Hong Kong-based Moody's Investors Service (Moody's) has placed on review for possible downgrade of the Baa3 issuer and senior unsecured rating of Bharti Airtel (Bharti) and the ratings on the backed senior unsecured notes issued by Bharti's wholly owned subsidiary, Bharti Airtel International (Netherlands) BV.
The review reflects the company's low levels of profitability, particularly from its core Indian mobile operations, negative free cash flow and higher debt levels to fund capital spending.
"The review for downgrade is primarily driven by our expectation that Bharti's cash flow generation will remain weak and leverage elevated," says Annalisa DiChiara, a Moody's Vice President and Senior Credit Officer.
In the September quarter, Bharti Airtel posted consolidated net income of Rs 1.18 billion up from Rs 0.97 billion in the previous quarter but 65 per cent down from Rs 3.4 billion a year ago. Consolidated revenues for the September quarter was Rs 204 billion, a decline of 6.2 per cent year-on-year but up just 1.7 per cent sequentially. Net debt increased to Rs 1.13 trillion from Rs 1.03 trillion in the last quarter. At 30 September 2018, Bharti's consolidated adjusted debt-to-EBITDA was around 4.5x. EBITDA is earnings before interest, tax, depreciation and amortisation.
India revenues for Q2'FY19 at Rs 149 billion declined 10.9 per cent on a reported basis from Rs 167 billion a year ago. Mobile revenues continued to witness a decline and was down 7.2 per cent year-on-year on an underlying basis led by continued average revenue per user (ARPU) down-trading impacted by competitive pricing pressures, said the company in its results statement.
While Moody's expects that the majority of the $1.25 billion raised from the pre-IPO of its African business will be used to reduce debt, leverage will only improve marginally, the rating agency said.
Moody's views positively the management's plans to engage in further capital-raising activities - including asset sales - which aim to reduce debt levels significantly. However, Bharti is becoming increasingly dependent on a major turnaround of the underlying Indian operations to ensure a sustainable level of financial health supportive of an investment grade rating.
"Because we believe a more rational competitive environment in India's telecommunications market is unlikely over the next 12-18 months, the review also reflects uncertainty as to whether the company's profitability, cash flow situation and debt levels can improve sustainably and materially over the same period," adds DiChiara, who is also Moody's lead analyst for Bharti.
The review will focus on issues like Bharti Airtel’s commitments and plans to substantially reduce debt levels over a short period of time and plans to turnaround the underlying Indian mobile operations.
The ratings could be downgraded if the company fails to use proceeds received from its recent pre-IPO of its African business or its proposed capital-raising activities for debt reduction.
Moreover, any further deterioration in its operating performance, particularly in the Indian mobile segment, such that earnings and cash flows or revenue market share contracts from current levels, would also lead to a downgrade said Moody’s.
JP Morgan research analyst, Viju George noted in a recent report that the strategic investment in Bharti Africa ($1.25 billion from a clutch of investors) will help alleviate the debt burden by only 8 per cent, scarcely enough given the rate of EBITDA decline in India wireless. Bharti’s India wireless EBITDA margins at 21 per cent declined 540 basis points quarter-on-quarter (13.5 per cent year-on-year) largely due to the revenue decline.