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-'.
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.
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.
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.
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%.
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.
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