Moody's: Bharti's Strong FY2014 Results Support its Rating

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Moody's Investors Service says Bharti Airtel's financial results for the full year ended March 2014 were strong and continue to support its Baa3 issuer and senior unsecured ratings. The ratings outlook remains stable.

"Bharti maintained momentum in the fourth quarter and posted solid year-on-year ("y-o-y") growth of 13.5% and 20.6% in reported revenue and EBITDA, driven primarily by continued robustness in its mobile business in India," says Laura Acres, a Moody's Associate Managing Director and Lead Analyst for Bharti.

Mobile Services in India reported solid y-o-y growth of 8% in revenue and 22% in EBITDA in the fiscal year. Whilst voice services remained the predominant profit driver for the company, growth in data services for the year was more pronounced with a 34% y-o-y increase in the customer base and 43% increase in average revenue per user (ARPU). Data customers as a percentage of total subscribers in the mobile segment in India also increased to 28% as of March 2014 from 23% a year ago.

Operating performance in Africa was a mixed bag; whilst Bharti reported a 9% y-o-y growth in subscribers, ARPU decreased by 7% y-o-y mainly as a result of intense competition. As such, reported revenue and EBITDA for the African segment only increased modestly by 1% and 2% respectively. By contrast, revenues net of access charges and therefore more reflective of underlying performance increased y-o-y by 6.8% to USD 951 million. Gross EBITDA margins for this segment remained sluggish at about 26.2%, though free cash flow (using EBITDA -- capex as a proxy) increased by 25% y-o-y as capital investments continued to tail off.

Bharti's overall financial metrics in FY2014 improved modestly from last year. Although reported debt increased to about INR758 million from INR667 million, higher absolute EBITDA and an improvement of 3% in its EBITDA margin led to Moody's adjusted gross leverage declining to 2.9x from 3.1x a year ago. On a reported basis, net debt/EBITDA in the last twelve months fell to 2.2x from March 2013's 2.5x, providing further cushion under the financial covenant of 3.25x for its USD 7.5 billion acquisition facility.

Reflecting strong underlying growth in the majority of its businesses, the company's reported operating cash flow also improved by 15.2% y-o-y to about INR 262 billion.

During Q4 FY2014, Bharti also made an upfront payment of INR55 billion for 115MHz spectrum that it won in the spectrum auction in February. Although auction payments were higher than expectations, the impact on the company's capital structure was negligible in the year as this was financed by a combination of operating cash flows and bond proceeds. The company also received an equity injection in the year. The remaining auction payment of INR129 billion will be paid in 10 installments after a moratorium of 2 years. We anticipate these payments to be funded out of internal cash flow and that Bharti will continue on its path of relative and absolute deleveraging.

"Apart from improvements in core earnings, Bharti has also taken steps to address its foreign currency exposure. In FY2014, the company reduced its USD exposure with bond issuances of Euro1 billion and CHF350 million. Although Bharti's USD debt remains significant, the company has been proactive in managing down its exposure which gives us more comfort, and has also extended the company's debt maturity profile," adds Acres.

Bharti maintains a strong liquidity profile with cash on hand, including short term investments of INR112 billion and operating cash flows of INR262 billion for FY2014. The company's internal funds should be sufficient to cover capex of approximately INR150 billion and debt maturities of INR209 billion in the next 12 months. However, we expect Bharti to refinance a portion of its maturing debt, which is not a concern given the company's strong banking relationships and good access to capital markets.

The rating outlook is stable, based on the expectation that Bharti will continue to grow its core Indian and African wireless businesses and that the group will continue to deleverage 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 FCF-to-debt to exceed 10%.

We 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. Evidence of this trend includes consolidated adjusted debt/EBITDA remaining above 3.0x, consolidated free cash flow/debt remaining below 5%, or EBITDA margins falling below 35%.

Furthermore, any unexpected regulatory developments in some of Bharti's key markets will also be negative for the rating.

Given Bharti's recent history of transformational and debt-funded acquisitions, 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.

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