Rating Rationale

Strengths:
* Strong market position in the domestic mobile telephone segment: BAL has a healthy subscriber base and revenue market share with a pan-India network. The wireless subscriber base was 326 million, as of October 31, 2019 (market share of 27.5%), as compared with 342 million, as of October 31, 2018 (market share of 29.2%). While the company had seen decline in its subscribers, largely driven by introduction of minimum recharge plans, however both, the subscriber market share and the revenue market share have seen improvement over the months of September and October 2019. Revenue market share (excluding national and international long distance) was 31.4% for the half year ended September 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 extensive experience of the promoters, enhance 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 amount of funds at competitive rates across domestic and international markets. The company has also adhered to its deleveraging plans. Furthermore, the shareholders'the Mittal family and SingTel'have a strong reputation. Hence, CRISIL believes BAL has full capability to fulfil the potential AGR liability.

Weaknesses:
* Lower cash accrual for the India mobility business, though improving: 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 by 26.6% over fiscals 2018 and 2019.

Measures like introduction of minimum recharge packs, have helped BAL to improve its ARPU to Rs 128 for the quarter ended September 2019. However, this also led to 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.

The recent tariff hike taken by the industry will improve ARPU. We expect the ARPU of BAL to increase to Rs 140-145 in fiscal 2021. However, ability to sustain 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 had constrained profitability and cash accrual. Furthermore, significant capital expenditure (capex) for enhancing network capabilities, had increased debt (including deferred spectrum payments) and lead to subdued debt protection metrics:

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,. 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, in October, an issuance of perpetual securities of USD750 million was done which further reduced leverage. 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.

However, TRAI has deferred the plan of reduction in IUC to zero paisa per minute to January 1, 2021, earlier planned to be effective from January 1, 2020 which will be beneficial to BAL.

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.