Credit Opinion: Bharti Airtel Ltd.

Global Credit Research - 08 Jun 2015

India

Ratings
Category

Moody's Rating

Outlook
Issuer Rating
Senior Unsecured

Stable
Baa3
Baa3

Bharti Airtel Int'l (Netherlands) B.V.

Outlook
Bkd Senior Unsecured

Stable
Baa3

Contacts
Analyst

Annalisa Di Chiara/Hong Kong

Nidhi Dhruv, CFA/Singapore
Laura Acres/Hong Kong

Phone

852.3758.1537
65.6398.8315
852.3758.1310

Key Indicators
[1]Bharti Airtel Ltd.
[2]3/31/2015 3/31/2014 3/31/2013 3/31/2012 3/31/2011
Scale (USD Billion)
EBITDA Margin
Debt / EBITDA
FCF / Debt
RCF / Debt
(FFO + Interest Expense) / Interest Expense
(EBITDA - Capex) / Interest Expense

$15.1
38.2%
3.0x
0.8%
23.7%
6.1x
1.9x

$14.2
37.9%
3.1x
3.8%
22.8%
5.4x
2.1x

$14.1
36.2%
3.2x
6.3%
22.4%
4.9x
2.2x

$15.0
38.6%
3.2x
4.3%
22.7%
4.8x
1.9x

$13.1
39.3%
3.4x
-14.4%
21.4%
6.0x
-1.8x

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. Source: Moody's Financial Metrics [2] Based on the company's preliminary FY2014/15
results and Moody's estimates. Source: Moody's Financial Metrics

Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide.

Opinion
Rating Drivers
1. Global player supported by market leading position in India
2. Evolving regulatory framework in all markets
3. Moderate, albeit improving financial leverage
4. Substantial FX risk related to the high level of foreign currency borrowings, although improving

4. Substantial FX risk related to the high level of foreign currency borrowings, although improving
5. Strong shareholder base
6. Future event risk

Corporate Profile
Founded in 1994, Bharti Airtel Ltd ("Bharti") is the 4th largest operator globally based on total number of
subscribers (324.4 million as of 31 March 2015) with operations in 20 countries across South Asia and Africa.
Bharti has been listed on the Bombay Stock Exchange and National Stock Exchange since 2002.
Within India, the company's product offerings include 2G, 3G and 4G wireless services, mobile commerce, fixed
line services, high speed DSL broadband, IPTV, DTH, enterprise services including national & international long
distance services to carriers. In the rest of the geographies, it offers 2G, 3G wireless services and mobile
commerce.
Bharti's main shareholders include the Mittal family, Singapore Telecommunications Limited (Singtel, Aa3 stable)
which owns 32.4%. Qatar Foundation Endowment ("QFE") which owns 5% is also a key shareholder.

Rating Rationale
Bharti's Baa3 rating is underpinned by the strong cash flow generation of its Indian operations, particularly in
wireless voice and data, where it enjoys a well-established and leading market position under the Airtel brand.
Although the regulatory environment for telecommunications in India had been fraught with uncertainty over the
past several years, competition is easing and the regulatory situation is clearing and boding more favorably for the
operators. At the same time, concerns exist regarding emerging market risks and, in particular, changes to the
regulatory and political environments in the countries in which Bharti operates, especially considering its
investments in 17 African countries.
Adjusted debt/EBITDA of 3.0x for FY2014/15 was similar to leverage at FY2013/14 (3.1x). However, excluding
deferred payment liabilities related to spectrum payments, adjusted leverage was around 2.6x for FY2014/15,
evidencing continued deleveraging of the underlying business, which was in line with our expectations for the
rating.
Bharti announced a benchmark senior unsecured bond issuance on 3 June 2015. According to the
announcement, proceeds from the notes will be used for capex. However, as the company has committed to
applying excess cash flows to debt reduction, this will not result in an increase in leverage. At the same time, this
transaction will extend Bharti's debt maturity profile, which is credit positive.
Overall, we expect adjusted leverage (including deferred payment liabilities) to remain at the upper end of the
tolerance for the Baa3 rating, or around 3.0x, this is mitigated by the following factors: (1) Bharti has committed to
use all proceeds from its African tower asset sale to reduce debt; and (2) use proceeds from other monetization
activities for debt reduction, such as its February 2015 stake sale in tower subsidiary Bharti Infratel (Infratel,
unrated) of around $310 million and (3) organic cash generation from business, which continues to be strong.
The rating also takes into account the company's currency mismatch with its revenue base. Although this situation
may give rise to translation risk, the company has a board approved policy of hedging a minimum percentage of
total foreign liabilities due, covering a substantial portion of liabilities due over the next 12-month period, thereby
partially mitigating the impact of rupee depreciation. Moreover, the company has taken proactive steps to reduce
its USD exposure, such that the proportion of US dollar denominated debt had fallen to below 50% as of 31 March
2015 from 60% the prior year.
Finally, although Bharti's direct and indirect subsidiaries in Africa have largely raised debt on a non-recourse
basis, Moody's remains concerned that it may need to provide additional financial support to its overseas
subsidiaries in a distress situation should such a requirement arise.

DETAILED RATING CONSIDERATIONS

1. GLOBAL PLAYER SUPPORTED BY A LEADING MARKET POSITION IN INDIAN WIRELESS
In India, Bharti offers a full range of services, including wireless (2G, 3G and 4G), fixed line, broadband, highspeed DSL and digital TV. It is the largest mobile operator in the country with a subscriber market share of 23.3%

as of 31 March 2015 (Telecom Regulatory Authority of India, "TRAI"). Other leading operators included Vodafone
India (wholly owned by Vodafone Group Plc, Baa1 stable) (18.9%), Idea Cellular (unrated) (16.3%) and Reliance
Communications Limited (Ba3 stable) (11.3%).
In terms of revenue contribution, businesses in India accounted for about 70% of consolidated revenue and 81% of
reported EBITDA for the year ended 31 March 2015, thus providing a solid base to the credit profile.
In the March 2015 spectrum auctions, Bharti won approximately 112 MHz (61 MHz of 900 MHz, 15 MHz of 1800
MHz, and 35 MHz of 2100 MHz spectrum) for a total cost of around INR291 billion ($4.6 billion). Bharti retained
and also added contiguous 900 MHz spectrum in its six renewal circles. It further added to its 900 MHz footprint in
three additional leadership circles, which were not due for renewal. The company also bought 2100 MHz spectrum
in seven circles and increased its holding in 1800 MHz spectrum.
Bharti now holds approximately 40% of the industry allocation of 900 MHz spectrum, regarded as the most
efficient for 3G services and so further enhancing its market leadership opportunities. Moreover, through the
auctions, Bharti significantly expanded its network, making it the only operator with pan-Indian footprint for 3G
services (except in one circle). Through the auctions of 2010 and 2014, Bharti had already secured pan India 4G
spectrum enablement as well, through a combination of 1800Mhz and 2300Mhz band.
Through Bharti's 71.9% owned subsidiary Infratel, which in turn owns a 42% interest in Indus Tower Ltd (unrated),
the company builds and operates tower infrastructure for wireless telecommunication service providers in India.
As of 31 March 2015, Infratel alone owned and operated 37,196 towers in 11 telecommunication circles in India.
With the inclusion of its economic interest in Indus Tower, Infratel managed over 85,891 towers on a pro-rata basis
and is one of the largest tower providers in the country with pan India footprint.
Growth in the tower business had been relatively stagnant for the past few years, given the level of regulatory
uncertainty which resulted in operators holding back on investments and few operators exiting the country,
following the 2012 Supreme Court license cancellation. However, the spectrum auctions concluded in 2014 and
2015 should bring in a wave of new 3G and 4G investments and Infratel, given its scale, is well placed to take
advantage of such investment.
Following Bharti's 2010 $10.7 billion acquisition of 100% of Zain Africa's operations in 15 countries, the company
has operations in 17 countries (acquired 15 as part of Zain, and added the Seychelles in 2010 and Rwanda in
2011), and has steadily increased its subscriber base.
Bharti is focused on 3G roll-outs as a means of increasing its African subscriber base and 3G has now been rolled
out across all 17 markets. License costs have proved reasonable. Typically awarded for 15-20 year terms, the
costs of these are not significant as a part of overall capex. Bharti has also invested in developing Airtel Money -a mobile banking and money transfer service - across all 17 countries. This operation has proved useful in
creating stickiness with subscribers and reducing churn.
The African business was negatively impacted by currency movements against the dollar in FY2014/15, driving a
14% contraction in EBITDA year-over-year (8% on a constant currency basis). Still however, we view favorably
the continued growth in its customer base and subscribers and the expansion of its mobile data revenue base.
Bharti also offers wireless services in Sri Lanka and Bangladesh. The overall contribution from this segment,
however, remains relatively small at only about 2% of total revenue and it is still free cash flow negative.
2. EVOLVING REGULATORY FRAMEWORKS IN ALL MARKETS
India's telecommunication industry is under the jurisdiction of two main entities: TRAI and the Department of
Telecommunications (DoT). The regulatory framework continues to evolve and as such, policy changes could
lead to challenges for operators as they have in the past.
In March, spectrum auctions successfully concluded with the winning prices being about 35% higher than the
government's pre-set base prices and higher than the previous record of INR1.06 trillion ($16.9 billion) for the 2100
MHz and 2300 MHz the government auctioned in 2010.
Notwithstanding the higher pricing, the auctions brought an end to a period of uncertainty overhanging the sector.
In this auction Bharti secured assets that are strategically important to its competitive position and data growth
strategy, particularly in the 900 MHz band. Post these auctions, Bharti's spectrum band in the 900Mhz band will be
40% of the industry, further enhancing its leadership opportunities."

Longer-term, the spectrum the operators secured will also help them maintain their competitive positions and
support their data growth strategies. All licenses won will be valid for a 20-year period. The auction, while
expensive, has also minimized any spectrum renewal risk over the next five years for Bharti.
High spectrum costs could also lead to industry consolidation. India has some 10 telecom operators, as compared
with three to four in more developed and efficient telecom markets. Operators' high debt burdens may also pave
the path for recapitalization events which would partially restore the companies' financial flexibility and allow for
additional investment in network technology. Both Bharti and RCOM have a record of raising equity and using the
proceeds to pay down debt.
Operator-owned tower companies - Bharti Infratel (unrated, 71.9% owned by Bharti), Indus Towers (unrated, 42%
owned each by Bharti and Vodafone, and 16% owned by Idea Cellular Limited (unrated)) and Reliance Infratel
(unrated, wholly owned by RCOM) - will also benefit from efficiencies as the expanding data networks will drive
higher revenues and cash flows.
Bharti's operations outside of India are mostly in riskier markets from a regulatory, political and economic risk
perspective; nonetheless, they also offer good growth opportunities, particularly given that ARPU levels are
significantly higher than the home market. While it is easy to consider Africa as showing higher regulatory risk, it is
also important to recognize the diverse and independent nature of Bharti's operations in the continent.
3. SPECTRUM AUCTION PAYOUTS WILL KEEP LEVERAGE AT MODERATE LEVEL
Bharti's spectrum payment of INR291 billion ($4.6 billion) was the second highest amongst bidders, still the
company secured assets that are strategically important to its competitive position and data growth strategy,
particularly in the 900 MHz band.
Bharti has opted for the deferred payment structure for these spectrum payments, whereby the balance remaining
(around $2.8 billion) after upfront payments of around $1.8 billion were made, is stretched out over a 10 year
period, after a 2 year moratorium. This deferred payment structure will mitigate the effect on cash flow. We
consider all spectrum related deferred payments as debt. In this case, we consider the entire $2.8 billion balance
as deferred payment liability as at 31 March 2015 and include in our pro-forma adjusted debt calculations.
As a result, we expect adjusted leverage to remain at the upper end of the tolerance for the Baa3 rating, or around
3.0x.
Still, we also acknowledge that the company has a proven track record of reducing core leverage, as evidenced
by its reported debt levels (excluding deferred payment liabilities related to spectrum) declining to around INR664
billion ($10.7 billion) as of 31 March 2015 from INR 759 billion ($12.2 billion) as of 31 March 2014.
We expect Bharti will remain committed to debt reduction in 2015 as cash flow from operations and proceeds from
other monetization activities are used to reduce debt levels further such that adjusted debt/EBITDA trends towards
2.5x over the next 12-24 months. Specifically, Bharti has committed to use all proceeds from its African tower
asset sales to reduce debt. We expect the company will receive $2.2 billion from that sale over the next six
months. Further, in August 2014 and February of 2015, the company undertook secondary sale of a 7.41% stake
in Infratel for around INR 41 billion. We anticipate that proceeds from all future monetization initiatives will be
deployed toward debt reduction.
Debt exists at various levels within the Bharti capital structure. However, certain facilities are ring-fenced, given
the ability of particular operations to service their own debt, including about $2 billion of bank debt held at the
African operations under the guarantee of Bharti Airtel Netherlands and in some cases secured on local assets.
This debt is non-recourse to Bharti, however it is Moody's view that Bharti will provide financial support, if required.
4. SUBSTANTIAL FX RISK, GIVEN HIGH LEVEL OF FOREIGN CURRENCY BORROWINGS
We estimate at March 2015 year-end around 50% of the company's total outstanding debt was denominated in
USD, with another 21% denominated in rupee and the remainder in a wide range of currencies. We believe that
USD borrowings will decline further with the debt reduction from the tower asset proceeds.
Still, given the high degree of foreign currency borrowings versus its largely rupee-denominated cash flows,
Bharti's ability to manage its foreign currency exposure is an important credit factor. However, some safeguards
around this risk include: (1) Bharti has an approved policy of hedging a minimum percentage of total foreign
liabilities due, covering a substantial portion of total liabilities due over the next 12-month period, and (2) at the
Indian operation level, there is some $500 million of debt denominated in USD, and which is naturally hedged

against some $400 million in annual revenues.

Finally, we understand Bharti will remain proactive in diversifying currency risk against the USD, although its
financial statements will remain highly exposed to translation risk for the time being.
With respect to covenants on its bilateral bank facilities, these are calculated based on USD financials translated
from INR to USD at the same rates as used for publishing financial statements. Based on this approach, net
debt/EBITDA was 2.08x at year end 31 March 2015, versus a covenant of 3.25x.
5. STRONG SHAREHOLDER BASE
In addition to the Mittal family, Singtel is a major shareholder with an indirect ownership of 32.4%. Singtel maintains
a close relationship with Bharti as the company represents a core part of Singtel's emerging markets portfolio.
Excluding Singtel Optus Pty Limited (A1 stable), the second largest mobile operator in Australia, Bharti is Singtel's
largest overseas investment with invested capital of SGD2.31 billion. Other than transferring know-how, providing
technology support and cross-staff transfers, Singtel also holds 2 of 16 seats on the board. All material strategic
decisions are consented by the board.
While Singtel maintains a stance of being arms length from its investments, Moody's is of the view that they would
be supportive should any support be required from them and may attempt to increase its stake further, should the
opportunity arise.
6. FUTURE EVENT RISK
Bharti's long-term comfort zone of is net debt / EBITDA of 2.0x.
Historically, Bharti's financial profile has been very conservative. Prior to the Zain acquisition it was almost net
cash, and even post-Zain, it has continued to generate positive free cash flow each year despite high levels of
capex.
We are however, concerned about the possibilities of event risk, as management has displayed a strong
willingness in the past for mega deals, having both considered the acquisition of MTN and then subsequently
acquired Zain.
Over the near term, however, we do not expect Bharti to engage in material M&A and expect it to focus more on
in-country consolidation opportunities rather than entry to new markets. Bharti aims to be the number 1 or 2
operator in each market and will seek acquisitions of smaller operators to achieve that position. Given the current
portfolio, Moody's believes that such acquisitions would be no more than USD200-500 million and likely in
overseas business opportunities.
Conversely, should it not see a path towards achieving a solid market leading position, then it would consider
exiting that market.

Liquidity
As of 31 March 2015, Bharti had about $2.2 billion (INR135.8 billion) in cash and short-term investments,
compared to $3.4billion (INR211.4 billion) in short-term debt. Overall, Bharti's liquidity profile remained strong with
the company generating over about $4.5billion (INR 276 million) in cash from operations on a LTM basis.
The company has announced a capex plan of around $3 billion for 2015We expect the company will have
recurring maintenance capex of about $1.6 billion (INR100 billion) per year, which, together with future spectrum
payments, can be funded out of cash and cash flow.
As Bharti remain in a high growth phase, we believe it's dividend policy is relatively modest which we anticipate to
continue as the company remains focused on debt reduction

Structural Considerations
Bharti Airtel Ltd is not a pure holding company as it accounts for more than 50% of consolidated revenue and 60%
of EBITDA. Furthermore, the debt at its African level is non-recourse and can be serviced out of Africa-sourced
cash flow. As such, we do not apply notching for structural subordination.

Rating Outlook

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.

What Could Change the Rating - Up

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 (including deferred
spectrum payment liabilities) to below 2.0x and for consolidated adjusted free cash flow 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.

What Could Change the Rating - Down

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. Moody's would seek evidence of this trend with consolidated
debt/EBITDA remaining above 3.0x, consolidated free cash flow/debt remaining below 5%, or adjusted EBITDA
margins falling below 35%.
Furthermore, any unexpected regulatory developments in any of Bharti's key markets will also be negative for the
rating.
Given Bharti's recent history of a transformational and debt-fund acquisition, 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.

Other Considerations
Methodology Output: In accordance with the Global Telecommunications Industry (December 2010) methodology,
Bharti's grid output (on a consolidated basis) is Baa3, which is consistent with the assigned rating.

Rating Factors
Bharti Airtel Ltd.
Global Telecommunications Industry Grid [1][2]
Factor 1: Scale And Business Model, Competitive Environment And Technical
Positioning (27% )

a) Scale (USD Billion)

b) Business Model, Competitive Environment and Technical Positioning

Current LTM
3/31/2015
Measure

Score

$15.1
Baa

A
Baa

Ba
A

Ba
A

Baa

Baa

38.2%

Baa

3.0x
0.8%
23.7%
6.1x
1.9x

Ba
Caa
Ba
Baa
Ba

Factor 2: Operation Environment (16%)

a) Regulatory and Political

b) Market Share
Factor 3: Financial Policy (5%)

a) Financial Policy
Factor 4:Operating Performance (5%)

a) EBITDA Margin
Factor 5: Financial Strength (47%)

a) Debt / EBITDA
b) FCF / Debt
c) RCF / Debt
d) (FFO + Interest Expense) / Interest Expense
e) (EBITDA - Capex) / Interest Expense
Rating:

a) Indicated Rating from Grid

Baa3

b) Actual Rating Assigned

Baa3

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. [2] Based on the company's preliminary FY2014/15 results and Moody's estimates.
Source: Moody's Financial Metrics

This publication does not announce a credit rating action. For any credit ratings referenced in this publication,
please see the ratings tab on the issuer/entity page on http://www.moodys.com for the most updated credit rating
action information and rating history.

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