Fitch Says Bharti Airtel Strong Despite Infratel's Equity Offering

Fitch Ratings  has said that Bharti Airtel's debt rating is unlikely to be affected by the initial public offering of $821 million by its 86.1%-owned subsidiary - Bharti Infratel.

This is because the IPO proceeds of $600m-$650 million that Bharti is due to receive will not be material enough to affect a rating change.

Fitch believes that cash injection into Bharti from Infratel's offering will help meet, but not fully pay off, an estimated one-time regulatory charge for excess spectrum of about USD700m-USD750m. The rating is also held back by a likely lower EBITDA margin of 31% in FY13 (FY12: 33%).

Bharti's Negative Outlook continues to reflect Indian regulatory risks and a limited ability to raise tariffs.

Further, while Bharti's forecasted funds from operations (FFO)-adjusted net leverage at end-March 2013 is likely to slip to 2.6x-2.7x (FY12: 3.0x), it is still above the agency's positive guidance of 2.5x.

Key regulatory risks for Bharti include a one-time charge for excess spectrum and spectrum re-farming payments - both of which are now likely to be billed in 2013.

The spectrum re-farming payments could be significant and will negatively affect Bharti's competiveness and cash flow generation.

Bharti lost 200bps of EBITDA margin in H1FY13 mainly due to intense competition and aggressive marketing to regain revenue market share that was lost to competitors.

Fitch believes that over-capacity in the Indian telecom sector is unlikely to ease in 2013, and that the market will remain sufficiently competitive to prevent any sustainable increase in tariffs.

The agency believes that at most only six telcos can operate profitably in the long term, and that the industry needs to further consolidate to afford higher average revenue per minute - currently the cheapest in the world at INR0.41-0.43 (0.75 US cents).

A sustained increase in tariffs and a favourable outcome to key regulatory issues would result in a change in Bharti's Outlook to Stable.

Bharti's ratings could be downgraded if higher-than-expected regulatory charges or any M&A activity results in FFO-adjusted net leverage remaining above 2.5x on a sustained basis.