“The stable outlook reflects our view that Airtel will actively manage its leverage such that its ratio of funds from operations (FFO) to debt will stay well above 20% on a sustained basis, while maintaining its competitive position,” S&P Global said in a media statement Thursday.
The latest developments come on the heels of Airtel’s recent decision to raise upto Rs 21,000 crore through a rights issue that is likely to help the telco tap growth opportunities, with 5G set to arrive in India next year and also grow its digital business.
S&P Global also expects Airtel’s upcoming mega funds raise via rights issue “to alleviate the likely impact from upcoming 5G spectrum liabilities,” which, it said, is necessary for the telco’s competitiveness.
The rights issue, it said, signals proactive leverage management. “We believe the rights issue aims to preemptively build financial capacity for Airtel ahead of upcoming 5G investments, given the absence of other immediate funding needs,” it added.
The ratings agency said Airtel’s “improving operating fundamentals should improve its margins and Ebitda” and mitigate the potential effect on leverage from expected 5G spectrum investments. It added that Airtel’s upcoming rights issue also mitigates this risk.
S&P Global expects India’s second-largest telco to “continue improving” its operational performance. So much so, it estimates Airtel’s adjusted Ebitda to rise 16%-18% in FY22 and 9%-11% in FY23.
The global ratings agency, though, has affirmed its ‘BBB-‘ long-term issuer credit rating on Airtel and the ‘BBB-‘ issue rating on the telco’s senior unsecured notes. Further, it has also affirmed “the ‘BB’ issue rating on the subordinated perpetual securities (PERPS)” it guarantees.
Airtel shares closed 2.77% higher at Rs 686.30 on BSE Thursday. The outlook revision by S&P Global came well after market hours.
S&P Global also said that any “regulatory support from the government as part of any potential relief package for the industry” could further boost Airtel’s profitability, although “we have not factored this into our base-case scenario”.
The telecom sector’s relief package, though, did not come up for consideration in Wednesday’ Cabinet meeting, which had taken even senior telecom department officials by surprise.
The global ratings agency expects Airtel’s Indian mobile segment to continue growing at a healthy rate, though, at a slower pace than in FY21 in the absence of across-the-board tariff hikes.
“We project the segment’s (read: mobile segment) Ebitda, which accounts for about half of the company’s reported Ebitda, will rise about 25% in FY22 and in the low teens in FY23, given increases in subscribers and average revenue per user (ARPU). This compares with reported Ebitda growth of 43% for the segment in FY21,” the global ratings agency said.
S&P Global also expects the momentum in Airtel’s Indian mobile ARPU growth to pick up after slowing in recent quarters. This, since the telco’s customers have been “upgrading to higher tariff plans over time” amid growing data demand. Besides, Airtel, it said, had also raised entry-level postpaid plans for corporate users and hiked its base prepaid rates by 61% in a clear bid to boost ARPUs.
S&P Global, however, said India’s 5G roadmap and Airtel’s corresponding 5G spectrum investments remained uncertain. It, in fact, expects any 5G investments to weigh on the company’s credit metrics, given the lag between investment and returns. “The 5G spectrum auction is likely to happen in the first-half of 2022, and at current reserve prices, it could cost the company close to Rs 500 billion for an entire spectrum block of 100 Mhz.”
