Will Moody's downgrade Airtel's rating if competition intensifies?

Moody's Investors Service on Friday said Bharti Airtel's ratings may face downward pressure if the operator fails to continue its deleveraging strategy and competition intensify in any of the key markets. 

Moody's has assigned Baa3 long-term rating to Bharti Airtel and the outlook is stable. "Bharti's Airtel Ltd's Baa3 rating is underpinned by the strong cash flow generation of its operations in India, particularly in wireless voice and data, where it enjoys a well-established and leading market position under the Airtel brand," Moody's said in its credit opinion.

The agency added the outlook is stable and reflects its expectation of strong cash flow generation of the firm's Indian operations and the application of cash proceeds from asset sales to reduce debt on an absolute and relative basis.

"Downward pressure could arise should competition intensify in any of its key markets, but particularly for the Indian wireless business, such that its key operations and/or subsidiaries report materially declining margins, or if Bharti fails to continue with its deleveraging strategy," it added.

It also said ratings may be upgraded if the company's overall credit profile continue to strengthen. Moody's said the rating also considers its expectation that the company will continue to grow its core Indian and African wireless businesses while maintaining a prudent approach to capital spending and leverage, funding all capital expenditure (capex) with cash from operations, and monetizing assets opportunistically to support debt reduction.

"In particular, we assume that all proceeds from tower asset sales are being used for debt reduction and to help counter the adverse effect on debt levels associated with its growth initiatives," it said.

Moody's further said Baa3 rating also considers management's proactive steps to reduce its exposure to the US dollar, such that the proportion of US dollar denominated debt was, by its estimates below 50% at March 31.

The Baa rating granted by Moody's indicates obligations on a firm are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.