Fitch Removes Bharti Airtel from Negative Ratings Watch over Zain Acquisition

Fitch Ratings has affirmed Bharti Airtel's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-', and simultaneously removed it from Rating Watch Negative (RWN). The Outlook is Stable.

­The removal of the negative ratings watch is based on Fitch's expectations that Bharti will maintain its consolidated credit profile commensurate with the 'BBB' rating category, despite the USD8.5bn debt-led acquisition of the Zain's African operations in 15 countries, and the likely payment of more than USD3bn for 3G and Broadband wireless access (BWA) license fees in the financial year ending March 2011 (FY11). Bharti's leverage will increase significantly in FY11 as a result of the acquisition debt and from the license fee payments; however the agency expects it to delever, firstly following a USD2bn equity injection in FY11, and thereafter as a result of robust EBITDA generation from its India operations and Bharti-led improvements in the African operation's financial performance.

Fitch added that it remains cautious over the intense price competition in India's over-crowded wireless market, which has led to a recent steep decline in Bharti's ARPU. This is evident from lower FY10 revenue growth - it was only 12% versus a CAGR of 34% during FY06-FY09 - and a slightly declining subscriber market share. The agency also notes that the African operations' financial performance, prior to Bharti's acquisition, has been poor - revenues and EBITDA declined by 12% and 11%, respectively, and it recorded a net loss of over USD100m in the financial year to end-December 2009. Although these operations may continue to remain under pressure, due to integration risks, forex risks, higher operating costs and geo-political reasons, the agency believes that for the African operations, Bharti will be able to improve upon its 2009 performance.

Bharti's rating reflects it's position as the fifth-largest (subscriber-wise) wireless company in the world, following the acquisition of Zain's African operations. It will have around 179 million subscribers across 18 countries (India, 15 African countries, Sri-Lanka and Bangladesh). Bharti is India's leading wireless operator with a subscriber and revenue market share of 21.8% and 32%, respectively, at end-FY10. It has integrated and diversified operations across mobile, fixed-line access, consumer broadband, direct-to-home television, long-distance and enterprise services.

Despite intense price competition in FY10, Bharti maintained its revenue market share and EBITDA margins at 32% and 39.6%, respectively. It also posted a net cash position at end-FY10 and its first-ever positive free cash flows during the year. The agency believes that Bharti has reasonable growth prospects, with the Indian wireless teledensity still moderate at 49.6% at FYE10, and 34% (excluding Ghana) for its average African operations. The company will infuse equity of USD2bn in FY11 via a partial sale of equity in its telecom tower companies in India.

Negative rating triggers include a delay in the equity infusion of USD2bn in FY11, if there are difficulties in the acquisition integration process, if the African operations underperform, or if Fitch expects FFO adjusted net leverage to remain above 2.0x in FY12.

Bharti's business has become increasingly diversified, both geographically and product wise. Around 30% of its FY11 consolidated EBITDA is expected to be contributed by the newly-acquired African operations, while the remaining 70% is itself diversified (the non-wireless business contributed 42% of its FY10 EBITDA). During FY10, Bharti reported consolidated revenues of INR418bn, EBITDA of INR165.7bn and a net income of INR78.6bn.