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Bharti's Infratel stake sale is credit positive

Anjana Das, New Delhi
10/08/2017   0 Comments

Bharti Airtel Ltd’ s  secondary stake sale of 67.53 million shares or 3.7% of Bharti Infratel is credit positive for Bharti, but has no immediate effect on its Baa3 issuer and senior unsecured debt ratings and negative outlook, Moody's Investors Service has said.
 
The global rating agency said  although we expect ongoing and transformative consolidation activity in the Indian telco sector to help stabilize industry-wide average revenue per user over the longer term, intense price competition will persist over the next few quarters, as operators respond to protect and grow their market shares. As a result, Moody's expects Bharti's profitability to remain under pressure at least over the next four quarters.
 
The sale was completed via its wholly owned subsidiary, Nettle Infrastructure Limited, for  Rs 25.7 billion, or around $400 million.
 
"The sale of this stake by Bharti is consistent with management's commitment to strengthening its balance sheet and reducing debt, which we view positively," says Annalisa Di Chiara, a Moody's Vice President and Senior Credit Officer.
 
Earlier in March, Bharti sold a 10.3% stake in Infratel to a consortium of funds advised by KKR and the Canada Pension Plan Investment Board for a total of around Rs 61.9 billion (approximately $951.6 million). As a result, Bharti and its wholly owned subsidiaries have reduced their equity stake in Infratel to 58% from around 71.96% at the beginning of the year.
 
The company reported total gross debt of Rs 1,028.1 billion at 30 June 2017. "While a positive, even assuming all proceeds are used for debt reduction, we estimate the impact on leverage is limited. For example, pro-forma for this transaction,Moody's estimates adjusted debt/EBITDA would have been 3.43x versus 3.50x for last 12 months ended 30 June 2017," adds DiChiara, also Moody's lead analyst for Bharti.
 
Bharti's profitability remained under pressure over the last three quarters as price competition was intense, tempering the potential effect of this debt reduction on its leverage metrics. The company reported EBITDA of Rs 78.2 billion, which was relatively stable compared to the previous quarter, but a 18.4% contraction year over year. The rating outlook is negative as we expect adjusted debt/EBITDA to rise into the 3.6x range by 31 March 2018, barring any further significant debt reduction from additional efforts to monetize its assets.
 
 
Upwards ratings pressure is unlikely, given the negative outlook. However, the outlook could be revised to stable if Bharti's overall credit profile strengthens, such that adjusted debt/EBITDA is sustained at, or below, 3.0x. We would also look for adjusted EBITDA margins to be sustained above 40%. Downward rating pressure could arise if competition intensifies further in any of its key markets, but particularly for the Indian wireless business, such that its key operations and/or subsidiaries report contracting EBITDA or margins below our expectations. We would seek evidence of this trend with consolidated debt/EBITDA remaining above 3.25x for a sustained period; consolidated retained cash flow/adjusted debt remaining below 20%; or adjusted EBITDA margins falling below 35%. Furthermore, any unexpected adverse regulatory developments in any of Bharti's key markets will also be negative for the rating. We would also view negatively any event risk associated with a sizeable debt-financed acquisition or other corporate activity that negatively impacts the company's existing or targeted leverage ratios. 

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