OREANDA-NEWS.  Fitch Ratings has affirmed Indonesian mobile operator PT XL Axiata Tbk's (XL) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB'. Simultaneously, the agency has affirmed XL's National Long-Term Rating at 'AAA(idn)'. The Outlooks are Stable.

A full list of rating actions is at the end of this rating action commentary.

'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
Axiata's Support Drives Ratings: XL's 'BBB' rating reflects the credit strength of its 66.4% parent, Axiata Group Berhad (Axiata). We use the top-down method to assess XL, with Axiata as a basis, to reflect XL's strategic and financial importance to its parent. XL accounted for around 33% of Axiata's revenue and EBITDA in 9M15.

We believe Axiata has sufficient credit strength to support XL, as it did by providing a shareholder loan to XL in its acquisition of PT Axis Telekom Indonesia (Axis) in 2014.

Gradual Deleveraging: Fitch expects XL's funds flow from operations (FFO) adjusted net leverage to improve to around 3.0x-3.2x in 2016 and 2017 (2014: 3.8x). We believe its profit-oriented strategy and the synergies post-integration of Axis will drive earnings recovery in the next two years. Potential monetisation of XL's remaining towers could also serve as a catalyst for further deleveraging.

Low-to-Mid-Single-Digit Growth: XL's revenue for 2016 is likely to grow at low-to-mid-single-digit rates, as it focuses on driving profitability rather than market share. The new strategy is likely to see operating EBITDAR margins stabilising at around 40% in the next two years (2014: 40.5%), as improving data yields and average revenue per user (ARPU) help offset the larger proportion of lower-margin data services in its revenue mix.

Competition to Stabilise: Fitch expects price discipline to continue amidst a more benign competitive environment. Industry consolidation and smaller telcos' increasing emphasis on improving profitability have brought more stability to data tariffs. In our opinion, telcos are likely to focus on offering larger data bundles rather than to compete on price.

Minimal FCF: We think that XL's 2016 cash flow from operations will be just sufficient to meet XL's annual capex budget of IDR6.3trn-6.5trn (2014: IDR7.1trn), driven by accelerated expansion of its 4G network. The reassignment of 1800MHz spectrum for 4G services has now been completed and should lead to progressive long-term evolution (LTE) rollout in major cities. We think XL's goal to improve data yields may lead to lower capex/revenue ratios of around 25%-28% in 2016 and 2017 (2014: 30%).

Exposure to Rupiah Depreciation: XL is exposed to rupiah depreciation, as 50% of its IDR25.4trn debt as at end-October 2015 is in US dollars, of which around 47% is hedged through forward contracts. The remaining 53% of the dollar-denominated debt is unhedged, but comprises the USD500m shareholder loan from Axiata. We see scope for refinancing of US dollar debt should significant weakness continue in the Indonesian rupiah.

LIQUIDITY
Refinancing Needs: XL's IDR3.6trn cash balance as of end-September 2015 would be enough to cover its short-term debt maturities of IDR3.3trn over the next 12 months. However, the company may seek to refinance a portion of its debt due in 2017, when IDR13trn comprising mainly the USD500m shareholder loan will fall due. We believe XL has reasonable refinancing ability, with access to local banks and capital markets.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue to stay relatively flat for 2015, and to grow by low-to-mid-single-digits in 2016-2017;
- Competition to stabilise as smaller telcos shift emphasis towards profitability and away from market share;
- Operating EBITDAR margin of around 40% in 2015-2017; and
- Annual capex/revenue ratio of around 25%-28% in 2015-2017.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- an upgrade in Fitch's credit view of Axiata will benefit XL's international ratings. However, an upgrade of the Foreign-Currency IDR would be contingent on Indonesia's Country Ceiling of 'BBB' being upgraded. XL's Foreign-Currency IDR is currently at the same level as the Country Ceiling.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- a downgrade of Indonesia's Country Ceiling, which would lead to a downgrade in XL's Foreign-Currency IDR
- weakening of linkages with Axiata
- a downgrade of Fitch's credit view of Axiata

FULL LIST OF RATING ACTIONS

PT XL Axiata Tbk
Long-Term Foreign-Currency IDR affirmed at 'BBB'; Outlook Stable
Long-Term Local-Currency IDR affirmed at 'BBB'; Outlook Stable
National Long-Term Rating affirmed at 'AAA(idn)'; Outlook Stable
IDR5trn sukuk ijarah programme affirmed at 'AAA(idn)'
IDR1.5trn issuance of the sukuk ijarah programme affirmed at 'AAA(idn)'