Fitch Affirms Indonesian Operator, Telkomsel's Ratings

Fitch Ratings has today affirmed Indonesia's Telekomunikasi Selular's (Telkomsel) Long-term foreign and local currency Issuer Default Rating (IDRs) at 'BB+' and 'BBB-', respectively, and its National Long-term rating at 'AAA(idn)'. The Rating Outlook is Stable.

The company is 65% owned by Indonesia's incumbent Telekomunikasi Indonesia (Telkom,) and 35% owned by Singapore Telecommunications, from whom Telkomsel derives operational benefits and technological support.

"Telkomsel's ratings reflect its leading position in the Indonesian cellular market and sound financial profile, with high operating margins and credit metrics that are strong for its ratings," said Priya Gupta, Director in Fitch's Asia-Pacific telecommunications, media and technology team. "Despite intense price competition in 2008, Telkomsel has managed to maintain a dominant share of GSM revenue (59% at H109) and sustain exceptionally strong EBITDA margins at over 60% of revenue," she added.

While the company generates robust cash flow from operations, heavy capex requirements combined with a high dividend payout have resulted in moderately negative free cash flow (FCF) generation over the last four years to FY08, and Fitch expects this to continue through FY09 as well. Nevertheless, Telkomsel's financial profile remains conservative with net adjusted leverage (defined as total adjusted debt net of cash divided by operating EBITDAR) of 0.2x and funds from operations (FFO) net interest cover of 24.8x by H109. The ratings factor in a mild weakening in leverage metrics during FY09, arising from new bank loan availments in H209.

­Telkomsel's ratings also take into account the intensely competitive and fragmented nature of the Indonesian cellular market. Following a series of aggressive price wars in 2008, Fitch notes that a more rational environment has prevailed during H109, with operators implementing selective tariff increases on on-net voice-calls and SMS. Fitch expects the company to benefit from easing price competition in 2009, which should underpin revenue growth in the mid-single digits and relatively stable margins for the period.

The company's ratings also reflect a persistently uncertain regulatory regime, as well as the risks inherent in Indonesia including political and social instability, economic and currency volatility, and a legal framework that lacks robustness.

With respect to its foreign currency IDR, Telkomsel remains constrained by the Country Ceiling of the Republic of Indonesia, which is currently at 'BB+'. On the local currency (LC) scale however (which ignores foreign currency transfer and convertibility risk), Telkomsel is rated two notches above the sovereign LC rating, due to SingTel's strategic shareholding and influence which the agency believes provides an important counter-balance to the Indonesian government's ownership via Telkom and hence allows the company to be rated more towards its stand-alone credit profile. The shareholder agreement offers strong minority protection and accords SingTel right of veto on initiatives proposed by Telkom that could materially impair Telkomsel's financial position.

The Stable Outlook for the ratings is based on Fitch's expectation that Telkomsel is likely to maintain its strong credit profile over the medium term. However, downward rating pressure could arise on the Long-term local currency IDR if capex and/or shareholder returns are raised to a level which causes FCF to turn significantly negative, if SingTel substantially reduces its stake, or if terms as per the existing shareholder agreement are diluted, invalidated or in any way altered materially to SingTel's disadvantage.

Posted to the site on 7th October 2009