India-based Bharti Airtel will face margin pressure as competition hots up in the data segment, roaming revenue trends downward and the government’s higher service tax goes into effect (14 per cent vs 12 per cent in FY15).
Fitch Ratings expects India’s top four operators to consolidate their market share and use their increased power to raise voice tariffs gradually in response to high spectrum prices. Bharti currently has a 30 per cent market share by revenue.
But fierce data competition from Reliance Jio Infocomm will likely result in flat blended ARPU, offsetting any increase in voice tariffs.
Bharti’s EBITDA margin was 34 per cent last fiscal year. Driven by fast-growing data services in Indian and African operations, revenue is forecast to grow by a mid-single-digit percentage in the fiscal year to 31 March 2016.
Fitch expects its African operations’ EBITDA margin (FY15: 23 per cent) to improve only gradually as usage grows slowly and the tariff gap between off-net and on-net calls narrows following a cut in mobile termination rates in some markets. Its operations there continue to struggle to improve profitability as low usage, high costs and largely on-net voice traffic favour larger incumbent operators.
Fitch said Bharti will need to invest at least 20 per cent of revenue – or about $3 billion — in capex during FY16-17 to support fast-growing data services and to close the competitive gap with its African peers.
Bharti’s deferred spectrum liability increased to $5.1 billion (up from $2.3 billion in FY15) as it committed $4.7 billion during the March auctions — $775 million was paid in FY15 and $1.1 billion will be paid in FY16.
Fitch does not include the deferred spectrum liabilities as debt but treats the payments as capex as they fall due. The spectrum life is 20 years, and Bharti will be able to fund the payments using cash generated from operations.
The agency believes its net debt for FY16 will decline as it uses available cash and equivalents of $2.2 billion and the expected proceeds of its $2 billion sale of African tower assets to repay part of its existing debt.