Detailed rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of Bharti Hexacom Ltd (BHL).

 

The rating continues to factor in the established market position of the company in Rajasthan and Northeast telecom circles and improving operating performance as well as healthy financial risk profile. The rating also factors in the strategic importance of BHL to the parent, Bharti Airtel Ltd (BAL; ‘CRISIL AA+/Positive/CRISIL A1+’) with whom it also shares a common brand and services. These strengths are partially offset by the company’s exposure to regulatory as well as technological risks.

 

BHL’s operating performance has significantly improved over the last few years, largely on account of improvement in average revenue per user (ARPU) because of increase in data consumption and tariff revisions.

 

On a standalone basis, in fiscal 2024, operating revenue and earnings before interest, tax, depreciation and amortisation (EBITDA; including impact of Ind-AS 116 and excluding other income) grew ~8% and ~21% on-year, respectively. Over fiscals 2020 to 2024, the company’s revenue grew at compound annual growth rate (CAGR) of ~16%. However, EBITDA improved sharply at CAGR of ~61% during the period, largely led by reduction in operating costs coupled with strong growth in revenue.

 

Likewise, the operating performance of the parent has improved sequentially over the past few years, resulting in healthy business as well as financial risk profiles. Consolidated revenue and EBITDA grew at CAGR of ~14% and ~20% over fiscals 2021 to 2024, respectively. This was largely driven by continued strong growth in the India mobile business (accounting for ~60% of consolidated EBITDA). The company had the highest ARPU in the India mobile services industry at Rs 209 during the quarter ended March 2024.

 

Besides, BAL also benefits from diversified operations in Africa along with presence in enterprise services, home broadband and dish-to-home (DTH) segments in India. Business segments such as home broadband and enterprise services are expected to see strong growth momentum, as seen over the last few years. BAL also continued to maintain strong EBITDA margins in these businesses. Therefore, going forward, the business risk profile is expected to be driven by expectation of sustenance of strong operating performance across segments.

 

Strong financial risk profile of BAL is demonstrated from sustenance of net leverage1 at ~2.6 times as of March 31, 2024, despite large dues pertaining to spectrum purchase and adjusted gross revenue (AGR)-led liabilities. Net leverage is expected to continue to improve even further to below 2.5 times in the near term, as strong cash flow from the business is expected to contribute towards steady deleveraging.

Analytical approach

CRISIL Ratings has considered the standalone business and financial risk profiles of BHL. CRISIL Ratings has also factored in the parent notch-up criteria to factor in the company’s high strategic importance to the parent, BAL, and strong operational and financial linkages with it.

Key rating drivers and detailed description

Strengths:

• Strong operational, financial and managerial support from the parent: BHL accounted for about 8% of BAL’s total subscriber base as of March 2024, as per data from Telecom Regulatory Authority of India (TRAI). The company provides flagship wireless services under the Airtel brand in Rajasthan and the Northeast circles. 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 its credit risk profile. Even post the company’s listing in April 2024, the parent continues to hold 70% shareholding in BHL.

 

• Established market position in Rajasthan and Northeast telecom circles and improving operating performance: BHL enjoys a strong market position and has shown resilience against competitive pressures by holding a subscriber market share of ~37% as on March 31, 2024, as per TRAI. Moreover, BHL’s operating performance has significantly improved over the last few years, largely on account of improvement in ARPU led by customer up-trading and tariff revisions and reduction in operating expenses. In fiscal 2024, revenue grew ~8% on-year while EBITDA jumped ~21% on-year. As a result, operating profitability improved sharply to ~47% in fiscal 2024 from ~42% in fiscal 2023.

 

• Healthy financial risk profile: Over the last couple of fiscals, there has been substantial improvement in the financial risk profile of the company, aided by healthy and improving cash accrual. Interest coverage ratio and gearing have improved to ~5.2 times and ~1.7 times, respectively, as on March 31, 2024, from ~4.4 times and ~2.2 times as on March 31, 2023, respectively. The financial risk profile is expected to improve further, over the medium term, with expectation of further increase in accrual. Listing of the company in April 2024 has further enhanced its financial flexibility providing greater access to capital markets. Moreover, the company will continue to benefit from the financial flexibility arising from strong links with BAL.

 

Weakness:

• Exposure to regulatory and technological risks: Regulatory and policy changes play a central role in defining the risk characteristics of the Indian telecom sector, which also remains susceptible to technological changes. New technology in the telecom sector could necessitate fresh investments or overhaul of existing networks. For instance, with the launch of 5G services, players are required to step up capital expenditure (capex) for laying networks even after incurring significant capex on 4G networks in the recent past. 

Liquidity: Strong

Liquidity was around Rs 312 crore as on March 31, 2024. The company had outstanding debt of Rs 1,160 crore as on July 19, 2024, against commercial paper. In addition to this, the company has access to sufficient bank limits which remain completely undrawn as on date. It is expected that BHL will continue to generate net free cash, although it has high financial flexibility since BAL is the parent, which enables it to raise short and long-term debt from banks and capital markets at competitive rates to service debt or capex, if required.

Rating sensitivity factors

Downward factors

• Decline in market share and operating profit impacting the business risk profiles of BHL and BAL
• Larger-than-expected capex because of technological changes or debt-funded spectrum acquisition leading to net leverage of BAL sustaining above 3.0 times

About the company

Incorporated in 1995, BHL is a subsidiary of BAL, providing wireless services in Rajasthan and Northeast India. The parent acquired 68.5% stake in BHL in fiscal 2004 and increased the share to 70% in fiscal 2009. BHL had ~2.93 crore subscribers as on March 31, 2024, as per TRAI.

About the group

Headquartered in India, BAL is a global communications solutions provider with ~56 crore customers in 17 countries across South Asia and Africa as on March 31, 2024. The company ranks among the top three mobile operators globally and its networks cover over two billion people. Airtel is the largest integrated communications solutions provider in India and the second-largest mobile operator in Africa. Airtel's retail portfolio includes high speed 4G/5G mobile broadband, Airtel Xstream Fiber with convergence across linear and on-demand entertainment, streaming services spanning music and video, digital payments and financial services. For enterprise customers, Airtel offers a gamut of solutions that include secure connectivity, cloud and data centre services, cyber security, internet of things (IoT), ad tech and cloud-based communication. The company had 40.6 crore mobile subscribers in India and ~15 crore in Africa as on March 31, 2024.

Key financial indicators

Particulars	Units	2024	2023
Operating income	Rs crore	7,089	6,579
Profit after tax (PAT)	Rs crore	504	549
PAT margin	%	7.2	8.2
Adjusted debt/adjusted networth	Times	1.7	2.2
Adjusted Interest coverage	Times	5.2	4.4

Note: Above numbers are adjusted for CRISIL Ratings analytical treatment and may not represent the numbers reported by the company.

Any other information: Not Applicable