The Stable Outlook reflects our view that an equity injection of USD2 billion in January 2020 and EBITDA growth for the financial year ending March 2020 (FY20) and FY21 will be more than sufficient to offset the increase in debt to pay regulatory dues of up to USD4.9 billion, which stem from a dispute over adjusted gross revenue (AGR). We estimate that funds from operations (FFO) adjusted net leverage will improve to 2.3x-2.4x in FY20 and around 2.0x in FY21 - excluding USD6.3 billion in deferred spectrum costs - below 2.5x, the threshold above which we may consider negative rating action.
Key Rating Drivers
Regulatory Dues Payment: Bharti paid USD1.4 billion (INR100 billion) on 17 February 2020 to the Department of Telecommunications (DOT) after the Supreme Court rejected incumbent telcos' petition to ascertain with the DOT the amount and timing of the payment of the regulatory dues related to the AGR dispute. Bharti's management estimates the regulatory dues will not exceed the provision amount of USD4.9 billion.
The Supreme Court's original ruling in October 2020 led the DOT to demand hefty unpaid dues on licence fees and spectrum usage charges from Indian telcos. The DOT demand relates to a 14-year-old dispute regarding the definition of AGR, which the Supreme Court agreed should include all kinds of income generated by the telcos.
Equity Injection: The USD2 billion equity injection alleviated pressure on the balance sheet resulting from the high regulatory-dues obligations. Management says that Bharti is committed to an investment-grade rating and raised about USD7.6 billion in equity through a rights issue and the sale of equity in its African subsidiary, Airtel Africa Plc, in last 18 months. It also issued USD1 billion of subordinated perpetual bonds, on which Fitch assigns 50% equity credit. The company also raised USD1 billion in convertible debt, which we treat as debt in our analysis.
Strong EBITDA Growth: We estimate Bharti's consolidated EBITDA will increase by 20%-25% a year in FY20 and FY21 due to easing competition in the Indian wireless market and continued strong growth in its African markets and Indian enterprise segment. We expect FY20 EBITDA for the Indian wireless segment to rise by 25%-35%, driven by a 15% increase in blended average revenue per user (ARPU) to INR150-155 (USD2.1) by end-4QFY20 (3QFY20: INR135). The move by all telcos in India to raise tariffs, effective 5 December 2019, by 30%-40% for prepaid tariff plans was the first increase in a decade.
We estimate 9MFY20 revenue and EBITDA rose by 6% and 14% yoy, respectively, mainly driven by the 30% increase in ARPU. The EBITDA figure excludes accounting adjustments due to the introduction of Indian accounting standard 116, which inflated reported EBITDA and finance leases. The Indian mobile segment's profitability is improving, boosted by the addition of 47 million 4G subscribers in 9MFY20 and cost savings from the planned closure of 3G networks by March 2020. We expect FY21 EBITDA to increase, supported by the full impact of the tariff hikes and subscriber additions at the expense of struggling telco, Vodafone Idea Ltd.
Subscriber Growth: We believe that Bharti is poised to gain at least 30 million subscribers from Vodafone idea in FY21. We believe that Bharti and Jio will gain market share, given Vodafone Idea has the limited financial flexibility to raise at least USD6 billion in debt to pay regulatory dues in the short term. Vodafone Idea is struggling to improve its EBITDA amid a rapidly shrinking subscriber base and significantly high leverage. The company's chairman publicly stated that it may shut down if it does not receive any relief on regulatory dues from the Supreme Court.
Negative FCF; High Capex: We estimate Bharti's free cash flow (FCF) will be slightly negative in FY20 despite the tariff increases, as cash flow from operations will be insufficient to fund large capex even though core capex fell by 35% in 9MFY20 to INR161 billion and Bharti did not pay any dividends.
We estimate FY20 capex/revenue at 28%-30%, excluding regulatory dues, as Bharti continues to strengthen its 4G network and fibre infrastructure. However, its FCF will improve due to the government's two-year moratorium on payment of existing spectrum dues, which will defer about USD840 million each in FY21 and FY22. Management expects core capex, excluding deferred spectrum payments, to peak and decline significantly in FY20 and FY21.
Strengthening African Operation: We forecast revenue and EBITDA from Bharti's African business to increase by a high-single-digit percentage a year on a constant currency basis in FY20-FY21, driven by revenue growth in the mobile data and mobile money segments. Bharti's market position has improved to the largest or second-largest mobile operator in 11 of its 14 African markets. Revenue and EBITDA in 9MFY20 rose by 12% and 16% yoy, respectively, on a constant currency basis, driven by a 9% increase in subscribers to 107 million, strong growth in mobile data and mobile money services, and stable ARPU of USD2.8.