February 13, 2017 Aircel Cellular Limited Instruments* Amount Rated Rating Action (Rs. crore) Fund-based Non Fund-based limits 17,479^ [ICRA]BBB+ @; rating placed under negative watch *Instrument details are provided in Annexure-1 @ - Under rating watch with negative implications ^These limits are consolidated for Aircel Group; interchangeable among Aircel Limited, Aircel Cellular Limited, Dishnet Wireless Limited and Aircel Smart Money Limited Rating Action ICRA has outstanding long-term rating of [ICRA]BBB+ (pronounced ICRA triple B plus) for the Rs. 17,479 crore bank lines of Aircel Cellular Limited (Aircel)1. The long term rating which was under rating watch with developing implications has been placed under watch with negative implications. The “[ICRA]BBB+@” rating takes a consolidated view on the credit risk profiles of Aircel Limited and its wholly- owned subsidiaries Aircel Cellular Limited, Dishnet Wireless Limited and Aircel Smart Money Limited. The four entities are together referred to as Aircel. Rationale ICRA has taken note of the heightened risks for the company arising from the Supreme Court of India (“SC”) hearing petitions filed by certain quarters and proposing to make certain adverse orders against Aircel, notwithstanding that the underlying proceedings brought against the shareholder of Aircel was dismissed by the special 2G Court on February 2, 2017. The matter pertains to the investigations into acquisition of Aircel by Maxis Communications Berhad (MCB) in 2006. Aircel has filed applications before the SC to present the full facts. While these actions have been undertaken by Aircel, the matter is subjudice, and any adverse order that may be passed by the SC against Aircel may have an impact on its business and financial risk profile. ICRA is closely monitoring the developments in this regard and will take appropriate action accordingly. Key rating drivers Credit Strengths ● Management and promoter strength; 74% equity participation from MCB (through Global Communication Services Holdings Ltd and Deccan Digital Networks Private Limited), who has demonstrated support to Aircel by funding cash losses and support the liquidity of the company and also by funding the recent spectrum acquisitions. ● Pan-India operations in the mobile services segment with strong market presence in its four legacy circles namely - Tamil Nadu, Assam, North East and Jammu & Kashmir. ● Various market segmentation and cost rationalization steps have led to the improvement in the operating profitability over the last few quarters. 100 lakh = 1 crore = 10 million 1 For complete rating scale and definitions, please refer to ICRA’s website www.icra.in or other ICRA Rating Publications. Credit Weakness ● Aircel remains a relatively small player in majority of its telecom circles and exposed to competitive challenges from the established players in these circles. ● Sustained performance improvement would be critical for the company given the increased competitive intensity of the telecom industry. ● Dependence on the continued support of the sponsor in meeting the cash losses and liquidity requirements of the company ● Sizeable debt funded capex has lead to elevated debt levels and weak debt protection indicators. ● Uncertainties regarding the recent developments in the ongoing investigations into acquisition of the company by MCB. Description of key rating drivers highlighted above: Aircel has a pan-India network and an established position in the Indian telecom industry (90.6 mn subscribers as on November 30, 2016). Aircel had witnessed improvement in revenue growth and operating profitability leading to reduction in cash losses over the last few quarters supported by the management’s initiatives and market segmentation strategy. However the pricing power and profitability of the industry has been impacted, by heightened competitive intensity post launch of free voice and data services by Reliance Jio Infocomm Limited and demonetisation. The company has continued to receive funding from its promoters to meet its cash losses and other liquidity requirements. The funding by the promoters has been in excess of the funding required as per the business plan of the company. The Company has recently traded its BWA spectrum in eight circles to Bharti Airtel and has utilized the net proceeds received to prepay the loans of all Lenders on a pro rata basis. The business plan provides for a moratorium on debt servicing till March 2018 thereby providing cushion to company’s cash flows in the medium term. Nevertheless, the ability of the company to maintain its performance in line with the revised business plan would be critical to its liquidity position. The funding requirements are expected to increase given the likely increase in capex intensity of the company and factors impacting industry to support the growth in data services and to meet the debt repayment obligations which would begin from March 2018. The financial profile of the company is characterised by sizeable debt levels taken to fund the capex in the past. This, along with modest EBDITA has led to muted debt-coverage metrics. Going forward, ICRA is of the view that the liquidity and the debt servicing ability of the company would hinge on EBDITA accretion and this along with the funding support from the parent would remain the key rating sensitivities apart from the developments in the court proceedings. Analytical approach: While arriving at the rating, ICRA takes a consolidated view on the credit risk profiles of Aircel Limited and its wholly-owned subsidiaries Aircel Cellular Limited, Dishnet Wireless Limited and Aircel Smart Money Limited. The four entities are together referred to as Aircel. Links to applicable Criteria Rating Methodology for Mobile Service Providers About the Company: Aircel Limited, along with its 100% subsidiaries Aircel Cellular Limited and Dishnet Wireless Limited, is a telecom service provider with a pan India presence. Aircel Limited (Aircel) was incorporated in December 1994 as Srinivas Cellcom Limited and was part of the Chennai based Siva Group of companies. The company started by offering services in the Tamil Nadu circle in April 1999 and has over the years won licences and launched services in all the 22 telecom circles in the country. Later in 2006, Maxis Communications Berhad, Malaysia (Maxis), through its investment holding companies, acquired majority stake in the company. Maxis Communications Berhad, a Malaysian telecom company, holds the majority stake (74%) in Aircel with the remaining 26% held by family members of Mrs. Suneeta Reddy of India. Maxis Communications Berhad also has a substantial shareholding in Maxis Berhad, the leading telecommunication operator in Malaysia. Aircel offers GSM based 2G services in all the 22 telecom circles (out of which services in 13 circles were launched post 2008.) and has also introduced 3G services in select geographies. As of November 2016, the company’s subscriber base stood at 90.6 million with a subscriber market share of 8.2%. Status of non-cooperation with previous CRA: Not Applicable. Any other information: Not Applicable. Rating History for last three years: Table: Rating History Name of Current Rating Chronology of Rating History for the past 3 Instrument years S. Type Rated Month - year & Month - year Month - year & Month - No. amount rating & Rating in Rating in year & (Rs. FY2016 FY2015 Rating in Crores) FY2014 Fund-based Feb 2017 Dec 2015 July 2014* NA Long 1 Non Fund- [ICRA]BBB+ NA term 17,479 [ICRA]BBB+ @ [ICRA]BBB+ & based limits (Stable) *during July 2014 amount was Rs. 25,367 crore Complexity level of the rated instrument: ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in Annexure-1 Details of Instruments Name of the Date of Coupon Maturity Size of the Current Rating and instrument issuance rate Date issue (Rs. Cr) Outlook Fund based – term CY2013 - CY2024 13,729 [ICRA]BBB+ @ Loans Non Fund based - - - 3,400 [ICRA]BBB+ @ limits Unallocated Limits - - - 350 [ICRA]BBB+ @ @ - under rating watch with negative implications Source: Aircel Limited Name and Contact Details of the Rating Analyst(s): Mr. Sabyasachi Majumdar Mr. Harsh Jagnani +91 124 4545 304 +91 124 4545 394 [email protected] [email protected] Mr. Sachin Sachdeva +91 124 4545 307 [email protected] Name and Contact Details of Relationship Contacts: Mr. L Shivakumar +91 22 61143406 [email protected] About ICRA Limited: ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder. For more information, visit www.icra.in © Copyright, 2017, ICRA Limited. All Rights Reserved Contents may be used freely with due acknowledgement to ICRA ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA’s current opinion