Airtel could lose revenue, but may withstand Jio: S&P

Bharti Airtel’s revenue growth in India may halve over the next two financial years, but it has enough room to weather Mukesh Ambani-led Reliance Jio's disruptive entry into the telecom market, S&P Global Ratings said on Monday.

“We expect Bharti Airtel's operating performance to weaken because of competitive data tariffs and free voice calls,” the agency said.

S&P said the impact of Jio’s entry is uncertain, but on a conservative basis, it assumes that “revenue growth for its (Airtel) domestic business could decline to below five per cent during FY18 and FY19, from about 10 per cent in FY16”.

The agency also said its credit rating on Bharti Airtel is unaffected by higher competition with the launch of Reliance Jio.

“Based on our forecasts, we consider Bharti Airtel has financial headroom to withstand weaker operating performance from intensifying competition. Reliance Industries provides fourth generation (4G) services under the Jio brand,” S&P said.

This is despite the assessment that Bharti Airtel's funds from operations to debt could decline to about 23 per cent for the next two-three years, from 25.4 per cent in 2015-16, which is materially above S&P's downgrade trigger of 20 per cent.

“The rating on Bharti Airtel remains vulnerable if significantly higher spectrum acquisition costs and a weaker operating performance than our expectations were to occur and Bharti Airtel fails to make commensurate measures to offset the financial deterioration,” S&P said.

The agency assumes that operating margin for the company's Indian operations could tighten by 300-400 basis points to about 37 per cent in FY19, from 41 per cent in FY16.

“This pressure could ease in the long term as the current competitive environment will accelerate consolidation in the Indian telecom sector,” the agency said.

Bharti Airtel, according to S&P, is best placed among the incumbent players in India to compete with Reliance and should be able to maintain its strong market position with over 250 million customers.

“Moreover, Bharti Airtel has first-mover advantage in 4G technology, having launched the services in many parts of the country over the past one-two years. In comparison, Reliance Jio has just launched commercial services and has about 1.5-2 million customers,” S&P said.

It feels Airtel could support its financial ratios through strategic measures such as the sale of Bharti Infratel shares, given that it can reduce its 71.7 per cent holding to 51 per cent without losing control.

“Every sale of a 5 per cent stake in Bharti Infratel can provide $500 million of proceeds. This could help offset the potential adverse impact of Bharti Airtel's spending in the upcoming spectrum auction, which we assume would cost about $1 billion,” the agency added.