Fitch Ratings has affirmed Bharti Airtel Limited’s long-term foreign-currency issuer default rating (IDR) and senior unsecured rating at “BBB-“. The outlook on the IDR is negative. Fitch also affirmed Bharti Airtel International (Netherlands) B.V.’s senior unsecured guaranteed bonds at ‘BBB-‘ and Network i2i Limited’s subordinated perpetual bond at ‘BB’.
Network i2i’s subordinated perpetual note is rated two notches below Bharti’s IDR. This reflects the notes’ deeply subordinated nature, ranking junior to all debt obligations and senior only to Airtel’s ordinary shares. This is in line with Fitch’s corporate hybrids treatment and notching criteria.
The negative outlook reflects the outlook on India’s long-term foreign- and local-currency IDRs, which were revised from “stable” to “negative” on June 18, 2020. Bharti’s IDR and senior issue ratings are not directly constrained by the sovereign rating but cannot exceed the country ceiling, which reflects the transfer and convertibility risks associated with foreign-currency obligations.
Fitch forecasts Airtel’s FY22 funds from operations (FFO) net leverage to be 1.8x-2.0x in the financial year end-March 2022 (FY22), well below the threshold of 2.5x beyond which we will take negative rating action. Fitch expects Airtel’s FY22 revenue to rise by 10-12 per cent and EBITDA by 20-22 per cent, on improvement in the Indian wireless market and strong growth in the African markets. In first half of FY22, consolidated revenue and EBITDA rose by 14 per cent and 32 per cent y-o-y, respectively, defying the Covid-19 slowdown as it added 30 million subscriber additions.
Management is committed to an investment-grade rating and raised about $11.3 billion in equity in aggregate in 2019 to 2021: $2.8 billion rights issue in October 2021, $3.5 billion rights issue in 2020, equity sale in Airtel Africa of $1.5 billion, IPO of Airtel Africa for $680 million and another $2 billion through an equity injection in 2020. It also completed issuance of a 5.65 per cent $1 billion subordinated perpetual bond in 2020 and another 3.975 per cent $500 million subordinated perpetual bond, on which Fitch assigns 50 per cent equity credit.
Jio and Airtel is expected to increase their combined revenue market share for private telecom operators to 80-82 per cent in 2022, from around 77-78 per cent in June 2021. Rival Vodafone Idea has rapidly lost market share because of its weak balance sheet and limited financial flexibility. It has lost about 180 million subscribers in the past three years. It had 253 million subscribers ending September 2021.
Fitch expects the FY22 Indian wireless EBITDA to increase by 30-33 per cent, led by 15 million subscriber additions and tariff improvement of around 15 per cent. Airtel increased headline tariff by 20-25 per cent on prepaid plans effective from November 26, 2021. In the first half of FY22, Indian mobile revenue increased by 10 per cent y-o-y and EBITDA 40 per cent, on a pre-Ind AS 116 basis, supported by a 7 per cent rise in monthly average revenue per user (ARPU) to Rs 153 ($2.1) and high monthly data usage of around 19 GB per user, one of the highest globally.
The Indian government has taken several reforms leading to lower regulatory risk for Indian telcos, the decision to defer AGR and spectrum dues for four years, the prospective exclusion of non-telecom revenue from the definition of AGR, the abolition of spectrum usage charges on future spectrum auctions and the increased tenor of future spectrum assets to 30 years instead of 20 years. These regulatory actions will boost Airtel’s cash flow.
Fitch forecasts Airtel’s capex to increase to about $5 billion in FY22 (against $4.6 billion in FY21), of which $1.5 billion is likely to be paid upfront to acquire 5G spectrum assets. The company will also seek to strengthen its fibre infrastructure, connecting towers with fibre and backhaul infrastructure to prepare its network to launch 5G services in 2022-2023.
Capex on 5G infrastructure in 2022-2023 is believed to replace current 4G capex, as 4G coverage is largely complete. Barring a one-time 5G spectrum payment, Airtel is likely to generate positive free cash flow in FY22 on higher EBITDA generation, which should be sufficient to fund higher core capex, interest costs and taxes.
The negative outlook does not reflect Fitch’s view of Airtel’s underlying credit profile, which has been improving on strong growth in Indian and African wireless operations, but rather the heightened probability that India’s (BBB-/Negative) country ceiling of ‘BBB-‘ could be lowered to ‘BB+’. Such an action would constrain Airtel’s IDR and senior issue ratings to ‘BB+’.
