CRAB Rating Corporate - Credit Rating Agency of Bangladesh

CRAB RatingPage 2 of 3CorporateHigh Revenue Growth but Low EBITDA and EBITDA MarginsOTBL achieved high revenue growth over the past years. In FY08, the revenue reachedat BDT 19,945.90 million from BDT 13,398.43 million in 2007, registering a growth ofaround 48.87%. In 2009 first quarter, it earned BDT 5770.72 million which was 21.43%higher than first quarter in 2008. OTBL’s financial showed negative EBITDA in the pastyears however in FY08, EBITDA turned to positive. EBITDA Margin as of FY08 is 1.35%,which was -15.84% and -34% in FY07 and FY06 respectively. EBITDA margin of OTBL isyet to reach a comfortable position to be in line with the level of revenue and scale ofoperation and CAPEX plan.Falling ARPUs and increased expenditure on subscriber acquisition and retention costsaffects the EBITDA and its margin. CRAB expects EBITDA margins would not increaserapidly in an environment of falling wireless ARPUs, higher network expansion costs andregulatory pressures. However, redefining its offering as per market need, adding morevalue added features at competitive price, OTBL is expected be able to achieve positivenet profit by 2014 as per projection of OTBL.High CAPEX, Negative FCF and High Leverage Ratios - 3G & WIMAX an EventRiskCAPEX as a percentage of revenue remained high [Q1-2009: 72.46%; FY08:109%;FY07:141.31%; FY06: 106.23%] as significant CAPEX was carried out to increase thenetwork coverage all over the country. Resultantly, FCF of OTBL has remained negativedue to higher CAPEX and financing costs. CRAB notes that CAPEX in absolute termthough low in Q1 2009 compare to the previous years, it is expected to report stable-toincreasingCAPEX (excluding 3G) in the medium term.If the 3G auction is held in FY10, industry CAPEX can potentially exceed previous levels.The impact on financial leverage is difficult to ascertain at this stage, as actual bid pricesmay be materially higher than the expected and that operators may not bid for spectrumin all circles.Orascom Telecom Bangladesh Limited’s (OTBL) ratings factor in its high financialleverage on a net basis. Total debt increased to BDT 24,441.32 million in Q1 2009 fromBDT 21,789.95 million in FY08, resulting in net financialleverage (total adjusted debt net of cash/operating EBITDA) of 19.25 times.As of Q1 2009, OTBL had strong liquidity pressure, with total debt of BDT 24441.32million and a cash balance of BDT 515.51 million, i.e. reflecting a net debt position.The high CAPEX combined with high working capital requirements kept free cash flow(FCF) negative in Q1 2009: -711.43 million; FY08: -31,795.62 million, FY07: -33,847.44million. OTBL achieved a significant improvement in cash flow and coverage position inQ1 2009. For the first time RCF and FFO as percentages of Total Debt became positive3.27%. Coverage ratio which was negative and below 1.0x in the previous years,became 2.64x in Q1 2009. Due to lowering capital expenditure and improvements inEBITDA, EBITDA minus CAPEX as percentages of Gross Interest Expenses shows animprovement in Q1 2009, though it is not yet at satisfactory level. In Q1 2009, theoperating EBITDA cover on net fixed charges also improved to -6.15 timesin FY08 against -18.80 times in FY07, as term loan repayments kept the interestexpense lower in FY08.