Rating Rationale
August 16, 2021 | Mumbai
Bharti Hexacom Limited
'CRISIL AA/Stable' assigned to NCD
 
Rating Action
Rs.2000 Crore Non Convertible DebenturesCRISIL AA/Stable (Assigned)
Rs.1500 Crore Non Convertible DebenturesCRISIL AA/Stable (Reaffirmed)
Rs.3500 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to the Rs 2,000 crore non-convertible debentures of Bharti Hexacom Ltd (Bharti Hexacom) and reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the company’s existing debt instruments.

 

The reaffirmation continues to factor in the expectation that the parent, Bharti Airtel Ltd (BAL; ‘CRISIL AA/Stable/CRISIL A1+’), would sustain its credit risk profile over the medium term on the back of improving operating metrics, despite liability related to the pending adjusted gross revenue (AGR) dues and recent spectrum acquisition. 

 

The consolidated earnings before interest, tax, depreciation and amortisation (Ebitda; including impact of Ind-AS 116 and excluding other income) of BAL grew by about 22% on-year to Rs 12,980 crore in the first quarter of fiscal 2022. However, net debt (excluding lease liability) increased by around Rs 11,000 crore during the quarter, primarily led by liabilities arising out of the recent spectrum acquisition.

 

BAL has acquired 355.45 MHz spectrum across sub-GHz, mid-band and 2,300 MHz bands for a total consideration of Rs 18,699 crore in the latest spectrum auction that concluded on March 2, 2021. Of the total consideration, about Rs 7,000 crore is the upfront payment (to be paid in this fiscal) while the remaining would be paid in 16 years after a moratorium of 2 years.

 

BAL, along with other telecommunication companies, had filed a review of this case in the Supreme Court contesting arithmetical error made by the department of telecommunications in AGR dues calculation. However, on July 23, 2021, the Supreme Court dismissed the review. Further review petition in this regard would continue to be monitored. In the meanwhile, CRISIL Ratings had already factored in full liability, as provisioned by BAL.

 

Despite the unpaid AGR dues and additional spectrum liabilities, BAL is able to maintain net debt to Ebitda1 ratio of around 3 times currently. However, net leverage is likely to improve from the current level over the medium term, aided by better operating metrics. Any significant bidding for additional 5G spectrum, which may have a bearing on the capital structure and leverage of the parent, will remain a rating sensitivity factor.

 

The ratings reflect the strong operational, financial and managerial support to Bharti Hexacom from BAL and its healthy market position in Rajasthan and Northeast telecom circles. These strengths are partially offset by improving, though modest, financial risk profile and exposure to technological risks resulting in high capital expenditure (capex) requirements.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of Bharti Hexacom. CRISIL Ratings has also factored in the parent notch-up criteria to factor in the company’s high strategic importance to, and strong operational and financial linkages with, the parent, BAL.

Key Rating Drivers & Detailed Description

Strengths

* Strong operational, financial and managerial support from the parent

Bharti Hexacom accounted for about 8% of BAL’s total subscriber base as on May 31 2021, as per data from TRAI (Telecom Regulatory Authority of India). It provides flagship wireless services under the Airtel brand in Rajasthan and the Northeast. These circles are key to BAL’s overall business strategy of being a pan-India player. The parent exercises management control over the company and the full integration of operations, including common brand, products, operations and common treasury, strengthens credit risk profile.

 

* Healthy market position in Rajasthan and Northeast telecom circles

Bharti Hexacom enjoys a strong market position, with a subscriber market share of 35% as on May 31, 2021. Overall, the company has shown resilience against competitive pressures by holding a subscriber base of about 2.68 crore as on May 31, 2021 (as per TRAI).

 

Weaknesses

* Improving, yet modest, financial risk profile

Profitability was severely impacted during fiscals 2018 and 2019 due to heightened competitive intensity. The Ebitda margin declined to about 0.6% in fiscal 2019 from 38.2% in fiscal 2017. However, profitability has since improved to 23.2% in fiscal 2021, on account of improvement in ARPU (average revenue per user).

 

Low profitability and continued capex over the past few fiscals constrained debt protection metrics. Financial risk profile should improve over the medium term with further increase in margin and lower capex intensity. The company will, however, continue to benefit from financial flexibility arising from strong linkage with BAL.

 

* Exposure to technological risks resulting in large capex requirements

The telecom industry remains susceptible to technological changes. New technology in the telecom industry could necessitate fresh investments or overhaul of existing networks. The advent of 4G, for instance, has seen operators investing substantially in upgrading infrastructure even before they had made significant gains on investments in 3G. However, with the transition to 5G, players may need to incur significant capex for acquiring spectrum, though with the advanced technology incremental expenditure on network equipment is expected be limited.

Liquidity: Strong

Liquidity was around Rs 60 crore as on March 31, 2021. However, the company should be able to meet debt obligation largely through healthy cash accrual expected over the medium term. Besides, high financial flexibility enables it to raise short- and long-term debt from banks and capital markets at competitive rates to service debt or capex, whenever required. 

Outlook: Stable

Bharti Hexacom will continue to benefit from its strong operational, managerial and financial linkages with BAL and high financial flexibility it derives from the parentage.

Rating Sensitivity Factors

Upward factors

  • Net leverage expected to sustain below 2.5 times
  • Sustained improvement in operating profit for the mobile segment in India amid steady performance in other businesses

 

Downward factors

  • Decline in operating profit with parent leverage sustaining above 3.5 times
  • Larger-than-expected capex due to technological changes further constraining financial risk profile.

About the Company

Incorporated in 1995, Bharti Hexacom, a subsidiary of BAL, provides wireless services in Rajasthan and Northeast India. The parent acquired a 68.5% stake in Bharti Hexacom in fiscal 2004 and increased the share to 70% in fiscal 2009. The remaining 30% is owned by Telecom Consultants of India, a wholly owned undertaking of the Government of India. Bharti Hexacom had about 2.68 crore subscribers as on May 31, 2021.

About BAL

BAL is an integrated telecom service operator. It offers mobile, broadband, fixed-line telephone, direct-to-home and enterprise services, and mobile telephone services in all 22 telecom circles in India. The company had 32.1 crore mobile subscribers in India as on June 30, 2021, and 12.1 crore in Africa.

 

BAL operates in 14 countries in Africa, as well as in Sri Lanka. In fiscal 2017, the company merged its Bangladesh operations with Robi Axiata Ltd, a unit of Axiata Group Berhad; the former holds 28.2% stake in the merged entity.

 

1Ebitda excluding adjustment on account of Ind-AS 116 for lease expenses for the last 12 months. Net debt is calculated on the basis of gross debt excluding lease obligation minus cash and cash equivalents.

Key Financial Indicators

Particulars

Units

2021

2020

Operating income

Rs.Crore

4602

3874

Profit after tax (PAT)

Rs.Crore

-1034

-2716

PAT margin

%

-22.4

-70.1

Adjusted debt/adjusted networth

Times

2.9

1.6

Adjusted Interest coverage

Times

2.5

2.7

Note: Above numbers are adjusted for CRISIL Ratings analytical treatment and may not represent the numbers reported by the company. The PAT losses in fiscals 2020 and 2021 are because of AGR dues provision made by the company

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of
allotment

Coupon rate (%)

Maturity date

Issue size
(Rs.Crore)

Complexity level

Rating assigned
with outlook

NA

Commercial paper

NA

NA

7-365 days

3500.00

Simple

CRISIL A1+

NA

Non-convertible debentures*

NA

NA

NA

2000.00

Simple

CRISIL AA/Stable

INE343G08018

Non-convertible debentures

21-Jan-2021

6% p.a.

19-Jan-2024

1500.00

Simple

CRISIL AA/Stable

*Not yet issued

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper ST 3500.0 CRISIL A1+ 12-01-21 CRISIL A1+ 23-12-20 CRISIL A1+ 22-11-19 CRISIL A1+   -- --
      --   -- 25-09-20 CRISIL A1+ 01-11-19 CRISIL A1+   -- --
      --   -- 24-02-20 CRISIL A1+ 15-01-19 CRISIL A1+   -- --
      --   -- 17-01-20 CRISIL A1+   --   -- --
      --   -- 13-01-20 CRISIL A1+   --   -- --
Non Convertible Debentures LT 3500.0 CRISIL AA/Stable 12-01-21 CRISIL AA/Stable   --   --   -- --
All amounts are in Rs.Cr.
 
   
 
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Mobile Telephony Services
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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