Bharti Airtel Ltd. Table Of Contents. Rationale. Outlook. Standard & Poor's Base-Case Scenario. Company Description. Business Risk.

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1 Primary Credit Analyst: Abhishek Dangra, FRM, Singapore ; Secondary Contact: Mehul P Sukkawala, CFA, Singapore (65) ; mehul.sukkawala@standardandpoors.com Table Of Contents Rationale Outlook Standard & Poor's Base-Case Scenario Company Description Business Risk Financial Risk Liquidity Covenant Analysis Other Modifiers Ratings Score Snapshot Reconciliation Related Criteria And Research SEPTEMBER 29,

2 Business Risk: SATISFACTORY Vulnerable Excellent CORPORATE CREDIT RATING bbb- bbb- bbb- Financial Risk: INTERMEDIATE BBB-/Stable/-- Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Satisfactory Leading market position in India Good geographic diversity of operations compared with many peers Above-average but declining regulatory risks in its key markets, particularly India High competition in India Financial Risk: Intermediate Significant capital expenditure requirements, including for spectrum Expected to generate healthy free operating cash flows Exposed to currency and interest rate risk Outlook: Stable The stable outlook reflects our expectation that Bharti Airtel Ltd. will maintain its competitive position over the next months, supported by the improving regulatory framework and moderating competition. We expect the company to continue to reduce its leverage over the period, resulting in the ratio of funds from operations (FFO) to debt improving to above 30% on a sustained basis. We anticipate that the company will continue to generate free operating cash flows with improving operating performance. Upside scenario We may raise the rating if: (1) the regulatory uncertainty in India further diminishes and Bharti improves its competitive position; or (2) we expect the company to significantly improve its EBITDA margin and deleverage, such that its ratio of FFO to debt is above 40% on a sustained basis. Downside scenario We may lower the rating if we expect Bharti's EBITDA margin to fall below 30% because of competition or the company's costs related to license renewal, spectrum, or acquisitions being significantly higher than we expected. The ratio of FFO to debt declining significantly below 30% on a sustained basis could trigger a downgrade. SEPTEMBER 29,

3 Standard & Poor's Base-Case Scenario Assumptions Stable growth for Bharti. This is in line with our view that the telecom industry globally is relatively resilient to a global economic slowdown, and that growth prospects for Asia-Pacific telecom companies will remain stable. Better competitive environment in India, with major players, such as Bharti, able to adjust tariff and promotions to improve profitability. Stable regulatory environment in India and Africa. Key Metrics 2014A 2015E 2016E Debt/EBITDA 3.3x 2.5x-3x 1.5x-2.5x Funds from operations/debt (%) Adjusted EBITDA margin (%) Data is for fiscal years ending March 31. E--Estimates. Company Description Bharti Airtel Ltd. is the leading telecommunications services provider in India with operations in Africa, Sri Lanka, and Bangladesh. The company is among the top telecom companies globally, in terms of number of subscribers. Business Risk: Satisfactory Bharti's business risk profile reflects the company's good market position and better business diversity than peers. Its leading market position in India underpins the rating. However, the company faces above-average regulatory risks in its key markets, particularly in India despite a significant improvement recently. Bharti's improving market position in Africa is also partly offset by weaker margins there. The February 2014 spectrum auction in India has established a well-defined auction process, which could serve as a model for future renewals. Other regulatory improvements include setting of spectrum usage charges at 5%, and guidelines on spectrum trading and mergers and acquisitions. Regulatory uncertainty persists on issues regarding charges for one-time spectrum fees, and the Department of Telecommunications may contest the lifting of restrictions on 3G roaming arrangements. India's telecom regulatory framework may get completely revamped in 2015 if the new Communications Bill under consideration is formalized. Bharti's EBITDA margin is comparable with global peers'. Nevertheless, Bharti's margin is lower than some Asian peers' because of the weak performance of the company's Africa business. We expect Bharti's EBITDA margin to sustain the recent improvement over the next months for these reasons: (1) higher average revenue per user (ARPU) in India because of reduction in discounted tariff and growth in the data segment; (2) greater pricing discipline among the top players; and (3) easing of the intense competition as smaller players get further marginalized. However, the improvement in the company's Africa EBITDA margins is likely to be gradual. SEPTEMBER 29,

4 S&P Base-Case Operating Scenario In our base-case scenario, we expect a stable regulatory and competitive environment for Bharti's operations. Key elements of our base-case scenario are: 50% higher payment for license renewal than the government-determined base price, given the higher price in the recent auction. Capital expenditure of about US$2.3 billion, in line with the company's guidance. Reported EBITDA margin of 33%-34% in fiscals 2015 to 2016, up from 32% in Higher fees than we expected for license renewals and new licenses, or unexpected large acquisitions are key risks to our estimates. Peer comparison We see Axiata and Vimpelcom, with large geographical spreads and significant presence in Asia, as direct peers for Bharti. We also consider Indosat and Telkomsel in the competitive Indonesian market as peers. In our view, Bharti Airtel is relatively less diversified than Vimpelcom (Russia/Italy) and Axiata (Malaysia/Indonesia) given that both these players have significant operations in at least two large markets; Bharti has significant India operations while, in Africa, it is relatively spread out with many smaller markets. Axiata and Vimpelcom also have operations in more mature telecom markets, resulting in lower capital expenditures. Bharti's operations, on the other hand, are in fast-growing emerging markets with spectrum technology upgrades increasing its capital expenditures. Axiata's and Vimpelcom's margins are also higher due to a larger proportion of postpaid subscribers and significant data revenues. Bharti's margins are lower because its subscribers are predominantly pre-paid and its data revenues are smaller (but growing fast). Indosat and Telkomsel have business diversity but lack geographical diversity. Bharti Airtel compares favorably with its presence across markets and larger scale of operations in the growth markets of India and Africa. The two Indonesian players compete in a higher margin but highly competitive and growing market. We view the competitive positions for most of the peer companies as comparable with Bharti in view of their good positions in some key markets, while facing strong competition or challenges in others. Table 1 Bharti Airtel Ltd. -- Peer Comparison Industry Sector: Telecom (US$ mil.) Bharti Airtel Ltd. Fiscal year ended March 31, 2014 Axiata Group Bhd. VimpelCom Ltd. PT Indosat Tbk. Fiscal year ended Dec. 31, 2013 Fiscal year ended Dec. 31, 2013 Fiscal year ended Dec. 31, 2013 PT Telekomunikasi Selular Fiscal year ended Dec. 31, 2013 Revenues 14, , , , ,929.6 EBITDA 5, , , ,900.7 Funds from operations (FFO) 3, , , , SEPTEMBER 29,

5 Table 1 Bharti Airtel Ltd. -- Peer Comparison (cont.) Net income from cont. oper (2,625.0) (228.5) 1,424.5 Cash flow from operations 4, , , ,482.6 Capital expenditures 1, , , ,018.0 Free operating cash flow 2, ,612.9 (78.2) 1,464.6 Discretionary cash flow 2,277.5 (334.6) (1,442.1) (96.3) Cash and short-term investments , Debt 17, , , , ,269.8 Equity 10, , , , ,936.3 Adjusted ratios EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) FFO cash int. cov. (X) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) INR--Indian rupees; MYR--Malaysian ringgit; IDR--Indonesian rupiah (3.3) (10.9) (5.4) (4.1) 32.0 Financial Risk: Intermediate We expect Bharti's financial performance to improve over the next months owing to the company's improving operating performance, deleveraging measures, and controlled capital spending. We estimate the company's ratio of FFO to debt to be about 30% in the fiscal year ending March 2016, compared with about 22% in fiscal In February 2014, Bharti acquired licenses for 900 megahertz (MHz) telecom spectrum in three circles and 1800 Mhz in 15 circles for a total of US$3 billion. This price is significantly higher than our earlier estimate and would result in slower deleveraging than our earlier expectations. However, we expect the company to generate free operating cash flows of US$1.5 billion-us$2 billion annually. Furthermore, in line with our expectation, Bharti continues to use funds from strategic measures such as sale of stakes in subsidiaries (such as Bharti Infratel Ltd.) and noncore assets (such as tower infrastructure) for deleveraging. Bharti sold 4.5% in Bharti Infratel for Indian rupees (INR) 21 billion and recently announced sale and leaseback of some towers in Africa. The company intends to use the funds for reducing debt. We believe the tower sale and leaseback transaction will be debt-neutral as repayment of debt is likely to be offset by our adjustment for higher operating lease required by the company. The company also reported a significant increase in operating lease commitments for fiscal SEPTEMBER 29,

6 2014, which resulted in slightly weaker ratios than our expectation, despite an operating performance that was in line with our forecast. Bharti's declining debt also reduces the adverse impact of foreign exchange fluctuations on the company's leverage. Over 80% of Bharti's debt is in a mix of foreign currency and carries a floating rate. Euro-denominated debt has a natural hedge from its Africa operations but the company is exposed to currency risk on some of its debt, in our opinion. We have not added any contingent liability for a legal suit filed by Econet Wireless Nigeria as the matter is sub judice and the court has not determined the damages. S&P Base-Case Cash Flow And Capital Structure Scenario Ratio of FFO to debt of about 30% in fiscal Ratio of debt to EBITDA of less than 3x in fiscal 2015 and onward. Financial summary Table 2 Bharti Airtel Ltd. -- Financial Summary Industry Sector: Telecom --Fiscal year ended March Rating history BBB-/Stable/-- BB+/Stable/-- BB+/Stable/-- BB+/Stable/-- BBB-/Watch Neg/-- (Mil. INR) Revenues 857, , , , ,472.0 EBITDA 325, , , , ,326.5 Funds from operations (FFO) 234, , , , ,084.9 Net income from continuing operations 27, , , , ,768.0 Cash flow from operations 255, , , , ,152.9 Capital expenditures 111, , , , ,989.0 Free operating cash flow 143, , , , ,163.9 Discretionary cash flow 136, , , , ,721.9 Cash and short-term investments 28, , , , ,396.8 Debt 1,071, , , , ,068.0 Equity 638, , , , ,231.0 Adjusted ratios EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) FFO cash int. cov. (x) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) SEPTEMBER 29,

7 Table 2 Bharti Airtel Ltd. -- Financial Summary (cont.) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) N.M.--Not meaningful. Liquidity: Adequate Bharti has "adequate" liquidity, as defined in our criteria. We expect the company's sources of liquidity to exceed its uses by more than 1.2x over the next 12 months. We anticipate that net sources of liquidity will remain positive even if EBITDA declines by 15%. Bharti has good access to banks and capital markets in India and abroad, in our opinion. We also believe that the company has greater financial flexibility because of its strategic relationship and significant ownership by Singapore Telecommunications Ltd. Principal Liquidity Sources Unrestricted cash and liquid investments of over Indian rupee (INR) 130 billion as of March 31, Annual FFO that we estimate at more than INR220 billion. Funds from bond issuance of US$1 billion and 750 million. Principal Liquidity Uses Debt maturities of about INR245 billion and prepayment from bond proceeds. Maintenance and committed capital expenditure (which we assume at 75% of base capital expenditure) of about INR100 billion. Minimum cash dividend of INR5 billion-inr6 billion. Debt maturities Table 3 Bharti Airtel Ltd. -- Debt Maturities (US$ mil.) March 2015 * 210,163 March ,589 March 2017 to ,480 Thereafter 132,612 * The company has refinanced some of the debt due in fiscal 2015 during the course of the year and we expect the debt payable in fiscal 2015 to be lower than US$1 billion. Covenant Analysis Covenant testing is suspended for the bonds since it is an investment grade (rated 'BBB-' or above) issuer. Consolidated total net borrowings/adjusted consolidated EBITDA less than 3.25x Adjusted consolidated EBITDA/consolidated net finance costs greater than 4x SEPTEMBER 29,

8 Cash flow to debt service greater than 1.25x Compliance Expectations We expect the company to meet its covenants. Other Modifiers None of the modifiers have any rating impact. Ratings Score Snapshot Corporate Credit Rating BBB-/Stable/-- Business risk: Satisfactory Country risk: Moderately high Industry risk: Intermediate Competitive position: Satisfactory Financial risk: Intermediate Cash flow/leverage: Intermediate Anchor: bbb- Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Adequate (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Neutral (no impact) Reconciliation SEPTEMBER 29,

9 Table 4 Reconciliation Of Bharti Airtel Ltd. Reported Amounts With Standard & Poor's Adjusted Amounts --Fiscal year ended March 31, Bharti Airtel Ltd. reported amounts (Mil. INR) Debt Shareholders' equity Revenues EBITDA Operating income Interest expense EBITDA Reported 758, , , , ,274 36, ,770 Standard & Poor's adjustments Interest expense (reported) (36,382) Interest income (reported) Current tax expense (reported) (41,270) Operating leases 251, ,816 15,127 15,127 32,689 Postretirement benefit obligations/deferred compensation 2,131 (734) Surplus cash (84,055) Capitalized interest ,266 (2,266) Share-based compensation expense Asset retirement obligations 5, Non-operating income (expense) Reclassification of interest and dividend cash flows Non-controlling Interest/Minority interest Debt - Accrued interest not included in reported debt , , , Debt - Guarantees 3, Debt - Other* 129, Total adjustments 312,844 41, ,981 17,751 18,098 (43,624) Standard & Poor's adjusted amounts Debt Equity Revenues EBITDA EBIT Interest expense Funds from operations Adjusted 1,071, , , , ,025 54, ,146 * Spectrum fees under deferred payment option, classified by company as capital commitments pending spectrum allocation. INR--Indian rupees. Related Criteria And Research Related Criteria Key Credit Factors For The Telecommunications And Cable Industry, June 22, 2014 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Jan. 2, 2014 Corporate Methodology, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Country Risk Assessment Methodology And Assumptions, Nov. 19, SEPTEMBER 29,

10 Methodology: Industry Risk, Nov. 19, 2013 Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Related Research Moderating Regulatory And Competitive Risks Are Positive For India's Top Telecoms, March 20, Business And Financial Risk Matrix Financial Risk Profile Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Ratings Detail (As Of September 29, 2014) Bharti Airtel Ltd. Corporate Credit Rating Senior Unsecured Corporate Credit Ratings History 06-Mar Dec Jun Feb-2010 Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b- BBB-/Stable/-- BBB- BBB-/Stable/-- BB+/Positive/-- BB+/Stable/-- BBB-/Watch Neg/-- *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. SEPTEMBER 29,

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