Says outlook would change if the company is able to sustain its leverage ratio under 3.5
Moody’s Investors Service on Tuesday cut the country’s second largest telecom company by subscribers from Baa3 to junk Ba1, the lowest investment-grade, after placing its credit ratings of review for downgrade in November 2018.
This is for the first time that Bharti’s credit rating has been downgraded to below investment grade by an international agency. This means that if Bharti chooses to raise funds overseas it will have to pay more. The downgrade is also a commentary on the country’s telecom sector and incumbent operators, including Bharti Airtel which are faced with declining tariffs leading to lower realisations as they fight a tariff war with Reliance Jio.
“The downgrade reflects uncertainty as to whether or not the company’s profitability, cash flow situation and debt levels can improve sustainably and materially, given the competitive dynamics in the Indian telecom market,” Annalisa DiChiara, Moody’s vice president and senior credit officer, said. Bharti reported Ebitda of Rs 26,500 crore for the 12 months ending December 31, representing a 15.5% year-over-year contraction. Moreover, the profitability of its core Indian mobile segment — which contributes around 37% of Ebitda — remained low, generating just Rs 9,800 crore over the same period.
“A significant recovery in cash flow from the core Indian mobile segment is needed to strengthen the company’s credit quality and support greater financial flexibility,” DiChiara, who’s also Moody’s lead analyst for Bharti, added.
Last week, Bharti Airtel reported its October-December earnings. It recorded a consolidated net profit of `86 crore, down 27.73% compared with the preceding quarter. This was on the back of Rs 1,017 crore exceptional gain largely on account of deconsolidation of Airtel Payments Bank. Before this exceptional gain the company registered a net loss of Rs 1,041 crore, wider than Rs 965 crore (before exceptional gain) in the preceding quarter.
It was for the 11th consecutive quarter that Bharti was posting a declining profit. The competitive pressure on the company since the commercial launch of Jio reflected in the earnings of India business. It recorded a net loss of `972 crore, lower than Rs 1,646 crore loss it posted in the preceding quarter. The India mobile services revenue were also down 0.6% sequentially at Rs 10,189.4 crore, while India revenues declined 1.01% at Rs 14,768 crore.
Bharti’s free cash flow generation has come under pressure in the first three quarters of the current fiscal when it generated negative cash flows. Moody’s has estimated that the profitability of Bharti’s Indian mobile segment will remain low over the next several quarters in the absence of a fundamental change in the pricing of mobile services, together with proportional shift in the composition of its subscriber base to high-end 4G customers.
Moody’s has acknowledged that with fund raising measures the company’s debt may fall but then its operating cash flows will become more reliant on its Indian operations, which will continue to be under pressure with weak cash flow generation. So, the leverage will continue to be elevated.
Bharti’s net debt at the end of December quarter was at Rs 1,06,367 crore against Rs 1,32,042 crore. During the period its net debt to Ebitda was at 4.78 times while the interest coverage ratio was 2.57. Bharti’s Africa unit has raised close to $1.25 billion by selling around 30% stake. The company has chalked out initiatives like equity dilution, listing of the African unit and sale of non-core businesses to raise funds.
Moody’s has noted that for the credit profile to improve the company’s Indian mobile segment needs to see a recovery. The ratings agency said that Bharti’s outlook would change only if it is able to sustain its leverage ratio under 3.5. The rating could be under further pressure if it remains above 4.5 or margin falls below 35% on a sustained basis.
In response to the downgrade, Bharti said in a statement: “Bharti Airtel and its businesses continue to be diversified and strong. While Africa and non-mobile businesses in India exhibit healthy momentum, the continuing trend of robust growth in data volumes in India and also the imminent recovery in voice tariffs will further help overall business going forward. Our focus is to maintain an optimum capital structure at all times and enhance our financial strength. The company’s capital structure has already benefited from the recent equity infusions via the marque investors in our Africa business as also infusion in India DTH business, totalling to $ 1.7 billion. In line with our conservative philosophy, we continue to explore other equity driven initiatives including a planned listing of African operations and also any tower stake sale post the merger of Infratel and Indus. All of these, and more, shall provide
further robustness to the capital structure.”
The company added that its board has recently formed a fund raising committee whose recommendations have been noted by the board and these shall be considered at its meeting convened for February, 28. It said that the company continues to be rated as investment grade by two of the global rating agencies — Fitch Ratings and Standard and Poor’s