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Airtel stake sale in Bharti Infratel credit positive but price wars to impact performance, says Moody's

November 16, 2017

Moody's Investors Service has stated that BhartiAirtel's 4.49 per cent stake sale in Bharti Infratel is credit positive but cautioned that the transaction would not have any immediate positive impact on the telecom operators' rating level and outlook as fierce price wars are likely to continue in the telecom sector, which, in turn, could hit the market leader's operating performance over the next one year.

The ratings agency remains cautious on Bharti Airtel's operating performance over the next 12 months as it expects heightened competition, revamping of price plans and ongoing pricing pressure to persist in the telecom sector. It also expects the 57 per cent cut in interconnect charges, which took effect from October 2017, to have a negative impact on the operator's profitability over the next 12-24 months.

Moody's pointed that assuming all proceeds from the stake sale transaction are applied to debt reduction, Airtel's pro-forma leverage as measured by adjusted debt/ earnings before interest, taxes, depreciation, and amortization (EBITDA) will improve only marginally to 3.6x as on September 30,2017 from 3.7x, and remain above the tolerance level of 3.25x for its Baa3 rating level. Meanwhile, Bharti Airtel's debt stood at Rs 914.80 billion at end-September 2017.

Further, the ratings agency expects Airtel's organic EBITDA to contract around 12 per cent on-year to March 2018, such that leverage will remain elevated, above the tolerance for its Baa3 rating level, barring any further significant debt reduction from additional efforts to monetise assets. But in the longer term, the global rating agency expects the operator's profitability to benefit from operational and capital spending synergies after completing its announced acquisitions such as Telenor India and Tata Teleservices Limited (TTSL) consumer mobility business.

Moody also pointed that Airtel would also be a key beneficiary as smaller players are forced out of the market, and pricing stabilises as competitive dynamics ultimately result in a market, comprising three strong players that would include Airtel, Reliance Jio Infocomm Limited (RJIL) and the Vodafone-Idea combined entity.However, it stated that the rating outlook for Airtel is negative as it expects profitability to remain under pressure and adjusted debt/EBITDA to be elevated through to March 31, 2018.

Further, the global ratings agency stated that the outlook could be revised to stable if Airtel's overall credit profile strengthens, such that adjusted debt/EBITDA is sustained at or below 3.0x, and adjusted EBITDA margins are sustained at above 40 per cent.On the other hand, it warned that the operator's rating could get downgraded if competition intensifies in any of the telecom operator's key markets, particularly in the Indian wireless business, such that its key operations and/or subsidiaries report contracting operating margins that are below Moody's expectations.


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