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Fitch Ratings: Bharti Airtel: Credit Positives amid Regulatory Uncertainty

­Fitch Ratings says that India-based Bharti Airtel’s financial profile could improve in the year ending March 2014 (FY14), aided by manageable spectrum payments and the likely return of pricing power. This is despite the persistence of regulatory uncertainty over the final auction price of the 900MHz spectrum in March 2013.

Fitch believes that Bharti’s effort in January 2013 to improve its voice tariff realisation by removing discounts in phases will help the company to deleverage in FY14. Fitch believes that this move indicates a likely first sign of a return in pricing power, as competitive intensity abates due to the exit of some operators, on-going operating losses for weaker telcos and high spectrum prices.

Regulatory risk surrounding spectrum-related cash outflows is now fading because the government has allowed telcos to pay the one-time fee for excess spectrum over 6.2MHz in phases over the life of the licences. Furthermore, spectrum prices could come down further in 2013 from the reserve price used in the last auction held in November 2012. Such payments too can now be paid in phases as announced by the regulator in late 2012.

Bharti can partially pay a one-time spectrum fee of INR52bn (USD963m) with proceeds from its December 2012 sale of its stake in its Tower arm – Bharti Infratel – for which it received USD583m. Also, the Indian government’s decision to allow such fees to be paid in phases – one-third upfront and the rest over the remaining life of the license – will help the company in managing its cash flows. While this payment is currently under dispute by Bharti and an Indian High Court has stayed the demand of such charges, Fitch believes Bharti’s annual cash outflow from the one-time fee will be a maximum of USD200m.

Also, following the limited participation in the auction held for 1800MHz auction in November 2012, where only 42% of the offered spectrum was sold, the Indian government reduced the spectrum price of unsold circles by 30% (mainly Delhi and Mumbai) and the spectrum price of CDMA by 50%.

The government is planning to hold another auction of the 900MHz and 1800MHz spectrums in March 2013. The price of spectrum in 900MHz has been fixed at two times the price of airwaves in the 1800 MHz spectrum, although it is probable that the final price may be lower.

Bharti’s nine months ended December 2012 (9M12) results were in line with Fitch’s expectations. Revenue and EBITDA rose by 14% and 5% respectively year-on-year due to a growing Indian and African subscriber base. EBITDA margin, however, deteriorated by 200bps to 31% on higher network operating costs (+21%) and marketing cost (+22%) as the company rolled out its 3G network and competed aggressively to regain its lost revenue market share.

Also, Bharti’s leverage will benefit from its downward FY13 capex revision to USD2.5bn-2.6bn from USD2.8bn-3bn earlier.

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