Global ratings agency Standard & Poor’s on Friday revised down its outlook on the country’s largest telco Bharti Airtel to “negative” from stable, following weak financial performance in FY18 and concerns on elevated capex in the current financial year. “We view an aggravation in price competition without any meaningful reduction in capex as key risks to a recovery in Bharti’s financial performance,” it said in a note. While the agency affirmed its rating on the Sunil Mittal-led company at ‘BBB-‘, the outlook was revised down to “negative” from “stable”.
The revised outlook is reflective of the “risks associated with a recovery in Bharti’s financial leverage over the next 12-24 months”, it said. The agency said its FY18 performance, which included a net profit of only Rs 79.20 crore for fiscal year 2017-18, was “weaker than expected”. It can be noted that the entry of the deep-pocketed Reliance Jio into the intensely competitive telecom market has wrecked the finances of all the players in the industry, and led to mergers and even an bankruptcy.
“Price competition in the wireless market is likely to remain intense with only a slight moderation. We believe wireless tariffs have hit rock bottom, with entry-level tariffs at Rs 50,” it said. Any further reduction in tariffs by Jio could be detrimental to its own revenues because its own customers are likely to benefit from the tariff cuts, the agency said, pointing out to Jio’s Q4 results wherein it reported a net income of Rs 510 crore.
Bottoming-out of tariffs, Airtel’s cost cutting measures, and strong African operations and non-wireless businesses will improve its leverage, the agency said. Bharti’s revenue slid 12.1 per cent primarily on a 18.2 per cent decline in domestic revenues, it said, adding that all the players in the industry have been meeting with a similar fate.
It said the capital expenditure for FY19 will come higher than the initially estimated Rs 21,000 crore mainly to augment 4G network, just like FY18, when it invested Rs 25,000 crore as against an estimated Rs 22,000 crore.
The agency said data on subscriber market is not reliable, given a significant number of customers with multiple mobile connections.
Merger of Telenor and Tata Teleservices will add up to 8 per cent to its revenues, the agency said, clarifying that its base case does not include synergies from the mergers. The plan to merge Infratel with Indus should not materially alter Airtel’s credit profile, it said. “We believe Bharti’s management is committed to maintaining its financial profile. It is looking at options to monetize its non-core assets and reduce debt,” it said.
The negative outlook reflects a one in three possibility that it may downgrade Airtel over the next 12-18 months if its business performance does not improve in line with our expectations, it said. The rating may be lowered in event of pre-tax margin slipping to 30 per cent on competitive pressures from the 36.4 per cent presently and additional debt being taken for bidding for spectrum, it said.
The outlook can be revised to stable if the company arrests the decline in its India mobile business or if it reduces debt through equity infusion or monetization of the Africa business, it said.