Credit Opinion: Bharti Airtel Ltd.

Global Credit Research - 08 Jun 2015

India

Ratings

Category Moody's RatingOutlook StableIssuer Rating Baa3Senior Unsecured Baa3Bharti Airtel Int'l (Netherlands) B.V.Outlook StableBkd Senior Unsecured Baa3

Contacts

Analyst PhoneAnnalisa Di Chiara/Hong Kong 852.3758.1537Nidhi Dhruv, CFA/Singapore 65.6398.8315Laura Acres/Hong Kong 852.3758.1310

Key Indicators

[1]Bharti Airtel Ltd.[2]3/31/2015 3/31/2014 3/31/2013 3/31/2012 3/31/2011

Scale (USD Billion) $15.1 $14.2 $14.1 $15.0 $13.1EBITDA Margin 38.2% 37.9% 36.2% 38.6% 39.3%Debt / EBITDA 3.0x 3.1x 3.2x 3.2x 3.4xFCF / Debt 0.8% 3.8% 6.3% 4.3% -14.4%RCF / Debt 23.7% 22.8% 22.4% 22.7% 21.4%(FFO + Interest Expense) / Interest Expense 6.1x 5.4x 4.9x 4.8x 6.0x(EBITDA - Capex) / Interest Expense 1.9x 2.1x 2.2x 1.9x -1.8x

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Source: Moody's Financial Metrics [2] Based on the company's preliminary FY2014/15results and Moody's estimates. Source: Moody's Financial Metrics

Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide.

Opinion

Rating Drivers

1. Global player supported by market leading position in India

2. Evolving regulatory framework in all markets

3. Moderate, albeit improving financial leverage

4. Substantial FX risk related to the high level of foreign currency borrowings, although improving

4. Substantial FX risk related to the high level of foreign currency borrowings, although improving

5. Strong shareholder base

6. Future event risk

Corporate Profile

Founded in 1994, Bharti Airtel Ltd ("Bharti") is the 4th largest operator globally based on total number ofsubscribers (324.4 million as of 31 March 2015) with operations in 20 countries across South Asia and Africa.Bharti has been listed on the Bombay Stock Exchange and National Stock Exchange since 2002.

Within India, the company's product offerings include 2G, 3G and 4G wireless services, mobile commerce, fixedline services, high speed DSL broadband, IPTV, DTH, enterprise services including national & international longdistance services to carriers. In the rest of the geographies, it offers 2G, 3G wireless services and mobilecommerce.

Bharti's main shareholders include the Mittal family, Singapore Telecommunications Limited (Singtel, Aa3 stable)which owns 32.4%. Qatar Foundation Endowment ("QFE") which owns 5% is also a key shareholder.

Rating Rationale

Bharti's Baa3 rating is underpinned by the strong cash flow generation of its Indian operations, particularly inwireless voice and data, where it enjoys a well-established and leading market position under the Airtel brand.

Although the regulatory environment for telecommunications in India had been fraught with uncertainty over thepast several years, competition is easing and the regulatory situation is clearing and boding more favorably for theoperators. At the same time, concerns exist regarding emerging market risks and, in particular, changes to theregulatory and political environments in the countries in which Bharti operates, especially considering itsinvestments in 17 African countries.

Adjusted debt/EBITDA of 3.0x for FY2014/15 was similar to leverage at FY2013/14 (3.1x). However, excludingdeferred payment liabilities related to spectrum payments, adjusted leverage was around 2.6x for FY2014/15,evidencing continued deleveraging of the underlying business, which was in line with our expectations for therating.

Bharti announced a benchmark senior unsecured bond issuance on 3 June 2015. According to theannouncement, proceeds from the notes will be used for capex. However, as the company has committed toapplying excess cash flows to debt reduction, this will not result in an increase in leverage. At the same time, thistransaction will extend Bharti's debt maturity profile, which is credit positive.

Overall, we expect adjusted leverage (including deferred payment liabilities) to remain at the upper end of thetolerance for the Baa3 rating, or around 3.0x, this is mitigated by the following factors: (1) Bharti has committed touse all proceeds from its African tower asset sale to reduce debt; and (2) use proceeds from other monetizationactivities for debt reduction, such as its February 2015 stake sale in tower subsidiary Bharti Infratel (Infratel,unrated) of around $310 million and (3) organic cash generation from business, which continues to be strong.

The rating also takes into account the company's currency mismatch with its revenue base. Although this situationmay give rise to translation risk, the company has a board approved policy of hedging a minimum percentage oftotal foreign liabilities due, covering a substantial portion of liabilities due over the next 12-month period, therebypartially mitigating the impact of rupee depreciation. Moreover, the company has taken proactive steps to reduceits USD exposure, such that the proportion of US dollar denominated debt had fallen to below 50% as of 31 March2015 from 60% the prior year.

Finally, although Bharti's direct and indirect subsidiaries in Africa have largely raised debt on a non-recoursebasis, Moody's remains concerned that it may need to provide additional financial support to its overseassubsidiaries in a distress situation should such a requirement arise.

DETAILED RATING CONSIDERATIONS

1. GLOBAL PLAYER SUPPORTED BY A LEADING MARKET POSITION IN INDIAN WIRELESS

In India, Bharti offers a full range of services, including wireless (2G, 3G and 4G), fixed line, broadband, high-speed DSL and digital TV. It is the largest mobile operator in the country with a subscriber market share of 23.3%

as of 31 March 2015 (Telecom Regulatory Authority of India, "TRAI"). Other leading operators included VodafoneIndia (wholly owned by Vodafone Group Plc, Baa1 stable) (18.9%), Idea Cellular (unrated) (16.3%) and RelianceCommunications Limited (Ba3 stable) (11.3%).

In terms of revenue contribution, businesses in India accounted for about 70% of consolidated revenue and 81% ofreported EBITDA for the year ended 31 March 2015, thus providing a solid base to the credit profile.

In the March 2015 spectrum auctions, Bharti won approximately 112 MHz (61 MHz of 900 MHz, 15 MHz of 1800MHz, and 35 MHz of 2100 MHz spectrum) for a total cost of around INR291 billion ($4.6 billion). Bharti retainedand also added contiguous 900 MHz spectrum in its six renewal circles. It further added to its 900 MHz footprint inthree additional leadership circles, which were not due for renewal. The company also bought 2100 MHz spectrumin seven circles and increased its holding in 1800 MHz spectrum.

Bharti now holds approximately 40% of the industry allocation of 900 MHz spectrum, regarded as the mostefficient for 3G services and so further enhancing its market leadership opportunities. Moreover, through theauctions, Bharti significantly expanded its network, making it the only operator with pan-Indian footprint for 3Gservices (except in one circle). Through the auctions of 2010 and 2014, Bharti had already secured pan India 4Gspectrum enablement as well, through a combination of 1800Mhz and 2300Mhz band.

Through Bharti's 71.9% owned subsidiary Infratel, which in turn owns a 42% interest in Indus Tower Ltd (unrated),the company builds and operates tower infrastructure for wireless telecommunication service providers in India.As of 31 March 2015, Infratel alone owned and operated 37,196 towers in 11 telecommunication circles in India.With the inclusion of its economic interest in Indus Tower, Infratel managed over 85,891 towers on a pro-rata basisand is one of the largest tower providers in the country with pan India footprint.

Growth in the tower business had been relatively stagnant for the past few years, given the level of regulatoryuncertainty which resulted in operators holding back on investments and few operators exiting the country,following the 2012 Supreme Court license cancellation. However, the spectrum auctions concluded in 2014 and2015 should bring in a wave of new 3G and 4G investments and Infratel, given its scale, is well placed to takeadvantage of such investment.

Following Bharti's 2010 $10.7 billion acquisition of 100% of Zain Africa's operations in 15 countries, the companyhas operations in 17 countries (acquired 15 as part of Zain, and added the Seychelles in 2010 and Rwanda in2011), and has steadily increased its subscriber base.

Bharti is focused on 3G roll-outs as a means of increasing its African subscriber base and 3G has now been rolledout across all 17 markets. License costs have proved reasonable. Typically awarded for 15-20 year terms, thecosts of these are not significant as a part of overall capex. Bharti has also invested in developing Airtel Money --a mobile banking and money transfer service - across all 17 countries. This operation has proved useful increating stickiness with subscribers and reducing churn.

The African business was negatively impacted by currency movements against the dollar in FY2014/15, driving a14% contraction in EBITDA year-over-year (8% on a constant currency basis). Still however, we view favorablythe continued growth in its customer base and subscribers and the expansion of its mobile data revenue base.

Bharti also offers wireless services in Sri Lanka and Bangladesh. The overall contribution from this segment,however, remains relatively small at only about 2% of total revenue and it is still free cash flow negative.

2. EVOLVING REGULATORY FRAMEWORKS IN ALL MARKETS

India's telecommunication industry is under the jurisdiction of two main entities: TRAI and the Department ofTelecommunications (DoT). The regulatory framework continues to evolve and as such, policy changes couldlead to challenges for operators as they have in the past.

In March, spectrum auctions successfully concluded with the winning prices being about 35% higher than thegovernment's pre-set base prices and higher than the previous record of INR1.06 trillion ($16.9 billion) for the 2100MHz and 2300 MHz the government auctioned in 2010.

Notwithstanding the higher pricing, the auctions brought an end to a period of uncertainty overhanging the sector.In this auction Bharti secured assets that are strategically important to its competitive position and data growthstrategy, particularly in the 900 MHz band. Post these auctions, Bharti's spectrum band in the 900Mhz band will be40% of the industry, further enhancing its leadership opportunities."

Longer-term, the spectrum the operators secured will also help them maintain their competitive positions andsupport their data growth strategies. All licenses won will be valid for a 20-year period. The auction, whileexpensive, has also minimized any spectrum renewal risk over the next five years for Bharti.

High spectrum costs could also lead to industry consolidation. India has some 10 telecom operators, as comparedwith three to four in more developed and efficient telecom markets. Operators' high debt burdens may also pavethe path for recapitalization events which would partially restore the companies' financial flexibility and allow foradditional investment in network technology. Both Bharti and RCOM have a record of raising equity and using theproceeds to pay down debt.

Operator-owned tower companies - Bharti Infratel (unrated, 71.9% owned by Bharti), Indus Towers (unrated, 42%owned each by Bharti and Vodafone, and 16% owned by Idea Cellular Limited (unrated)) and Reliance Infratel(unrated, wholly owned by RCOM) - will also benefit from efficiencies as the expanding data networks will drivehigher revenues and cash flows.

Bharti's operations outside of India are mostly in riskier markets from a regulatory, political and economic riskperspective; nonetheless, they also offer good growth opportunities, particularly given that ARPU levels aresignificantly higher than the home market. While it is easy to consider Africa as showing higher regulatory risk, it isalso important to recognize the diverse and independent nature of Bharti's operations in the continent.

3. SPECTRUM AUCTION PAYOUTS WILL KEEP LEVERAGE AT MODERATE LEVEL

Bharti's spectrum payment of INR291 billion ($4.6 billion) was the second highest amongst bidders, still thecompany secured assets that are strategically important to its competitive position and data growth strategy,particularly in the 900 MHz band.

Bharti has opted for the deferred payment structure for these spectrum payments, whereby the balance remaining(around $2.8 billion) after upfront payments of around $1.8 billion were made, is stretched out over a 10 yearperiod, after a 2 year moratorium. This deferred payment structure will mitigate the effect on cash flow. Weconsider all spectrum related deferred payments as debt. In this case, we consider the entire $2.8 billion balanceas deferred payment liability as at 31 March 2015 and include in our pro-forma adjusted debt calculations.

As a result, we expect adjusted leverage to remain at the upper end of the tolerance for the Baa3 rating, or around3.0x.

Still, we also acknowledge that the company has a proven track record of reducing core leverage, as evidencedby its reported debt levels (excluding deferred payment liabilities related to spectrum) declining to around INR664billion ($10.7 billion) as of 31 March 2015 from INR 759 billion ($12.2 billion) as of 31 March 2014.

We expect Bharti will remain committed to debt reduction in 2015 as cash flow from operations and proceeds fromother monetization activities are used to reduce debt levels further such that adjusted debt/EBITDA trends towards2.5x over the next 12-24 months. Specifically, Bharti has committed to use all proceeds from its African towerasset sales to reduce debt. We expect the company will receive $2.2 billion from that sale over the next sixmonths. Further, in August 2014 and February of 2015, the company undertook secondary sale of a 7.41% stakein Infratel for around INR 41 billion. We anticipate that proceeds from all future monetization initiatives will bedeployed toward debt reduction.

Debt exists at various levels within the Bharti capital structure. However, certain facilities are ring-fenced, giventhe ability of particular operations to service their own debt, including about $2 billion of bank debt held at theAfrican operations under the guarantee of Bharti Airtel Netherlands and in some cases secured on local assets.This debt is non-recourse to Bharti, however it is Moody's view that Bharti will provide financial support, if required.

4. SUBSTANTIAL FX RISK, GIVEN HIGH LEVEL OF FOREIGN CURRENCY BORROWINGS

We estimate at March 2015 year-end around 50% of the company's total outstanding debt was denominated inUSD, with another 21% denominated in rupee and the remainder in a wide range of currencies. We believe thatUSD borrowings will decline further with the debt reduction from the tower asset proceeds.

Still, given the high degree of foreign currency borrowings versus its largely rupee-denominated cash flows,Bharti's ability to manage its foreign currency exposure is an important credit factor. However, some safeguardsaround this risk include: (1) Bharti has an approved policy of hedging a minimum percentage of total foreignliabilities due, covering a substantial portion of total liabilities due over the next 12-month period, and (2) at theIndian operation level, there is some $500 million of debt denominated in USD, and which is naturally hedged

against some $400 million in annual revenues.

Finally, we understand Bharti will remain proactive in diversifying currency risk against the USD, although itsfinancial statements will remain highly exposed to translation risk for the time being.

With respect to covenants on its bilateral bank facilities, these are calculated based on USD financials translatedfrom INR to USD at the same rates as used for publishing financial statements. Based on this approach, netdebt/EBITDA was 2.08x at year end 31 March 2015, versus a covenant of 3.25x.

5. STRONG SHAREHOLDER BASE

In addition to the Mittal family, Singtel is a major shareholder with an indirect ownership of 32.4%. Singtel maintainsa close relationship with Bharti as the company represents a core part of Singtel's emerging markets portfolio.Excluding Singtel Optus Pty Limited (A1 stable), the second largest mobile operator in Australia, Bharti is Singtel'slargest overseas investment with invested capital of SGD2.31 billion. Other than transferring know-how, providingtechnology support and cross-staff transfers, Singtel also holds 2 of 16 seats on the board. All material strategicdecisions are consented by the board.

While Singtel maintains a stance of being arms length from its investments, Moody's is of the view that they wouldbe supportive should any support be required from them and may attempt to increase its stake further, should theopportunity arise.

6. FUTURE EVENT RISK

Bharti's long-term comfort zone of is net debt / EBITDA of 2.0x.

Historically, Bharti's financial profile has been very conservative. Prior to the Zain acquisition it was almost netcash, and even post-Zain, it has continued to generate positive free cash flow each year despite high levels ofcapex.

We are however, concerned about the possibilities of event risk, as management has displayed a strongwillingness in the past for mega deals, having both considered the acquisition of MTN and then subsequentlyacquired Zain.

Over the near term, however, we do not expect Bharti to engage in material M&A and expect it to focus more onin-country consolidation opportunities rather than entry to new markets. Bharti aims to be the number 1 or 2operator in each market and will seek acquisitions of smaller operators to achieve that position. Given the currentportfolio, Moody's believes that such acquisitions would be no more than USD200-500 million and likely inoverseas business opportunities.

Conversely, should it not see a path towards achieving a solid market leading position, then it would considerexiting that market.

Liquidity

As of 31 March 2015, Bharti had about $2.2 billion (INR135.8 billion) in cash and short-term investments,compared to $3.4billion (INR211.4 billion) in short-term debt. Overall, Bharti's liquidity profile remained strong withthe company generating over about $4.5billion (INR 276 million) in cash from operations on a LTM basis.

The company has announced a capex plan of around $3 billion for 2015We expect the company will haverecurring maintenance capex of about $1.6 billion (INR100 billion) per year, which, together with future spectrumpayments, can be funded out of cash and cash flow.

As Bharti remain in a high growth phase, we believe it's dividend policy is relatively modest which we anticipate tocontinue as the company remains focused on debt reduction

Structural Considerations

Bharti Airtel Ltd is not a pure holding company as it accounts for more than 50% of consolidated revenue and 60%of EBITDA. Furthermore, the debt at its African level is non-recourse and can be serviced out of Africa-sourcedcash flow. As such, we do not apply notching for structural subordination.

Rating Outlook

The rating outlook is stable based on the expectation that Bharti will continue to grow its core Indian and Africanwireless businesses and that the group will continue to deleverage on both an absolute and relative basis.

What Could Change the Rating - Up

The rating may experience upward pressure should Bharti's overall credit profile continue to strengthen; inparticular Moody's would like to see Bharti reduce consolidated adjusted debt/EBITDA (including deferredspectrum payment liabilities) to below 2.0x and for consolidated adjusted free cash flow to debt to exceed 10%.

We would also like to see a track-record that shows that some of its key markets outside of India (such asNigeria) demonstrate the ability to upstream cash flows to Bharti, while the operating performance of thosesubsidiaries remains solid.

What Could Change the Rating - Down

Downward pressure could arise should competition intensify in any of its key markets, but particularly for theIndian wireless business, such that its key operations and/or subsidiaries report materially declining margins, orBharti fails to continue with its deleveraging strategy. Moody's would seek evidence of this trend with consolidateddebt/EBITDA remaining above 3.0x, consolidated free cash flow/debt remaining below 5%, or adjusted EBITDAmargins falling below 35%.

Furthermore, any unexpected regulatory developments in any of Bharti's key markets will also be negative for therating.

Given Bharti's recent history of a transformational and debt-fund acquisition, Moody's would also view negativelyany event risk associated with a material acquisition or other corporate activity that negatively impacts thecompany's existing or targeted leverage ratios.

Other Considerations

Methodology Output: In accordance with the Global Telecommunications Industry (December 2010) methodology,Bharti's grid output (on a consolidated basis) is Baa3, which is consistent with the assigned rating.

Rating Factors

Bharti Airtel Ltd.

Global Telecommunications Industry Grid [1][2] Current LTM3/31/2015

Factor 1: Scale And Business Model, Competitive Environment And TechnicalPositioning (27% )

Measure Score

a) Scale (USD Billion) $15.1 Ab) Business Model, Competitive Environment and Technical Positioning Baa BaaFactor 2: Operation Environment (16%) a) Regulatory and Political Ba Bab) Market Share A AFactor 3: Financial Policy (5%) a) Financial Policy Baa BaaFactor 4:Operating Performance (5%) a) EBITDA Margin 38.2% BaaFactor 5: Financial Strength (47%) a) Debt / EBITDA 3.0x Bab) FCF / Debt 0.8% Caac) RCF / Debt 23.7% Bad) (FFO + Interest Expense) / Interest Expense 6.1x Baae) (EBITDA - Capex) / Interest Expense 1.9x BaRating: a) Indicated Rating from Grid Baa3

b) Actual Rating Assigned Baa3

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] Based on the company's preliminary FY2014/15 results and Moody's estimates.Source: Moody's Financial Metrics

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