Airtel’s earnings growth slow but balance sheet strong enough to support elevated 5G capex: S&P Global

Global rating agency, S&P Global has said Bharti Airtel’s earnings growth momentum is slower than anticipated but its balance sheet is strong enough to withstand its temporarily elevated 5G-related capex spends.

“Airtel maintains its focus on deleveraging….it aims to pare debt before increasing shareholder returns, and its ratio of funds from operations (FFO) to debt has solidified within the threshold commensurate with the ‘BBB-‘ rating, supported by rising earnings,” S&P Global Ratings said in an official statement Friday.

The ratings agency has estimated Airtel’s FFO-to-debt ratio was at 25%-26% in FY23, well above its downgrade threshold of 20%. This was up from 22% in FY22. Going forward, it projects this ratio to further improve to 26%-29% in FY24. “The forecast assumes Airtel will draw down on its residual rights issue in that year. Absent that, the ratio would be 24%-27%.”

The global ratings agency said Airtel’s rising earnings had also fortified its debt capacity in the past 12 months.

It, though, said Airtel’s earnings rose less than was expected, while its debt was higher than projected mainly due to a steep increase in lease liabilities. This, it said, followed a renewal of tower leases and new leases entered for 5G rollout.

Airtel’s consolidated net debt, including lease obligations, stood at Rs 2.13 lakh-crore in the quarter ended March.

The global ratings agency noted that Airtel’s reported capex (both cash and non-cash in nature) climbed to Rs 34,200 crore in FY23, which it said, compares with an average of about Rs 25,000 crore over FY20-22 and a much-lower cash capex of Rs 26,100 crore in fiscal 2023.

“We expect some cash outflow to spill over into FY24, and considering the elevated capex for 5G rollout, we project Airtel’s cash capex to be higher and peak in FY24, before easing in FY25,” S&P Global said.

It also expects Airtel will continue to deleverage as it expects the telco’s discretionary cash flow to remain positive.

Airtel’s consolidated net profit in the fiscal fourth quarter rose 50% from a year earlier to Rs 3,005.6 crore, on the back of a one-time exceptional gain from its Africa business, and further helped by strong 4G user additions, higher data and voice services consumption. Consolidated revenue grew 0.57% sequentially and 14.3% on-year in the January-March period to Rs 36,009 crore.