CORPORATES

ISSUER IN-DEPTH19 July 2019

Contacts

Annalisa Di Chiara +852.3758.1537VP-Sr Credit Officerannalisa.dichiara@moodys.com

Laura Acres +65.6398.8335MD-Corporate Financelaura.acres@moodys.com

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Bharti Airtel Ltd.Leverage is improving, but rating stabilization will be driven byoperational improvement in Indian mobile

» Proceeds from recent capital-raising activities will strengthen balance sheet andimprove cash flows. Indian telecommunications company Bharti Airtel Limited (Ba1negative) completed an INR250 billion ($3.5 billion) rights issue in May and the listingof its African subsidiary, Airtel Africa Ltd, which raised $750 million in June. Pro formafor these transactions – assuming nearly all of the proceeds are used to reduce debt – weestimate adjusted consolidated leverage improved to around 4.2x from 5.1x at fiscal year-end March 2019. These metrics reflect our adjustments to deconsolidate Bharti's 53.5%-owned telco-tower operator Bharti Infratel Limited (Infratel), given the company'sintention to sell down its stake. Despite a significant fall in Bharti's absolute debt, leveragewill remain above 3.5x, the threshold for outlook stabilization.

» Sale of a significant stake in its tower assets would aid further debt reduction.We expect Bharti to ultimately sell a significant stake in the tower company formed fromthe merger of Infratel and Indus Tower Limited, although it may retain a minority stake.Assuming a premium to Infratel's average closing price in July, we estimate Bharti couldraise an additional $3.5 billion of cash. If proceeds are largely applied to debt reduction,Bharti's leverage could fall below 3.5x by fiscal 2020, ending in March 2020. This is aMoody's hypothetical scenario and should not be interpreted as predictive of an outcome.

» Still, growth in the Indian operations' organic cash flow is needed to sustain anyimprovement in credit metrics. Although cash flows will rise as interest costs fall,a meaningful expansion of organic profitability at Bharti's Indian mobile operations isneeded to improve its credit profile. We expect Bharti's capital spending and networkcosts to remain high as competition remains intense. Following an eventual tower assetsale and the dilution of its stake in Airtel Africa, Bharti will rely more heavily on organiccash flow from the Indian operations to meet ensure adequate financial flexibility goingforward.

» Bharti's consolidated metrics may indicate a stronger profile than cash-flowmetrics would suggest. Airtel Africa contributed around 30% of reported consolidatedEBITDA in fiscal 2019. Bharti's ownership of Airtel Africa has been diluted to around 55%from 68% following the subsidiary's IPO. While Airtel Africa will continue to be a materialcontributor to Bharti's consolidated EBITDA, we expect actual cash flow received fromAirtel Africa by way of dividends to be limited over the next 12 months. Excess cash flowat the subsidiary will likely be reinvested in its growing business.

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Proceeds from recent capital-raising activities will strengthen balance sheet and improve cash flowsBharti Airtel Ltd. (Bharti, Ba1 negative), a leading mobile-service provider in India, has completed two transactions to raise cash fordebt reduction. The first transaction was a rights issue in May, which raised INR250 billion ($3.5 billion), and the second was the $750million listing (including greenshoe) of its African subsidiary, Airtel Africa, at the end of June.

Intense competition and disruptive pricing tactics in the Indian telco market following Reliance Jio Infocomm Ltd's (Reliance Jio) launchin September 2016 have driven a significant contraction in Bharti's profitability while debt levels climbed higher (see Exhibits 1 and 2).Given the fall in profitability and high spending requirements, Bharti turned to inorganic measures to strengthen its balance sheet andimprove cash flows.

Exhibit 1

Weak profitability at Bharti's Indian mobile segment drags down consolidated EBITDAIndian mobile accounted for 36% of EBITDA in fiscal 2019, down from 64% in fiscal 2017

64%

50%36%

13%

18%

20%

8%

11%

12%

14%

22%

32%

0

50

100

150

200

250

300

350

400

FY2017 FY2018 FY 2019

INR

bill

ion

s

Mobile (India) Non-mobile (India & SSEA) Towers (Infratel) Africa operations (Airtel Africa)

Fiscal year-end is 31 March. EBITDA breakdown as provided in company's quarterly reports.Source: Company reports

Exhibit 2

Reported debt (bank and bonds) at the Indian operations has climbed since fiscal 201770%-75% of consolidated debt sits with Indian operations at fiscal 2019

14% 16%

38%44% 42%

35%42% 42%

27%

0

200

400

600

800

1,000

1,200

1,400

FY2017 FY2018 FY 2019

INR

bill

ion

s

India operations (bank debt and bonds) India operations (deferred spectrum liabilities) Africa operations (Airtel Africa)

Fiscal year-end is 31 March. Reported debt as provided in company's quarterly reports.Source: Company reports

Bharti's reported consolidated debt registered at INR1,254 billion at March 2019. Around 70%-75% of this debt is associated with theIndian operations (including INR440 billion of spectrum liabilities). Debt levels are even higher (around INR1,615 billion) when includingMoody's adjustments primarily related to operating leases). (See Appendix 1, Exhibit 7 for debt breakdown).

We expect Bharti to use at least 85% of the proceeds from its recent $3.5 billion rights issue to repay higher coupon domestic debtassociated with its Indian operations. This means reported debt at the Indian operations will fall around 23% from its reported level at31 March 2019 or around 27% if Bharti applies 100% of the proceeds debt reduction (see Exhibit 3, “Rights Issue”).

While Bharti did not receive any cash directly from Airtel Africa's $750 million initial public offering (IPO), we expect proceeds will beused to reduce the subsidiary's debt levels (see Exhibit 3, “Airtel Africa IPO”).

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 19 July 2019 Bharti Airtel Ltd.: Leverage is improving, but rating stabilization will be driven by operational improvement in Indian mobile

MOODY'S INVESTORS SERVICE CORPORATES

Pro forma for these two transactions – assuming 85% to 100% of proceeds are used to reduce debt – we estimate adjusted pro formaconsolidated leverage improved to around 4.1x-4.2x, from 5.1x at fiscal year-end March 2019. These metrics reflect our adjustmentsto deconsolidate Bharti's 53.5%-owned telco tower operator Bharti Infratel Limited (Infratel) given the company's intention to selldown its stake significantly. (See Appendix 1, Exhibit 7 for our simplified approach to the deconsolidation.) Airtel Africa remains fullyconsolidated.

As shown in Exhibt 3, despite a significant fall in Bharti's absolute debt, leverage remains above 3.5x, the level which could prompta stabilization of the ratings outlook. Moreover, rating stabilization requires a sustained operational improvement in Bharti's Indianmobile segment.

Exhibit 3

Leverage drops to 4.1x-4.2x, assuming nearly all proceeds from recent capital-raising transactions are applied to debt reductionMoody's proforma: We assume cash is applied to debt reduction as of 31 March 2019

Consolidated reported debt of INR1,254 billion at fiscal year-end March 2019, composed of INR920 billion of reported debt at the Indian operations and INR334 billion of reported debt atAirtel Africa. Pro forma leverage metrics include Moody's standard adjustments. FX rate of $1 is to INR69. Projections above are based on Moody's proforma illustrative analysis and doesnot represent the views of the issue.Sources: Company filings, Moody's Financial Metrics, Moody's Investors service estimates

Sale of a significant stake in its tower assets would aid further debt reductionWe expect Bharti to ultimately sell a significant stake in the tower company formed from the merger of Infratel and Indus TowerLimited (TowerMergerCo). A stake sale would aid further debt reduction and also provide a cash buffer amid ongoing competition inthe Indian mobile market and potential 5G auctions.

As shown in Exhibit 4, Bharti has divested shares in Infratel opportunistically over the last few years. Although cash is fungible, webelieve the cash raised was used primarily to support the company's Indian mobile operations.

Exhibit 4

Bharti has monetized an 18.5% stake in Infratel since March 2017 for $1.86 billionMost of the proceeds have been used to support Bharti's Indian mobile operations

All shares sold during this period were held by Bharti's wholly owned subsidiary Nettle Infrastructure Investments Ltd. We believe Nettle serves as a selling vehicle of shares to third parties.Sources: Company announcements and filings

3 19 July 2019 Bharti Airtel Ltd.: Leverage is improving, but rating stabilization will be driven by operational improvement in Indian mobile

MOODY'S INVESTORS SERVICE CORPORATES

Although the valuation of TowerMergerCo will be sensitive to market conditions, we consider a hypothetical scenario to estimate theamount of cash proceeds Bharti could raise from a potential stake sale in TowerMergerCo. In this scenario, we assume a premium toInfratel's average closing price in July. We assume that Bharti sells all shares which have been transferred to its wholly owned subsidiary,Nettle Infrastructure Investments Ltd. Shares held by this subsidiary have historically been sold to a third party, as noted in Exhibit 4.

Based on these assumptions, Bharti could raise around $3.5 billion of proceeds while maintaining a minority stake, of around 13%, inTowerMergerCo. This is a Moody's hypothetical scenario and should not be interpreted as predictive of an outcome.

We assume the majority of proceeds are used to repay any remaining bank debt while some cash is held on the balance sheet to ensureadequate financial flexibility should profitability of the Indian operations remain low.

Under this scenario, TowerMergerCo sale proceeds reduce debt further - and following both the rights issue and African unit IPO -consolidated leverage could fall toward 3.2x by fiscal 2020.

Exhibit 5

Moody's illustrative analysis: Following tower asset sale, leverage could fall below 3.5x by fiscal 2020Hypothetical scenario: We assume an additional $3.5 billion of cash proceeds are raised

Based on consolidated reported debt of INR1,254 billion at fiscal year-end March 2019. Pro forma leverage following the tower asset sale is based on our EBITDA expectations for FY2020.Pro forma leverage metrics include Moody's standard adjustments. Projections above are based on Moody's illustrative analysis and does not represent the views of the issue.Sources: Company filings, Moody's Financial Metrics, Moody's Investors service estimates

The projections above exclude any capital outlay for 5G spectrum. Based on reserve pricing as recommended by the TelecomRegulatory Authority of Indian (TRAI), 100MHz of 3300MHz-3600MHz spectrum would cost around INR492 billion ($7.2 billion). Butthe Cellular Operators Association of India (COAI) has mentioned that the recommended price is actually too high for uptake in India.

Given the uncertainty of auction timing combined with Bharti's comments on affordability, we have not included any 5G spectrumauction scenarios in the analysis. That said, even if the government was to bring prices down, there is still potential for a large capitaloutlay.

As a result, should a spectrum auction (including 5G) eventuate over the next 12 months and Bharti actively participates, the significantstrides Bharti has taken to reduce debt may be only temporary.

As a result, an expansion of organic cash flow of its Indian operations is needed to sustain anyimprovement in credit metricsBharti is taking steps to improve profitability of its Indian mobile operations. Minimum recharge plans which were announced inDecember are helping to eliminate non-revenue generating subscribers and have supported a slight uptick in average revenue per user(ARPU) in the fourth quarter ended March 2019.

That said, Moody's believes the home market remains highly competitive. Meaningful expansion of profitability for the Indian mobilesegment requires a material increase in pricing together with a proportional shift in Bharti's subscriber base (existing and new) to 4G,given 4G subscribers still account for less than 30% of its India mobile customer base.

4 19 July 2019 Bharti Airtel Ltd.: Leverage is improving, but rating stabilization will be driven by operational improvement in Indian mobile

MOODY'S INVESTORS SERVICE CORPORATES

Although we do not expect a contraction in pricing over the next 12 months, we also do not expect a meaningful increase in pricing.However, we would revisit this assumption as Jio reaches a 40%-50% subscriber market share (around 30% currently) or the 5Gauction/rollout eventuates, as we believe both factors would stimulate a re-pricing industry-wide.

As a result, although Bharti's EBITDA is improving, we expect earnings to remain under some pressure over the next 12 months ascompetition persists in its home mobile market. We assume adjusted EBITDA of around INR370 billion in fiscal 2020, which ends inMarch 2020, or around INR330 billion if 53.5%-owned telco tower operator Bharti Infratel Limited (Infratel) is deconsolidated. Theseexpectations represent an increase of around 10% in Bharti's reported operational EBITDA over fiscal 2019.

Bharti's consolidated metrics may indicate a stronger profile than cash-flow metrics would suggestAs shown in Exhibit 1, Infratel and Airtel Africa together contributed around 44% of consolidated reported EBITDA in fiscal year 2019.On a consolidated basis, over the last 2.5 years, the improving operating performance of Airtel Africa and stable performance of Infratelhave helped offset the lower profitability of Bharti's India operations.

But Bharti no longer holds 100% of these assets, having diluted its shareholding to raise cash for its core India operations. Bharti hasalready sold down its stake in Infratel to 53.5% from around 79.1% in March 2017.

Bharti's ownership in Airtel Africa has also been diluted to 55% from around 68% just before the subsidiary's recent IPO. Still, Bhartiwill continue to fully consolidate this subsidiary in its financial results as it maintains managerial control.

We will continue to monitor Bharti on a consolidated basis, both in terms of credit metrics and its qualitative business risk position. Forexample, consolidated leverage may improve more quickly than we have shown in Exhibit 3 and Exhibit 5, if Airtel Africa's entire cashbalance – which exceeded $800 million at March 2019 – is also used to pay down its own debt permanently.

However, we also recognize that Bharti's financial metrics on a fully consolidated basis may indicate a stronger credit profile than itsactual cash-flow measures would suggest.

That is because the only portion of Airtel Africa's EBITDA that is available for Bharti's debt service or other cash requirements is theactual dividend income it receives from Airtel Africa. The economic reality is that Bharti's 55% proportional share of Airtel Africa's cashdividends will be lower than the EBITDA being consolidated, and the resultant credit metrics will therefore be weaker than the fullyconsolidated measures.

The composition of Bharti's cash flow is changing and the company will ultimately rely more heavily on organic cash flow from itsIndian operations to meet its cash needs.

Factors that may affect our base case assumptionsWe opined on the deleveraging potential of certain capital-raising transactions, assuming nearly all proceeds are applied to debtreduction. However, there are other factors that will influence our assessment - positively or negatively – over the next 6-12 months.Below are some factors we will be watching closely.

EBITDA growth: Our base case assumes a 5%-10% growth in operational EBITDA in fiscal 2020. An expansion of EBITDA beyond this– stemming from growth in organic profitability of the Indian mobile operations – would be positive for Bharti's credit profile and mayreduce leverage faster than our current expectations.

Capex and cash-flow stability: Our base case assumes around INR250-INR270 billion of consolidated capex in fiscal 2020, mostof which is earmarked for the Indian operations. A lower level of capex could lift free cash flow above our expectations and may alsoreduce leverage faster than our current expectations, a credit positive.

Spectrum auctions: Based on reserve pricing for spectrum intimated by the TRAI (particularly 5G), spectrum purchases could result ina significant cash outlay or incurrence of debt. Any material spend on spectrum which offsets the deleveraging Bharti achieved fromrecent capital-raising activities will be credit negative.

5 19 July 2019 Bharti Airtel Ltd.: Leverage is improving, but rating stabilization will be driven by operational improvement in Indian mobile

MOODY'S INVESTORS SERVICE CORPORATES

Additional debt reduction at Airtel Africa: If all of Airtel Africa's cash on its balance sheet – which exceeded $800 million at March2019 – was also used to pay down debt, Bharti's leverage metrics could fall around 0.1x from those levels shown in Exhibit 3 and Exhibit5. That said, further clarity around Africa's minium cash balance and contingent obligations will also need to be incorporated in ourcredit assessment.

Dividends from Infratel and Airtel Africa: As shown in Exhibit 6, we will consider Bharti's consolidated results but also the economicreality of cash flows based on Bharti's ownership. While Airtel Africa provides revenue diversity, the only cash available to Bharti toservice its own cash obligations is the dividend income it receives from Airtel Africa. We expect this will be less than the EBITDA beingconsolidated (INR83 billion in Exhibit 6) in Bharti's financials.

Airtel Africa's capital structure and strategic importance to Bharti: We take a consolidated approach to monitoring Bharti'sleverage, which includes bonds issued by Airtel Africa's holding company, Bharti Airtel Int'l (Netherlands) BV. (BAIN, Ba1 negative), andguaranteed by Bharti. As noted earlier, additional debt reduction at Airtel Africa above what we have shown in Exhibit 3 and Exhibit5 could improve leverage faster than we expect. We also believe a release of any guarantees of BAIN debt will further indicate thefinancial independence of Airtel Africa, a credit positive for Bharti.

Exhibit 6

Breakout of Bharti's reported consolidated debt and operational EBITDAIllustrative only: Moody's estimates

Source:Company filings, Moody's Financial Metrics, Moody's Investors service estimates

6 19 July 2019 Bharti Airtel Ltd.: Leverage is improving, but rating stabilization will be driven by operational improvement in Indian mobile

MOODY'S INVESTORS SERVICE CORPORATES

Appendix 1Deconsolidation of InfratelBharti intends to sell a significant stake in Infratel following the latter's merger with Indus Towers Limited. Although Bharti consolidatesInfratel, stripping it out allows us to analyze the cash-flow generating ability of Bharti's remaining operations - primarily its Indiaoperations - and credit profile.

To deconsolidate Infratel, we estimated the recapitalization of operating leases related to Infratel's towers, which Bharti will have tolease from TowerMergerCo and net off our expectation of adjusted debt levels at Infratel.

Exhibit 7

After deconsolidating Infratel, Bharti's debt levels rise marginally to INR1,615 billion (March 2019)

441

479

334

3351,589

-25

50

1,615

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Spetum liabilities Indian operations debt Airtel Africa debt Moody's standradadjustments

(pirmairly op leases)

Consolidatedadjusted debt

Less Infrateladjusted debt

Additional operating leaseadjustment

Moody's adjusted debtafter deconsolidatedInfratel (Mar-19 Est)

INR

billio

ns

Moody's adjustment for additional operating leases only with respect to Infratel as lease adjustments assuming towers leased from for Indus Towers has already been accounted for in theconsolidated numbers.Sources: Company filings, Moody's Financial Metrics, Moody's Investors service estimates

Infratel contributed around 12% of consolidated EBITDA (March 2019). As a result, Moody’s adjusted leverage for Bharti increases 0.6xto 5.1x at fiscal 2019 versus 4.5x, reflecting full consolidation (see Exhibit 8).

Exhibit 8

Moody's summary approach to deconsolidating Infratel

Based on Moody's estimates only.Sources: Company filings, Moody's Investors Service estimates

7 19 July 2019 Bharti Airtel Ltd.: Leverage is improving, but rating stabilization will be driven by operational improvement in Indian mobile

MOODY'S INVESTORS SERVICE CORPORATES

Moody’s related publicationsRating Action

» Moody's downgrades Bharti's senior unsecured notes to Ba1 and assigns a Ba1 CFR; outlook negative, 5 February 2019

Credit Opinion

» Bharti Airtel Ltd.: Update following downgrade to Ba1, 27 February 2019

Issuer Comment

» Bharti Airtel Ltd.: Proposed rights issue is credit positive, 4 March 2019

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.

8 19 July 2019 Bharti Airtel Ltd.: Leverage is improving, but rating stabilization will be driven by operational improvement in Indian mobile

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9 19 July 2019 Bharti Airtel Ltd.: Leverage is improving, but rating stabilization will be driven by operational improvement in Indian mobile