We assess Bharti's financial risk profile as "significant" because of the
company's high debt. For the six months ended Sept. 30, 2012, Bharti's
debt-to-capital ratio remained high at about 61.6%, and its ratios of
annualized funds from operations (FFO) to total debt and debt to EBITDA were
at 23% and 3.5x, respectively. The company's financial ratios were marginally
weaker than in the previous year. This was because of: (1) consolidation of
US$450 million of debt at Qualcomm India, the India broadband wireless
business of Qualcomm Inc. (not rated), which is 49% owned by Bharti; (2) a
depreciation of the Indian rupee (INR); and (3) weaker-than-expected operating
performance. However, increasing cash flows from revenue growth and an equity
offering at Bharti's majority-owned subsidiary Bharti Infratel Ltd. have
mostly offset the effects of the above factors.
We expect Bharti's financial ratios to be susceptible to regulatory
developments in India, especially related to changes in the costs for past and
future spectrum, and the company's response to such changes. The impact of
such changes on Bharti's cash flows is hard to determine because cash flows
are linked to prices derived from the spectrum auction and regulation.
However, our projected positive free operating cash flow could more than
offset such impact, especially with the lowering of the auction price in key
regions. This, combined with growing revenue, could help offset the limited
headroom in Bharti's financial ratios at the current rating level. We expect
Bharti's FFO-to-debt ratio to stay about 25% and its debt-to-EBITDA ratio at
close to 3x in the fiscal year ending March 31, 2014.
Bharti's "fair" business risk profile reflects the company's good market
position as well as above average regulatory and country and macroeconomic
risks in its key markets, particularly India. While regulatory uncertainty in
India has somewhat reduced with recent regulatory changes, policy is still
evolving. The uncertainty is regarding a one-time spectrum charge for spectrum
above 4.4 megahertz (MHz) from July 2008, spectrum re-farming in the 900MHz
frequency band, and license renewal over the next two to three years. Also, we
believe that the company's established position in India makes it less
vulnerable to regulatory uncertainty than some newer entrants.
Bharti's operating performance has been weaker than our expectations in the
past six months. But we believe the company's India business will gradually
improve over the next two to three years as competition moderates and pricing
pressure declines. This is on account of: (1) high penetration; (2) evolving
regulation, which has reduced the number of players; and (3) telecom operators
focus on improving profitability, especially with high spectrum costs, rather
than garnering market share. Bharti's EBITDA margins fell to 31% in the six
months ended Sept. 30, 2012, from 35% in fiscal 2012. The weaker performance
is despite revenue growing by 14%--led by the Africa business--during the same
period. Ongoing intense competition in India and slower-than-expected
improvement in the Africa business were key contributors to the decline in
EBITDA margins.
Bharti has a good market position as India's largest wireless operator. As of
June 30, 2012, the company has a subscriber market share of about 20%,
population coverage of more than 86%, and revenue market share of about 30%.
We expect Bharti to benefit from its strong market position in most African
markets. The company has 193.2 million subscribers in South Asia and 58.7
million in Africa as of Sept. 30, 2012. Bharti also benefits from good
diversity, with operations across South Asia and Africa in diverse business
lines.
Bharti Group owns more than 35% of Bharti, while Singapore Telecommunications
Ltd. (SingTel; A+/Stable/A-1; axAAA/axA-1+) owns 32.25%.
Liquidity
We assess Bharti's liquidity as "adequate," as defined in our criteria. We
expect the company's sources of liquidity to exceed its uses by more than 1.2x
over the next 12 months. Our liquidity assessment is based on the following
factors and assumptions:
-- Liquidity sources include cash and short-term investments of INR35
billion and unused credit facilities of about INR55 billion as of Sept. 30,
2012.
-- Sources also include our projected FFO of about INR190 billion over
the next 12 months and proceeds from Bharti Infratel's equity issuance of
about INR30 billion.
-- Uses of liquidity include debt of about INR146 billion maturing in the
next 12 months (including short-term debt that we expect the company to roll
over).
-- Maintenance and other capital expenditure of about INR80 billion and
projected dividend of about INR4.5 billion, even in case of stress.
-- We anticipate that net liquidity sources will remain positive even if
EBITDA declines by 20%.
Bharti has adequate headroom in its covenants.
We believe Bharti has good financial flexibility because of its strategic
relationship with SingTel, its investments in tower companies, and access to
financial markets and bank lines.
Bharti's foreign currency risk exposure is high, in our view. As of March 31,
2012, two-thirds of the company's debt is in foreign currency.
Correspondingly, only one-third of Bharti's revenue is in foreign currency.
This exposes the company to currency depreciation risk. However, most of
Bharti's debt matures in the second half of the loan period. Such a maturity
profile, along with the company's access to foreign currency funds from
capital markets and bank lines, somewhat offsets the risks of refinancing
foreign currency debt maturities. Bharti is also exposed to interest rate
risk, although it currently benefits from a low interest rate environment.
Outlook
The stable outlook reflects our expectation that Bharti will maintain its good
market position in India and improve its operating performance in Africa. We
anticipate that the company's ratio of debt to EBITDA will be below 3.5x in
the next 12 months.
We could lower the rating if: (1) Bharti's business risk profile deteriorates
due to regulatory changes, competitive pressures, or an increase in country
risk, particularly in Africa; or (2) the company's financial risk profile
weakens. A material increase in debt because of an acquisition or spectrum
auction, any other regulatory change, or a depreciation of the rupee could
weaken Bharti's financial risk profile. A ratio of debt to EBITDA of 3.5x or
more on a sustainable basis could indicate such weakening.
We could raise the rating if Bharti significantly improves its operating
performance, particularly in Africa, or undertakes strategic measures, such as
raising equity, that significantly improve its financial performance. A ratio
of debt to EBITDA of less than 2.5x on a sustainable basis could indicate such
improvement.
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