ICRA downgrades Bharti Airtel's long term rating from "AA" to "AA-"

Rating agency ICRA has downgraded Bharti Airtel Ltd's long-term rating from "AA" to "AA-"on higher than anticipated provision for dues towards license fees on adjusted gross revenues (AGR) and spectrum usage charge. These provisions were in the second quarter of current financial year (Q2Fy20) after Supreme Court pronounced verdict on payments of dues towards AGR.

Rating agency reaffirmed short-term rating at "A1+". The ratings continue to remain under watch with negative, ICRA said in a statement.

Although the company has not tied up funds for the same, this liability, if materialises is expected to be funded through a bridge loan. This result in deterioration in debt coverage metrics in near term.

The Department on Telecom (DoT) mandated that the operators should pay the license fee and other dues after carrying out their own assessment within timeline stipulated by the Supreme Court.

Moreover, additional provisioning related to indemnities to be paid to certain investors of Airtel Africa is also a credit negative, ICRA said.

The government has appointed a Committee of Secretaries to examine the situation and come out with recommendations for the sector.

As an interim relief, the government has announced deferment of auction instalments for FY2021 and FY2022. This is expected to provide cash flow easing to the tune of Rs 5500 crore per year for the next two years.

Additionally, the company has also filed a review petition with Supreme Court. Also the telecom service operators have announced tariff hikes from December 01, 2019 that is expected to improve the Average Revenue Per User (ARPU) further going forward. The outcome of these events is expected to resolve the rating watch.

The additional liability comes at a time when the company was making attempts to deleverage its balance sheet which includes a rights issue, Initial Public Offering (IPO) in Airtel Africa. It was also raising of funds through perpetual bonds of around Rs 5,500 crore (750 million USD).

The debt on the books of the company has remained elevated as reflected by gross debt of Rs 1,36,579 as on September 30, 2019 (including finance lease obligations). This has kept the debt coverage indicators under stress on account of continued high capex intensity amid relatively low cash flow generation in the past, limiting any scope of organic deleveraging.

Now, the operating environment is witnessing some improvement as reflected by consistent improvement in average revenue per user (ARPU) over the last few quarters, which stood at Rs 128 for quarter ended September 2019 from Rs 101 for quarter ended September 2018.