OREANDA-NEWS. Fitch Ratings has affirmed Telstra Corporation Limited's (Telstra) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'A'. The Outlook on the IDR is Stable. The Short-Term IDR and the commercial paper rating have been affirmed at 'F1'.

KEY RATING DRIVERS
Strong Mobile Subscribers Growth: Telstra's rating benefits from continued growth in mobile revenues, reflecting growth in mobile subscribers across all sub-product categories - handheld, broadband, hardware and machine-to-machine businesses. Telstra's sizeable investment in mobile infrastructure, including the 4G network, will continue to support both increasing customer coverage and higher data usage in future.

Market-Leading Position: Telstra's rating reflects its leading market share in Australia's fixed-wire and wireless communication markets. It also reflects its superior coverage, reliability and technology leadership of its wireless network and its ownership of a material share of domestic mobile spectrum. A substantial rollout of its 4G network which covered 94% of Australia's population at 30 June 2015, will continue to support its leadership in the mobile segment. Telstra had a total of 7.7m devices on the 4G network at 30 June 2015.

Low-Single-Digit Growth: Telstra's revenue and EBITDA growth will, however, continue to remain in the low single digits, reflecting the declining fixed-voice revenues from fixed-to-mobile substitution. Mobile revenue growth will benefit from increasing data usage and migration of customers to higher plans with higher minimum consumption and increased data penetration. Growth in non-traditional revenue sources such as network applications and services will continue, and is expected to contribute significantly to future revenue. Growth in these services is beneficial, although they have thinner margins than the traditional fixed segment - and therefore their growth dilutes overall margins.

Higher Capex, Network Leadership: Telstra's strong free cash flows relative to competitors are a competitive advantage and facilitate growth in mobile voice and broadband margins, while increasing mobile market share. Telstra's mobile market share continues to reflect its early-mover advantage and substantial investments in the 4G network, compared with SingTel Optus Pty Limited (A/Stable) and Vodafone Hutchison Australia. It will also support higher future capex commitments in extending and accelerating rollout of 4G and 4GX networks. This is reflected in management's guidance of capex to sales ratio of 15% over the financial years ending 30 June 2016 (FY16) and FY17 (FY15: 14%).

Increased Shareholder Proceeds: Telstra has indicated that it intends to distribute surplus-free cash flows that accumulate after setting aside funding for investment expenditure, future capital commitments and funding requirements to retain financial flexibility. Telstra paid out higher final dividend per share of 30.5cents in FY15, up by about 3.4%, compared to 29 cents at FY14. Telstra returned AUD4.7bn in dividends and buyback proceeds to shareholders, following a strong operational performance and increased national broadband network (NBN) inflows in FY15. Forecast dividend growth of approximately 2.5% reflects strong expected growth in Telstra's operational cash flows.

Forecast Stable Credit Metrics: Telstra's financial profile will benefit from continued growth in mobile and data subscriber revenue and increasing non-traditional revenue streams, including the NBN-related payments. Leverage, as measured by funds flows from operations (FFO) - adjusted net leverage, will remain elevated, but within guidelines, reflecting higher capex and dividends. It will benefit from strong and stable internal cash generation.

Lower Borrowing Costs: As Telstra's fixed rate borrowings mature, Fitch expects Telstra to continue to benefit from the relatively lower variable base rates. Telstra's cash borrowing costs decreased by AUD31m, reflecting a lower average interest costs of 5.8% in FY15 (FY14: 5.9%). The reduction is attributed to the fall in variable base interest rates in Australia, reflecting lower costs on floating debt portion, and from re-financings at lower rates.

Liquidity: Telstra's liquidity is good; as at end-June 2015 cash was AUD1.4bn, compared to debt obligations of approximately AUD630m due in FY16. Liquidity is strengthened by ready access to capital markets and banks - in light of recent pricing/demand for the bonds issued in FY15. Telstra issued USD1bn bonds in March 2015 at an all-in-fixed coupon of 4.27%.

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

- mid-single digit revenue growth in FY16 and FY17;
- postpaid mobile subscribers' annual growth rate of 2% over FY16 and FY17 (three year average ending FY15 of approximately 3.5%);
- prepaid mobile subscribers' annual growth rate of 5% over FY16 and FY17 (three year average ending FY15 of approximately 7.5%);
- EBITDA margin of 40% over FY16 and FY17 for the mobile segment (FY15: 40%);
- EBITDA margin of 54% in FY16 and 53% in FY17 for the fixed voice segment (FY15: 55%);
- EBITDA margin of 39% in FY16 and FY17 for the fixed data segment (FY15: 41%);
- capex to revenue ratio of 15% in FY16 and FY17 (FY15: 13.9%); and
- dividend of AUD3.8bn in FY16 and AUD3.9bn in FY17 (FY15: AUD3.7bn).

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO?adjusted net leverage being above 2x (FY15: 2.0x) on a sustained basis
- Negative free cash flow after dividends on a sustained basis

Positive: Given sector-related risks, a rating upgrade is unlikely in the medium term.