Moody’s Downgrades Bharti Airtel’s Debt To Below Investment Grade
This is the first time an international rating agency has downgraded Bharti Airtel’s bonds.
Bharti Airtel Ltd.'s credit rating was downgraded for the first time by an international agency to below investment grade status as a bruising tariff war with India’s newest wireless operator continues to hurt its revenue and profitability.
Moody's Investors Service downgraded Airtel’s rating by one notch from Baa3 to Ba1—which is non-investment grade rating—while saying that the outlook remains negative. Earlier the agency had placed Airtel’s rating under review for downgrade.
The downgrade reflects uncertainty as to whether or not the company’s profitability, cash flow situation and debt levels can improve sustainably and materially, given the competitive dynamics in the Indian telecom market.Moody’s Investors Service
A price war to gain customers intensified in the world’s second-largest telecom market when billionaire Mukesh Ambani-led Reliance Jio Infocomm Ltd. launched services in 2016 with free plans followed by cheaper-priced schemes. This forced smaller carriers to exit, spurring consolidation among the larger ones. Bharti Airtel, which was then the market leader, could become the third-largest player, after Vodafone-Idea Ltd. and Reliance Jio, due to consolidation and its minimum average revenue per user strategy.
Moody's expects the profitability of Airtel's mainstay, the Indian mobile market, to remain low over the next few quarters as there has been no change in its pricing. It notes that though the company’s debt levels may decline due to capital raising initiatives, weaker cash flow generation of the core mobile operations will likely keep leverage elevated.
Cash Flow At 15-Year Low
Airtel’s cash generation has been under pressure in the first nine months of the current fiscal. It’s been generating negative free cash flow for the last three quarters and this is for the first time in the last 15 years that the company has generated negative cash flows.
In the December-ended quarter, Airtel was able to reduce its debt by Rs 6,800 crore for the first time in the last six quarters due to fund infusion in the African unit. Yet, the company’s leverage ratio remains elevated due to fall in its Ebitda.
The company’s African unit had raised close to $1.25 billion from six different investors by selling close to near-30 percent stake.
Airtel has chalked out three major initiatives—equity dilution, listing of Africa business and stake sale in non-core businesses—to reduce debt and leverage to comfortable levels. However, recovery in Indian mobile segment is necessary for the telecom operator to strengthen its credit profile.
A significant recovery in cash flow from the core Indian mobile segment is needed to strengthen the company’s credit quality and support greater financial flexibility.Moody’s Investors Service
Airtel’s rating outlook would change only if the company is able sustain its leverage ratio under 3.5, while the rating could be under further pressure if it remains above 4.5 or margin falls below 35 percent on a sustained basis.
(Corrects an earlier version which misstated Bharti Airtel’s debt has been downgraded to junk.)