Rating Rationale

Strengths
* Strong market position in the mobile telephone segment in India: BAL has a healthy subscriber base and revenue market share with a pan-India network. The active wireless subscriber base was 303 million, as of September 2019 (market share of 31.5%), as compared with 337 million, as of September 2018 (33.3%). AGR market share (including national and international long distance) was 29.7% (31.6%, including Tata Teleservices Ltd) for the quarter ended June 30, 2019. Large spectrum spread across 900 megahertz (MHz), 1,800 MHz, 2,100 MHz, and 2,300 MHz bands, fortifies the market position and enables the company to offer 2G, 3G, and 4G data services across India. Robust brand equity and quick response to changing conditions have helped maintain a strong market position, despite intense price competition.

* Healthy and diversified operations in Africa and non-mobile businesses in India: There has been consistent improvement in Africa operations, as demonstrated by the increase in EBITDA margin to 44.1% in the quarter ended September 30, 2019, from 43.2% in the corresponding period of the previous fiscal. Operating performance of other businesses'digital TV, broadband, fixed line, and Airtel business services'have also remained strong, with a healthy EBITDA margin. Performance in these businesses should remain stable, thereby partially supporting cash accrual against pricing pressure in the India mobility business.

* Healthy financial flexibility: Investments in businesses, including telecom towers (Bharti Infratel) and the Africa mobility business (housed under BAIN BV), and the experienced promoters, enhance the overall financial flexibility. Initiatives such as stake sales in the African subsidiary, Bharti Infratel, and Bharti Telemedia, have helped contain debt. BAL also has wide access to financial markets, as demonstrated by its track record of raising significant funds at competitive rates across domestic and international markets. The company has also adhered to its de-leveraging plan. Furthermore, the shareholders'the Mittal family and SingTel'have a strong reputation. Hence, CRISIL believes BAL has full capability and willingness to fulfil the AGR liability.

Weaknesses
* Lower cash accrual for the India mobility business, though improving gradually: With the entry of Reliance Jio in September 2016, price competition in the domestic mobile services segment had intensified. This, along with reduction in call termination charges, led to a decline in ARPU (average revenue per user) to Rs 101 in the quarter ended September 30, 2018, from Rs 188 in the quarter ended September 30, 2016. Revenue from the Indian mobile services segment cumulatively declined 26.6% over fiscals 2018 and 2019.

Through measures like introduction of minimum recharge packs, BAL has been able to improve its ARPU to Rs 128 for the quarter ended September 2019. However, this also led to an increase in subscriber churn, with loss of around 517 lakh subscribers over the 12 months ended September 30, 2019. Overall, these steps have helped to ramp up revenue and EBITDA in the India mobility business, which increased sequentially by Rs 114 crore and Rs 117 crore, respectively, in the quarter ended September 2019, over the June quarter. Ability to maintain ARPU growth and thereby improve operating revenue and profits in the India mobility business, will remain a monitorable.

* Moderate debt protection metrics: Intense competition in the India wireless telecom business has constrained profitability and cash accrual. Furthermore, significant capital expenditure (capex) for enhancing network capabilities, has increased debt (including deferred spectrum payments), leading to subdued debt protection metrics: interest coverage ratio was 2.43 times in fiscal 2019. Gross leverage was 5.08 times as on March 31, 2019 (net leverage of 4.5 times).

BAL has, however, undertaken deleveraging since March 2019, through a rights issue of Rs 25,000 crore in May 2019, proceeds of USD680 million from the listing of Africa business in July 2019, and issuance of perpetual securities of USD750 million. As a result, net debt to annualised EBITDA ratio for the quarter ended September 30, 2019, after considering lease capitalisation, was 3.3 times. Further initiatives to deleverage and grow operating profit will continue to be monitored closely. Any sustained weakening of leverage from the current levels over medium term, will remain a key rating sensitivity factor.

* Exposure to regulatory changes and technological risks: The telecom industry remains susceptible to regulatory and technological changes. New technology could necessitate fresh investments or overhaul of the existing networks.

Furthermore, telecom is a highly regulated market. Drop in termination charges, for domestic calls to 6 paisa from 14 paisa, and for international calls to 30 paisa from 53 paisa, has constrained profitability of large incumbent players.

The DoT had earlier planned to reduce domestic termination charges to zero paisa per minute with effect January 1, 2020. However, the Telecom Regulatory Authority of India (TRAI) has floated a consultation paper for potential postponement of the earlier plan. TRAI has also issued another consultation paper to review existing regime for international termination charges. The final outcome in this regard will continue to be monitored.

Moreover, presence in multiple geographies exposes the company to international regulatory risks. In Africa alone, operations are spread across 14 markets, with the top five countries accounting for 60% of total revenue. Each market has its own regulatory environment and distinct consumer behaviour patterns.

Liquidity: Strong
Liquidity was more than Rs 18,000 crore as on September 30, 2019, most of which is likely to have been unencumbered. Cash accrual, though low, should suffice to cover the maturing debt of Rs 7,000 crore and Rs 13,900 crore, in fiscals 2020 and 2021, respectively. Annual capex requirement is likely to be moderate at Rs 22,000-24,000 crore from fiscal 2020. However, the recent Supreme Court ruling could potentially impact liquidity if the company needs to pay in the short term. In the absence of any relief from the GoI, BAL will have to clear the dues within three months. However, liquidity is supported by deleveraging plans, including proposed stake sale in company formed after merger of Indus Towers Ltd ('CRISIL AA+/Stable/CRISIL A1+') and Bharti Infratel Ltd ('CRISIL A1+'), among others. Also, BAL has strong access to capital markets.

Rating sensitivity factors
Upward Factors
* Net leverage sustaining below 2.5 times, led by increase in cash accrual and timely execution of deleveraging plans
* Sustained improvement in operating profit for India mobile segment, amidst steady performance in other businesses

Downward Factors
* Decline in operating profit, material delay in execution of deleveraging plans or significant debt-funded payout towards AGR liability, leading to leverage sustaining above 3.5 times over medium term
* Larger-than-expected capex due to technological changes, or debt-funded spectrum acquisition, constraining the financial risk profile.