatar Foundation Endowment. Bharti will use the equity proceeds to reduce its net debt to USD10.5bn, compared with USD11.7bn at end-March 2013 and USD12.7bn at end-March 2012.
Regulatory risk is reducing: Fitch believes that Bharti's regulatory payments are manageable despite on-going uncertainty over spectrum pricing in India. The Indian government now has these payments phased over the life of the licence, instead of up-front lump-sums previously. Fitch estimates that Bharti can absorb a maximum of USD1bn annual cash outflows at its current rating, which should be sufficient to cover two key regulatory issues - one-time fees on excess spectrum (over 6.2MHz) and future spectrum fees.
Indian competition is easing: Fitch believes that FY14 operating EBITDAR margin will remain above 30% (FY13: 31%) with a gradual rise in Indian average revenue per user from existing USD3-3.5/month. Overcapacity in the Indian sector has reduced with the exit of three operators and a scaling back by three other unprofitable smaller operators. Fitch expects a maximum of six operators will survive in the market in the long term and that further consolidation will occur once the regulator further relaxes the M&A guidelines.
Subdued African profitability: Fitch expects African FY14 operating EBITDA margin to remain around 25%-26% (FY13: 26%) due to higher costs and low price elasticity. However, Bharti is likely to gain market share and increase revenue due to a reduction in mobile termination rates in some African markets, dominated by operators with large on-net traffic.
Solid FCF generation: Fitch estimates Bharti will generate at least USD700m-USD800m of annual free cash flows (FCF), barring regulatory-related cash outflows. Bharti's FY14 lower capex guidance of USD2.2bn-USD2.3bn and lower interest cost (on lower debt) will boost cash generation. However, Fitch believes that Bharti could raise its capex in the medium term given its low capex/revenue of 15%-16% relative to other Asian peers which are investing over 20%.
Comfortable liquidity: Cash and equivalents of USD1.6bn along with the equity injection of USD1.26bn comfortably cover short-debt debt maturities of USD2bn. Liquidity has strengthened by its debut bond issue of USD1.5bn due 2023 which has increased its average debt maturity.
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.
An upgrade in the Country Ceiling is not likely to lead to a corresponding upgrade of Bharti's ratings as the latter are not constrained by the Country Ceiling.