Indonesia's Telkomsel Debt Ratings Held at Stable

The debt agency, Fitch Ratings has affirmed the Long-term foreign and local currency Issuer Default Ratings of Indonesia's Telkomsel at 'BB' and 'BBB-' (BBB minus), respectively. At the same time, Fitch has affirmed Telkomsel's National Long-term rating at 'AAA(idn)'. The Outlook on all the ratings remains Stable.

Fitch says that Telkomsel's ratings reflect its entrenched position as Indonesia's leading cellular operator and favourable growth prospects. It is 65% owned by the incumbent Telekomunikasi Indonesia, and 35% owned by Singapore Telecommunications, from whom Telkomsel derives operational benefits and technological support. As the largest beneficiary of ongoing robust industry growth, the company has achieved consistently impressive operating results - total subscribers increased to 42.8 million at H107 from 35.6m at FYE06, implying annualised growth of 41% and a market share of around 56%.

Medium-term growth prospects appear promising, with cellular penetration still low at around 34% at H107. However Fitch cautions that competitive pressures are increasing, with GSM incumbents facing aggressive price competition from smaller CDMA-mobile and fixed-wireless counterparts, and new licensee Hutchison CP Telecommunications (HCPT) having commenced operations in Q107.

"The ratings take into account Telkomsel's highly cash-generative operations, with operating margins that rank among the highest in the world for cellular operators," said Priya Gupta, Director in Fitch's Asia-Pacific telecommunications, media and technology team. "However a degree of margin pressure was evident over the last 12 to 18 months, with EBITDA margins falling to 69.5% at H107, from 71.2% at FYE06 and 72.9% at FYE05. This was mainly a result of higher operating and maintenance expenses arising from aggressive network expansion, particularly into remote areas," she added. In this regard, Fitch notes that Telkomsel has recently resolved to be more selective in its rural expansion, in order to better manage the higher costs involved.

Although the company generates robust cash flow from operations, large capital expenditure (capex) and high dividend payouts have led free cash flow (FCF) to turn negative over the last two years. Consequently Telkomsel reverted to a net debt position in FY06, from net cash in the two prior periods. Nonetheless, its credit metrics remain exceptionally strong for its ratings. The ratings also factor in new bank loan availments to partially fund its aggressive capex plans, which are around US$1.5 billion for FY07.

Posted to the site on 10th September 2007