OREANDA-NEWS. Fitch Ratings Indonesia has assigned PT Tiphone Mobile Indonesia Tbk (Tiphone) a National Long-Term Rating of 'A-(idn)' with Stable Outlook. At the same time the agency has also assigned Tiphone's IDR2trn bond programme and IDR500bn bond issued under the programme a 'A-(idn)' rating.

Tiphone's rating reflects its strategic business relationship with PT Telekomunikasi Selular Tbk (Telkomsel; AAA(idn)/Stable). Tiphone's main business is the distribution and sale of prepaid vouchers for mobile phone services and the company accounts for 20% of Telkomsel's sales of prepaid vouchers. The rating is constrained by the high working capital needed for its handset sales business; the company forecasts increases in working capital will consume a significant proportion of funds flow from operations over the next four years. Tiphone's credit profile is also affected by Fitch's expectation of higher inventory risks in the handset business as competition in the low-end segment will continue to be intense.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Cash Flow Stability from Telkomsel: Half of Tiphone's EBITDA comes from sales of Telkomsel prepaid vouchers. Tiphone controls 20% of Telkomsel's voucher sales, which is significant in the highly fragmented voucher distribution market. Fitch expects the voucher business to continue to make a significant contribution to cash flows in the medium term, driven by Telkomsel's market leadership in the Indonesian mobile market and as the country's large young, middle-income population continues to drive demand. However, Tiphone acquires the Telkomsel vouchers on the same terms as its competitors and it does not have a long-term contract with Tekomsel.

High Working Capital Needs: Tiphone's working-capital intensive handset business constrains the company's credit profile. The company's cash flow from operations is very weak compared with its revenue and debt. However, Tiphone's handset sales are robust at the moment because Samsung phones, which account for most of Tiphone's handset sales, are among the most popular in Indonesia. This helps mitigate some of the inventory turnaround risk.

Competitive Market for Handsets: We expect competition in handset sales to continue to be intense, especially in the low-end segment. The competition will squeeze margins and the financial profile of Tiphone, which has thin margins, may weaken. Samsung's strong branding, wide product offering and large market share partially mitigate this risk. Although Samsung has financial capacity to invest in marketing to promote sales, it will face growing competition from local or Chinese brands and we expect Samsung's global market share in smartphones to decline over time.

Weak Liquidity: The company relies on the roll-over of short-term facilities, which are secured on working capital and require 20% cash collateral. Our rating assumes that such facilities will continue to be available. We are likely to consider negative rating action if there is any evidence that these lenders become less willing to provide credit to Tiphone or if the terms of credit become less favourable.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Tiphone's prepaid vouchers business expands in line with growth in Telkomsel's prepaid subscribers, and the latter's ability to maintain its majority market share (48% in 2015 and 50% in 2016) in Indonesia's mobile telecommunications market in terms of subscribers
- Samsung handsets continue to dominate Tiphone's handset sales
- Increase in inventory days to 50 days in 2016 from 47 days in in 2015

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Gross debt/ EBITDA above 4x (2014: 3.4x) on a sustained basis
- Net working capital days (account receivable days + inventory days - account payable days) above 70 days (2014: 70 days) on a sustained basis.

Positive: Not expected over the medium term, unless there is evidence of stronger ties to Telkomsel.