Singtel&rsquo s investee company Bharti Airtel to pay Indian govt USD3b in past due

It was  reported  on Bloomberg yesterday (24 Oct) that India&rsquo s Supreme Court ordered several telecom carriers, including Bharti Airtel, Vodafone and many defunct ones, to pay the government as much as 920 billion rupees (US$13 billion) in past dues, dealing a blow to the struggling telecom carriers.

The Supreme Court will later decide on the timeline for payments. The legal dispute over air wave fees owed to the government had been dragging in the past 20 years.

The operators have disputed for years over how the Indian government calculates their annual adjusted gross revenue, a share of which is paid as license and spectrum fees. With the ruling, the Supreme Court upheld the government&rsquo s method, while rejecting the companies&rsquo plea to exclude revenue from non-telecommunications businesses.

Of the 920 billion rupees,  Bharti Airtel owes the Indian government 217 billion rupees  (US$3 billion) under the Supreme Court&rsquo s ruling. Singtel and GIC has about 40% stake in Bharti Airtel.

For the (Indian) government that runs perennial budget deficits, the court ruling comes as a fiscal bonanza,&rdquo Bloomberg commented.

GIC invests in Bharti Airtel

Two months ago in Aug, Singtel reported a  35 per cent drop in its first-quarter net profit  largely dragged down by losses in its investment in India&rsquo s Bharti Airtel.

Singtel posted a net profit of S$541 million for the three months ended in June, compared with S$832 million a year ago. Singtel owns stakes in a number of regional telecom operators including India&rsquo s Bharti Airtel, whose earnings have suffered from increased competition in its home market.

Earlier in March this year, it was reported that Singapore&rsquo s GIC will invest Rs5,000 crore (S$972 million) into the troubled Bharti Airtel, India&rsquo s second largest telecom company.

It came as Bharti Airtel decided to announce plans to raise nearly Rs32,000 crore (S$6.2 billion) through a combination of rights issue and perpetual bonds.

The fundraising was to help reduce Bharti Airtel&rsquo s current massive net debt estimated to be Rs 1.06 lakh crore (S$21 billion) as at end of last year. Singtel has renounced part of its rights to be picked up by GIC. As a result, Singtel&rsquo s stake in the Bharti Airtel will fall to 35.2% after the rights issue, while GIC will own about 4.4% for the first time.

In any case, Singtel announced that it will buy roughly 37.5 billion rupees (S$730 million) worth of Bharti Airtel stock as part of the Indian telecoms operator&rsquo s plan to raise the S$6.2 billion to cut its current massive net debt.

Bharti Airtel&rsquo s credit rating downgraded

In Feb this year, Bharti Airtel&rsquo s credit rating was downgraded for the first time by Moody&rsquo s to below investment grade status as a bruising tariff war with India&rsquo s newest wireless operator Reliance Jio continues to hurt its revenue and profitability.

&ldquo The downgrade reflects uncertainty as to whether or not the company&rsquo s profitability, cash flow situation and debt levels can improve sustainably and materially, given the competitive dynamics in the Indian telecom market,&rdquo Moody&rsquo s said.

Moody&rsquo s expects the profitability of Bharti Airtel&rsquo s mainstay, the Indian mobile market, to remain low over the next few quarters as there has been no change in its pricing. It noted that though the company&rsquo s debt levels may decline due to capital raising initiatives, weaker cash flow generation of the core mobile operations will likely keep leverage elevated.

The company&rsquo s cash generation has also been under pressure in the first nine months of the current fiscal. It&rsquo s been generating negative free cash flow for the last three quarters and this is for the first time in the last 15 years that the company has generated negative cash flows.

&ldquo A significant recovery in cash flow from the core Indian mobile segment is needed to strengthen the company&rsquo s credit quality and support greater financial flexibility,&rdquo Moody&rsquo s said.

Now with Bharti Airtel forced by the India&rsquo s Supreme Court ruling to pay past due of 217 billion rupees (US$3 billion) to the Indian government, its cash flow will surely be under even more pressure, dragging Singtel&rsquo s earnings down further.