TEXT-S&P summary: Bharti Airtel Ltd.

We assess Bharti's financial risk profile as "significant" because of the

company's high debt. For the six months ended Sept. 30, 2012, Bharti's

debt-to-capital ratio remained high at about 61.6%, and its ratios of

annualized funds from operations (FFO) to total debt and debt to EBITDA were

at 23% and 3.5x, respectively. The company's financial ratios were marginally

weaker than in the previous year. This was because of: (1) consolidation of

US$450 million of debt at Qualcomm India, the India broadband wireless

business of Qualcomm Inc. (not rated), which is 49% owned by Bharti; (2) a

depreciation of the Indian rupee (INR); and (3) weaker-than-expected operating

performance. However, increasing cash flows from revenue growth and an equity

offering at Bharti's majority-owned subsidiary Bharti Infratel Ltd. have

mostly offset the effects of the above factors.

We expect Bharti's financial ratios to be susceptible to regulatory

developments in India, especially related to changes in the costs for past and

future spectrum, and the company's response to such changes. The impact of

such changes on Bharti's cash flows is hard to determine because cash flows

are linked to prices derived from the spectrum auction and regulation.

However, our projected positive free operating cash flow could more than

offset such impact, especially with the lowering of the auction price in key

regions. This, combined with growing revenue, could help offset the limited

headroom in Bharti's financial ratios at the current rating level. We expect

Bharti's FFO-to-debt ratio to stay about 25% and its debt-to-EBITDA ratio at

close to 3x in the fiscal year ending March 31, 2014.

Bharti's "fair" business risk profile reflects the company's good market

position as well as above average regulatory and country and macroeconomic

risks in its key markets, particularly India. While regulatory uncertainty in

India has somewhat reduced with recent regulatory changes, policy is still

evolving. The uncertainty is regarding a one-time spectrum charge for spectrum

above 4.4 megahertz (MHz) from July 2008, spectrum re-farming in the 900MHz

frequency band, and license renewal over the next two to three years. Also, we

believe that the company's established position in India makes it less

vulnerable to regulatory uncertainty than some newer entrants.

Bharti's operating performance has been weaker than our expectations in the

past six months. But we believe the company's India business will gradually

improve over the next two to three years as competition moderates and pricing

pressure declines. This is on account of: (1) high penetration; (2) evolving

regulation, which has reduced the number of players; and (3) telecom operators

focus on improving profitability, especially with high spectrum costs, rather

than garnering market share. Bharti's EBITDA margins fell to 31% in the six

months ended Sept. 30, 2012, from 35% in fiscal 2012. The weaker performance

is despite revenue growing by 14%--led by the Africa business--during the same

period. Ongoing intense competition in India and slower-than-expected

improvement in the Africa business were key contributors to the decline in

EBITDA margins.

Bharti has a good market position as India's largest wireless operator. As of

June 30, 2012, the company has a subscriber market share of about 20%,

population coverage of more than 86%, and revenue market share of about 30%.

We expect Bharti to benefit from its strong market position in most African

markets. The company has 193.2 million subscribers in South Asia and 58.7

million in Africa as of Sept. 30, 2012. Bharti also benefits from good

diversity, with operations across South Asia and Africa in diverse business

lines.

Bharti Group owns more than 35% of Bharti, while Singapore Telecommunications

Ltd. (SingTel; A+/Stable/A-1; axAAA/axA-1+) owns 32.25%.

Liquidity

We assess Bharti's liquidity as "adequate," as defined in our criteria. We

expect the company's sources of liquidity to exceed its uses by more than 1.2x

over the next 12 months. Our liquidity assessment is based on the following

factors and assumptions:

-- Liquidity sources include cash and short-term investments of INR35

billion and unused credit facilities of about INR55 billion as of Sept. 30,

2012.

-- Sources also include our projected FFO of about INR190 billion over

the next 12 months and proceeds from Bharti Infratel's equity issuance of

about INR30 billion.

-- Uses of liquidity include debt of about INR146 billion maturing in the

next 12 months (including short-term debt that we expect the company to roll

over).

-- Maintenance and other capital expenditure of about INR80 billion and

projected dividend of about INR4.5 billion, even in case of stress.

-- We anticipate that net liquidity sources will remain positive even if

EBITDA declines by 20%.

Bharti has adequate headroom in its covenants.

We believe Bharti has good financial flexibility because of its strategic

relationship with SingTel, its investments in tower companies, and access to

financial markets and bank lines.

Bharti's foreign currency risk exposure is high, in our view. As of March 31,

2012, two-thirds of the company's debt is in foreign currency.

Correspondingly, only one-third of Bharti's revenue is in foreign currency.

This exposes the company to currency depreciation risk. However, most of

Bharti's debt matures in the second half of the loan period. Such a maturity

profile, along with the company's access to foreign currency funds from

capital markets and bank lines, somewhat offsets the risks of refinancing

foreign currency debt maturities. Bharti is also exposed to interest rate

risk, although it currently benefits from a low interest rate environment.

Outlook

The stable outlook reflects our expectation that Bharti will maintain its good

market position in India and improve its operating performance in Africa. We

anticipate that the company's ratio of debt to EBITDA will be below 3.5x in

the next 12 months.

We could lower the rating if: (1) Bharti's business risk profile deteriorates

due to regulatory changes, competitive pressures, or an increase in country

risk, particularly in Africa; or (2) the company's financial risk profile

weakens. A material increase in debt because of an acquisition or spectrum

auction, any other regulatory change, or a depreciation of the rupee could

weaken Bharti's financial risk profile. A ratio of debt to EBITDA of 3.5x or

more on a sustainable basis could indicate such weakening.

We could raise the rating if Bharti significantly improves its operating

performance, particularly in Africa, or undertakes strategic measures, such as

raising equity, that significantly improve its financial performance. A ratio

of debt to EBITDA of less than 2.5x on a sustainable basis could indicate such

improvement.

Source: http://news.yahoo.com/text-p-summary-bharti-airtel-ltd-073818765--sector.html

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