Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the debt instruments of Bharti Hexacom Limited (BHL).

 

The ratings continue to reflect the strong operational, financial and managerial support to BHL from the parent, Bharti Airtel Ltd (BAL; ‘CRISIL AA+/Stable/CRISIL A1+’). Besides, ratings also factor in the company’s established market position in Rajasthan and Northeast telecom circles and improving operating performance as well as healthy financial risk profiles. These strengths are partially offset by company’s exposure to regulatory as well as technological risks.

 

BHL’s operating performance has significantly improved over last few years largely on account of improvement in average revenue per user (ARPU) as a result of customer up-trading and tariff revisions.

 

On a standalone basis, in fiscal 2023, operating revenue and earnings before interest, tax, depreciation and amortisation (EBITDA; including impact of Ind-AS 116 and excluding other income) grew by ~21.7% and ~52% on-year, respectively. Over fiscals 2020 to 2023, company’s revenues grew at a CAGR of ~19%. However, EBITDA improved sharply at a CAGR of ~80% during the period, largely led by reduction in operating costs coupled with strong growth in revenues.

 

Likewise, operating performance of the parent, BAL also continued to improve sequentially over the past few years, resulting in healthy business as well as financial risk profiles. Consolidated revenue & EBITDA grew at CAGR of ~17% and ~24% over fiscals 2020 to 2023 respectively. Growth is largely driven by continued strong growth in India and Africa mobile business (together accounting for over three-fourth of consolidated EBITDA). The company has the highest average revenue per user (ARPU) for India mobile services in the industry, at Rs 193 during the quarter ended March 2023. Rising data usage with adoption of 5G services should continue to drive ARPU over near term leading to further growth in revenues as well as operating profits. Besides, other business segments such as home as well as enterprise services should also continue to see strong growth momentum, as seen over last few years. BAL also continued to maintain strong EBITDA margins in these businesses. Going forward, business risk profile of BAL is therefore 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 ~3x as of March 31, 2023, despite large dues pertaining to spectrum purchase and adjusted gross revenue led liabilities. Net leverage is expected to improve even further below 2.5x in the near term. BAL is continuously ramping up rollout of 5G services across cities in India, which could result in higher capital expenditure outgo over the near term. However, the capex intensity is expected to gradually come down once mass 5G networks have been established. Moreover, the company is not expected to incur any significant amount for purchasing spectrum in the forthcoming auction in India, although spectrum investment may continue in Africa. Higher-than-expected outgo towards networks layout or on spectrum acquisition which could have bearing on overall financial risk profile will continue to remain key rating sensitivity factor.

 

1Net leverage is calculated on the basis of gross debt including lease obligations minus cash and equivalents

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, 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 of April 2023, 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 credit risk profile.

 

Established market position in Rajasthan and Northeast telecom circles and improving operating performance

Bharti Hexacom enjoys a strong market position and has shown resilience against competitive pressures by holding a subscriber market share of ~37% as on April 30, 2023, as per TRAI. Moreover, BHL’s operating performance has significantly improved over 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 2023, revenue grew by ~21.7% on-year while EBITDA jumped by ~52% on-year. As a result, operating profitability improved sharply to 43.2% in fiscal 2023 from 34.5% in fiscal 2022.

 

Healthy financial risk profile

Over the last couple of fiscals, there has been substantial improvement in financial risk profile of the company, aided by healthy and improving cash accruals. Interest cover and gearing ratios have improved to ~6.7 times and ~2.2 times as at March 31, 2023 from ~4.4 times and ~2.4 times as at March 31, 2022, respectively. Financial risk profile should further improve over the medium term with expectation of further increase in accruals. Moreover, the company will continue to benefit from financial flexibility arising from strong linkages with BAL.

 

Weaknesses:

Exposure to regulatory and technological risks

Regulatory and policy changes play a central role in defining the risk characteristics of the Indian telecom sector. The telecom sector 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 capex for laying networks even after incurring significant capex on 4G networks in the recent past. 

Liquidity: Strong

Liquidity was around Rs 1,135 crore as on March 31, 2023. The company should be able to meet debt obligation largely through cash accruals 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. Besides, CRISIL Ratings understands that parent would continue to provide support for meeting the debt servicing obligations, whenever required. 

Outlook: Stable

BHL 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

• BAL’s sustained improvement in market share and operating profits for the mobile segment in India and Africa amid steady performance in other businesses
• Sustenance of net leverage of BAL below 2-2.5 times, led by increase in cash accrual and timely execution of deleveraging plans

 

Downward factors

• Decline in market share and operating profit impacting 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, 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 2.84 crore subscribers as on April 30, 2023, as per TRAI.

About BAL

Headquartered in India, BAL is a global communications solutions provider with ~51.8 crore customers in 17 countries across South Asia and Africa as on March 31, 2023. 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 includes secure connectivity, cloud and data centre services, cyber security, IoT, Ad Tech and cloud-based communication. The company had 33.5 crore mobile subscribers in India and ~14 crore in Africa as on March 31, 2023.

Key Financial Indicators

Particulars	Units	2023*	2022
Operating income	Rs crore	6,579	5,405
Profit after tax (PAT)	Rs crore	549	1,675
PAT margin	%	8.2	30.5
Adjusted debt/adjusted networth	Times	2.2	2.5
Adjusted Interest coverage	Times	6.7	4.4

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

*Provisional

Any other information: Not applicable