The weak operating results posted by Bharti Airtel, which saw its profits hit a 4-year low, will have no immediate impact on the country's largest telecom operator's outlook, but are credit negative, Moody's said.
The weak operating results posted by Bharti Airtel, which saw its profits hit a 4-year low, will have no immediate impact on the country’s largest telecom operator’s outlook, but are credit negative, Moody’s said. Bharti Airtel (Baa3 stable)’s weak operating results for the third quarter are credit negative but have no immediate effect on the company’s Baa3 issuer rating and stable outlook,” Moody’s Investor Service said. Bharti’s net profit saw a sharp decline of 65.50% quarter-on-quarter (q-o-q) to Rs 504 crore, while total revenues were down 5.34% to R23,336 crore. Its EBITDA too declined 9.47% sequentially to Rs 8,570 crore.
Moody’s vice-president and senior credit officer Annalisa Di Chiara said: “The slowdown in Bharti’s Indian operations—which contribute around 85% of consolidated EBITDA—was significant (q-o-q).
“This primarily reflects declines in ARPUs across mobile services-voice and data and as well as a 12.4% drop in data customers q-o-q, as India’s newest mobile operator, Reliance Jio Infocomm in its promotional entry proposition—providing all services free of charge—continued to drive intense price competition.”
Even though the firm’s Africa operations, benefitting from continued cost reductions, rose 6% in reported EBITDA q-o-q and saw a 1.2% increase in EBITDA margins, this was insufficient to offset the weaker operating performance of the Indian operations in Q3 FY17, Moody’s said.
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The ratings agency said Bharti reported a debt increased by around $2.2 billion in Q3 FY17, due to incremental debt associated with the purchase of 173.8MHz of spectrum in the October 2016 auctions. Bharti’s net debt rose to $14.339 billion in Q3 FY’17 against $12.232 billion in Q2 FY17.
As a result, Moody’s estimated adjusted consolidated debt/EBITDA (including deferred spectrum liabilities) increased to around 3.4x as of December 2016 from 3.0x as of September 2016. Although in line with its expectations, but the leverage is above the downward trigger level of 3.0x-3.25x.
“Still this elevated leverage can be accommodated in the rating for a short period of time. We still expect cash flow from operations and monetisation opportunities — including divestments in subsidiaries — to reduce absolute debt levels permanently to expedite deleveraging towards 3.0x. Bharti has no headroom for any delay in its deleveraging plans,” Di Chiara said.
Moody’s warned that any delay in deleveraging will put negative pressure on the rating.
“Downward pressure could also arise if competition intensifies further in any of its key markets, but particularly for the Indian wireless business, such that its key operations and/or subsidiaries report materially declining margins,” it said.
It further said: “Moody’s would also view negatively any event risk associated with a sizeable acquisition or other corporate activity that negatively impacts the company’s existing or targeted leverage ratios.”
The ratings agency said that it would seek evidence of this trend with consolidated debt/EBITDA remaining at or above 3.25x; consolidated retained cash flow to adjusted debt remaining below 20%; or adjusted EBITDA margins falling below 35%.