Fitch Ratings: Bharti's Strong 3Q, Google's Stake to Aid Deleveraging

Fitch Ratings-Singapore/Hong Kong: Bharti Airtel Limited's (BBB-/Negative) strong EBITDA growth in 9MFY22 and Google's equity investment of USD700 million for a 1.28% stake in Bharti, will further increase its financial flexibility and strengthen the balance sheet, says Fitch Ratings.

We expect Bharti's funds flow from operations (FFO) net leverage to improve to below 1.5x in the financial year end-March 2022 (FY22) and FY23 (FY21: 2.2x), providing sufficient ratings headroom on its underlying credit profile. It raised USD12 billion in equity in the past three years, mostly to deleverage. Deleveraging will result in substantial savings in interest costs. In December 2021, the company prepaid USD2.1 billion in deferred spectrum costs to the Indian government, relating to 2014 spectrum auctions. It announced that it will also prepay 5.125% guaranteed USD505 million notes in March 2022

Google's USD700 million equity investment in Bharti is through its USD10 billion Indian Digitization fund. Google will spend an additional USD300 million, to jointly develop with Bharti, 5G business cases and to scale-up Bharti's digital offerings in India. The partnership will accelerate investment in Bharti's digital assets, including data centre subsidiary Nxtra, music application Wynk and video platform Airtel IQ. Bharti operates the largest network of data centres in India with 11 hyperscale and 120 edge data centres.

Fitch forecasts group revenue and EBITDA to increase by 10%-15% and 25-28%, respectively, in FY22; 9MFY22 revenue and EBITDA rose by 14% and 25% yoy, respectively, on solid growth in the Indian wireless and African businesses. Growth was broad-based with a strong performance in the enterprise and home broadband segments, which increased EBITDA by 13% and 16% yoy, respectively.

For the Indian wireless segment, the group's key growth driver, we forecast FY22 EBITDA to increase yoy by 25%-30% on 15 million-20 million subscriber additions and monthly average revenue per user (ARPU) growth of around 15%-20%. 9MFY22 EBITDA for Indian wireless grew by 25% on 15 million subscriber additions and a 12% rise in monthly ARPU to INR163 (USD2.2). We also expect 4G subscribers to grow by 3 million-5 million each quarter, on a base of 196 million at end-December 2021. The 4G subscriber base now represents 63% of the subscriber base and increased by 18% during 9MFY22, while average monthly data consumption per user rose by 12% to 18.7GB.

We expect industry-wide ARPU to grow by 15%-20% in 2022 on tariff hikes and migration from 2G to higher-priced 4G plans. Strong ARPU growth during 9MFY22 was led by the prepaid tariff hikes of 20%-25% in November 2021 by all three private telcos: Bharti, Reliance Jio - a subsidiary of Reliance Industries Ltd (FC IDR: BBB/Negative, LC IDR: BBB+/Stable) and Vodafone Idea Ltd. Bharti's data usage remained resilient despite the tariff hikes, with a sequential decline of only 2% in average monthly data consumption per user in the quarter.

We forecast the African segment's FY22 EBITDA to rise by 33%-35%, led by subscriber additions and strong growth in data usage and mobile money services. In 9MFY22, African segment's EBITDA increased by 34% yoy, aided by 6% growth in subscribers to 126 million and a 15% rise in ARPU to USD3.3. The data and mobile money segments in Africa rose by 38% and 29%, respectively. The home broadband segment's EBITDA is also likely to increase by 12%-15% in FY22, benefiting from rising data demand amid work from home and online streaming services. Home broadband subscribers grew strongly by 49% in 9MFY22 to 4.2 million households.

The 5G spectrum auction will most likely happen in 2H22, and we expect FY23 core capex to remain stable at USD3.5 billion (FY22E: USD3.5 billion). In addition, we estimate Bharti to pay an additional upfront USD1.5 billion for 5G spectrum assets. 5G capex in FY23-FY24 will most likely replace current 4G capex, as 4G coverage is largely complete.

The Negative Outlook on the Bharti's IDR does not reflect our view of its underlying credit profile, which has been improving on strong wireless growth, but rather the heightened probability that India's (BBB-/Negative) Country Ceiling of 'BBB-' could be lowered to 'BB+'. Such an action would constrain Bharti's IDR and senior issue ratings to 'BB+'.