OREANDA-NEWS. Fitch Ratings Indonesia has affirmed Indonesia-based PT Telekomunikasi Selular's (Telkomsel) National Long-Term Rating at 'AAA(idn)'. The Outlook is Stable.

'AAA' National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.

KEY RATING DRIVERS

Dominant Market Leader: Telkomsel's rating reflects its dominant market position in the Indonesian mobile telecommunication market. Telkomsel posted revenue of IDR66trn in 2014 - higher than the combined revenue of the second- and third-largest Indonesian operators, PT Indosat Tbk (BBB/Stable) and PT XL Axiata Tbk (XL, BBB/Stable), which had less than IDR25trn each. Telkomsel had more than 140 million subscribers as at end-2014, more than Indosat's 63 million and XL's 59 million combined.

Data-Driven Growth: Fitch expects Telkomsel's revenue to increase by high single digits in 2015-2017 (2014: 10%), driven by the expansion in data revenue. Data revenue rose by 34.2% during 2014, outpacing the 7.8% increase for traditional voice service and 3.5% rise for SMS service. We believe that EBITDA margin could narrow gradually as data replaces more profitable voice and text services.

Solid Liquidity and Financial Profile: Telkomsel's financial profile will remain robust given its solid cash flow generation. Fitch expects the company to continue generating positive free cash flow of around IDR1trn despite potential erosion in EBITDA margin due to higher data contribution, significant capex of around 20% of the revenue, and a dividend pay-out of 80% of net income. We believe that the solid profile will help Telkomsel expand its network coverage and protect its leadership position.

Minimal Impact from Rupiah Depreciation: Fitch believes further depreciation in the Indonesian rupiah will not materially impact the company's profile because it has large rating headroom, with the ratio of net debt to EBITDA likely to remain below 1.0x in 2015-2017 (2014: Net cash position). Telkomsel has 75% of its debt denominated in U.S. dollars and approximately 60% of its capex in US dollars.

Industry Consolidation: We believe that further industry consolidation might happen in 2015 as intense data competition will force smaller and unprofitable telcos to consider exiting the market. Industry consolidation will be positive as it will reduce the overcapacity in the market and bring more stability to the data tariff. During 2014, PT Smartfren Telecom Tbk (CCC(idn)) emerged as the sole code division multiple access (CDMA) operator as PT Bakrie Telecom sold its spectrum asset to Smartfren. Operators such as PT Telekomunikasi Indonesia Tbk (BBB-/Stable) and Indosat have also shut down their CDMA operations.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Single digit revenue growth in 2015-2017
- Gradual narrowing of EBITDA margin as less -profitable data services replace voice and text services
- Capex/revenue of 20% as per management's guidance
- Dividend pay-out ratio of 80%

RATING SENSITIVITIES

No positive rating action is possible as the company is already at the highest level on the National Rating scale.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A significant increase in shareholder return or a major debt funded acquisition could lead to a negative rating action. However, this is unlikely in the short to medium term given the large ratings headroom.