Bharti Airtel's rating headroom will narrow due to lower cash generation and high capex requirements in the financial year ending March 2018 (FY18), says Fitch Ratings. However, some of the pressure on Bharti and other incumbent Indian telcos should begin to fade this year, as the intense competition sparked by Reliance Jio's 2016 market entry begins to ease, it said. The agency estimates Bharti's FFO-adjusted net leverage will deteriorate to around 2.1x-2.3x in FY18, from 1.9x at FYE17 - excluding USD7.2 billion in deferred spectrum costs.
This would move it closer to the threshold of 2.5x, above which Fitch would consider negative rating action. Bharti remains committed to maintaining an investment-grade rating and plans to sell a larger stake in its tower arm, Bharti Infratel, in FY19. Over the last 12 months, it has sold a total of 18.5 per cent in Infratel for about USD1.9 billion.
Fitch Ratings forecasts annual negative free cash flow USD 600 million-800 million during FY18-19, as Bharti's cash flow from operations will be insufficient to fund large capex requirements. It increased its capex guidance by USD1 billion to around USD4 billion to strengthen its network infrastructure, particularly 4G, and to compete against Jio. The regulator's decision in January 2018 to extend deferred spectrum liability payment to 16 years from 10 will only partially ease cash flow pressures.
The agency said that outlook for the Indian telco sector is improving, which could mean that the results in the quarter ended December 2017 marked a low point for Bharti and other incumbents.
We revised the sector outlook to Stable in 2018 from Negative in 2017, as we expect competition to ease now that industry consolidation is all but completed.
Three large telcos - Bharti, Jio and merged entity of Vodafone-Idea - have emerged from the shake-out. Their combined revenue market share will increase to around 90 per cent in 2018, from 80 per cent in 2017, as smaller telcos continue to exit.
Industry revenue growth is likely to be in the mid-single-digits, after a decline in 2017. The current low industry tariffs are unsustainable, and we expect they rise in 2018, as Jio switches its focus from gaining customers to making reasonable returns on its USD31 billion investment in the sector, it added.