Fitch says removing Bharti Airtel from ratings watch to depend on Supreme Court ruling

Fitch Ratings on Thursday said removing Bharti Airtel Ltd from its Rating Watch Negative (RWN) will depend on the Supreme Court ruling on a review petition filed by telecom companies against being asked to pay backdated statutory dues after considering non-telecom revenues. Fitch assigned a rating of ‘BBB-‘ to the company’s proposed US dollar senior unsecured convertible notes. “The notes are rated at the same level as Bharti’s foreign-currency senior unsecured rating of ‘BBB-‘ and are also placed on RWN,” it said in a statement. The proposed interest-bearing notes can be converted to equity at a conversion price premium from a predetermined stock price, it said adding Bharti will use the proceeds of the notes to fund its capex or to refinance its debt.

“Fitch placed Bharti’s ratings on RWN on October 30, 2019, following India’s Supreme Court verdict against the country’s telcos on the definition of adjusted gross revenue (AGR) on which the incumbent operators, including Bharti, must pay hefty dues to the government. “The resolution of the RWN, which may take more than six months, requires a Supreme Court’s ruling on the review petition subsequently filed by telcos, successful completion of Bharti’s planned equity issuance of USD 2 billion and our assessment of the positive impact of EBITDA growth from announced tariff hikes by all telcos in December 2019,” it said.

Fitch said Bharti’s management has stated that the company is committed to an investment-grade rating and raised about USD 5.6 billion in equity through a rights issue and the sale of equity in its African subsidiary, Airtel Africa Limited, in 2019. “Management is confident of successfully completing the planned equity injection of USD 2 billion in January 2020,” it said. “Bharti may also raise USD 1.7 billion-2.7 billion through a planned stake sale of the combined Bharti Infratel (Infratel) and Indus Tower entity, which is awaiting regulatory approval of the merger. However, deconsolidation of Infratel-Indus would lead to cash outflow for tower lease rentals, nullifying any significant leverage benefits.”

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The rating agency said the Supreme Court’s adverse ruling, leading to a Department of Telecommunications (DoT) demand of Rs 1.47 lakh crore in unpaid dues on licence fees and spectrum usage charges from telcos before January 24, 2020, is credit-negative for the industry. “The DOT demand for unpaid dues pertains to a 14-year-old dispute regarding the definition of AGR, which the Supreme Court agreed that it should include all kinds of income generated by the telcos. Typically, telcos pay about 3-5 per cent of AGR as spectrum usages charges and 8 per cent as licence fees,” it said.

Fitch said relief on AGR dues, if any, is likely to come only from the Supreme Court as the government may be reluctant to intervene in the court process. “However, it is uncertain if the government would allow payment of AGR dues in instalments over five or 10 years, subsequent to the court’s ruling on the review petition,” it said. Bharti filed a review petition in the court in November 2019 seeking relief on the unpaid dues, out of which interest and penalties constitute about 75 per cent. The court may rule on the review petition during January 2020.

Fitch said Bharti’s Indian wireless FY20 EBITDA is likely to rise by around 25-35 per cent, driven by a 30 per cent increase in blended average revenue per user to Rs 165 from Rs 128 in 2QFY20. The simultaneous announcement by all telcos to hike tariffs by around 30-40 per cent across different prepaid tariff plans, effective from December 5, 2019, is credit-positive and is the first such increase in tariffs in a decade.

Also, Bharti announced this month that it will increase its minimum amount that a customer needs to pay to keep a number active to Rs 45 from Rs 35. “Bharti’s free cash flow (FCF) will remain negative during FY20 despite tariff hikes, as cash flow from operations will be insufficient to fund large capex and moderate dividends of Rs 3,000-4,000 crore,” it said. “Barring regulatory dues, we expect FY20 capex/revenue to remain high at 34-37 per cent, with forecast capex of around USD 4 billion, as Bharti continues to strengthen its 4G network and fibre infrastructure.”

However, negative FCF will improve following the government’s two-year moratorium on payment of existing spectrum dues, which will save about USD 840 million in FY21 and FY22. Management expects its core capex, excluding deferred spectrum payments, to have peaked and to decline significantly in FY20 and FY21. “We expect the government to hold a 5G spectrum auction in the next 12-18 months. However, we believe the incumbents would be unlikely to participate if they had to pay AGR dues in the short term,” Fitch said.