Bharti Airtel's H1 Results See Continued Operating Improvement
Moody's Investors Service says Bharti Airtel reported continued operating improvement in its H1 results, although these are in line with its expectations and therefore have no immediate impact on the company's Baa3 issuer and senior unsecured ratings.
"Bharti's H1 results are within our expectations with healthy year-on-year (y-o-y) growth of 13.3% and 17.1% in reported revenue (post adjustment for one-time items) and EBITDA respectively (on a local currency basis), reflecting improved performances from all major segments," says Laura Acres, a Moody's Senior Vice President.
"Its overall financial profile remained stable with the main Indian mobile business reporting solid growth in the customer base, particularly in 3G and data. We also find comfort in the improved performance of its African operations, which continued generating positive free cash flow (using EBITDA-capex as a proxy)," adds Acres, who is also the lead analyst for Bharti.
Wireless business in India -- which remained the group's largest profit driver and contributed 56.6% of consolidated EBITDA in H1 -- reported y-o-y growth of 17.0% in reported EBITDA. While adding a modest 4.4% to its customer base, overall average revenue per user (ARPU) increased y-o-y by 8.5% due to successful realization increases, however quarter-on-quarter overall blended ARPU fell by 4.0% mainly due to a seasonality issue. Although data users still only represent 26.2% of total customer base in India, the 24.7% y-o-y increase in the number of data users -- and the subsequent 111.8% y-o-y increase in total data usage -- also contributed to the overall ARPU growth year-on-year.
Bharti's international wireless business also reported H1 revenue and EBITDA growth of 11.4% and 15.7% in local currency terms compared to the same period last year. However the impact of Rupee depreciation reduced growth to 2.4% and 6.1% in USD terms. Africa operations continued on its positive trend and reported a 13.0% growth in total customers, though this increase was partially offset by a 10.9% decrease in ARPU. Operating cash flow--using EBITDA -- CAPEX as a proxy -- also stayed positive at about USD266 million, representing a y-o-y increase of 9.5%.
Reflecting improved earnings of the core businesses, Moody's adjusted FFO/Debt in the last twelve months (LTM) has improved to about 23.4% from 21.9% at FYE March 2013.
Although net finance costs have increased by 67.2% in H1, this primarily reflects the depreciation of the Rupee, and not an increase in absolute debt levels.
Reported net debt, in US-dollar terms, as of September 2013 decreased to USD9.7 billion from USD10.7 billion. On an LTM basis, reported net debt/EBITDA continued its improving trend and fell to 2.18x down from 2.21x in June 2013, which represents a sizable buffer against a covenant maximum of 3.25x. Moody's LTM adjusted debt/EBITDA was virtually unchanged from FYE March 2013 at about 3.1x.
Moody's said that the rating outlook is stable and it is based on the expectation that Bharti will continue to grow its core Indian and African wireless businesses and more deleveraging on both an absolute and relative basis.
The rating may experience upward pressure should Bharti's overall credit profile continue to strengthen; in particular Moody's would like to see Bharti reduce consolidated adjusted debt/EBITDA to below 2.0x and for consolidated, adjusted free cash flow to debt to exceed 10%. The ratings agency would also like to see a track-record that shows that some of its key markets outside of India (such as Nigeria) demonstrate the ability to upstream cash flows to Bharti, while the operating performance of those subsidiaries remains solid.
Downward pressure could arise should competition intensify in any of its key markets, but particularly for the Indian wireless business, such that its key operations and/or subsidiaries report materially declining margins, or Bharti fails to continue with its deleveraging strategy. Moody's would seek evidence of this trend with consolidated debt/EBITDA remaining above 3.0x, consolidated free cash flow/debt remaining below 5%, or adjusted EBITDA margins falling below 35%.
Furthermore, any unexpected regulatory developments in any of Bharti's key markets will also be negative for the rating. Given Bharti's recent history of a transformational and debt-fund acquisition, Moody's would also view negatively any event risk associated with a material acquisition or other corporate activity that negatively impacts the company's existing or targeted leverage ratios.