Bad news for Airtel: Moody's says may downgrade rating if margins dip further

Telecom major Bharti Airtel may face a rating downgrade in next 6-12 months if intense competition remains in the market and decreases its margins, Moody's Investors Service said while affirming Baa3 ratings with negative outlook to the company.

"The ratings are likely to be downgraded within the next 6-12 months if heightened competition persists in its Indian wireless business, such that consolidated EBITDA or margins deteriorate further from current levels," Moody's said in a statement.

Moody's Investors Service has affirmed Bharti Airtel (Bharti) Baa3 issuer rating and senior unsecured debt ratings, as well as the Baa3 ratings on the senior unsecured notes issued by Bharti Airtel International (Netherlands) B.V., which are irrevocably and unconditionally guaranteed by Bharti.

"The outlook on the ratings is negative," the report said.

Credit ratings reflect an organisation's ability to repay debt.

The Baa3 rating means the entity is medium-grade and subject to moderate credit risk and has an acceptable ability to repay short-term obligations.

"The affirmation of Bharti's Baa3 rating and negative outlook recognises that the company's leverage metrics remain elevated as profitability continues to be under pressure," Moody's Vice President and Senior Credit Officer, Annalisa Di Chiara said.

The negative outlook reflects the company's high leverage levels with adjusted debt to EBITDA ratio of around 3.8 times on a consolidated basis at year-end March 2018.

The consolidated net debt of Airtel increased to Rs 95,228 crore at the end of March 2018 from Rs 91,714 crore at the end of December 2017.

The country's largest mobile operator Bharti Airtel reported its lowest quarterly consolidated net profit in at least 14 years, as competition with free voice calls and dirt-cheap data tariffs from new entrant Reliance Jio ate into its margins.
 

Airtel posted a consolidated net profit of Rs 82.9 crore (or 21 paisa per share) in January-March quarter of 2017-18 fiscal as compared to Rs 373.4 crore (or 93 paisa a share) in the same period of the previous fiscal.
 

Airtel's total revenue fell by 10.5 per cent to Rs 19,634 crore in the fourth quarter of 2017-18.

For the full fiscal year that ended in March 2018, Airtel's net profit came in at Rs 1,099 crore, over 71 per cent lower than Rs 3,800 crore logged in FY 2016-17.

"To that end, we believe the recently announced merger of Bharti Infratel and Indus Towers provides a path for significant debt reduction with the possibility of an eventual sale of its stake in a larger business over the next 12-15 months," Di Chiara said.
 

Bharti is expected to have a 33.8-37.2 per cent stake in Indus Towers following the merger, Moody's said.

"Based on the company's announcement, the equity value of the combined entity is estimated at USD 14.6 billion, making Bharti's stake worth around USD 4.9-5.4 billion, and thus providing significant potential for debt reduction within the next 12-15 months," the report said.

Moody's expect that with improvement in financial position of the African operations, Bharti will consider options to monetise a part of its stake in that operation as it focuses on measures to reduce consolidated leverage.