Fitch Ratings has affirmed TIM S.A.'s National Long-Term Rating at 'AAA(bra)'.
The Rating Outlook is Stable.
The rating reflects TIM's strong business profile, supported by its significant market share in the Brazilian mobile segment and the company's conservative financial metrics, with reduced leverage and robust liquidity position. The rating also incorporates the expectation that TIM will report solid cash flows from operations (CFFO), supported by growth in its post-paid customer base and average revenue per user (ARPU). TIM is well suited to deal with the competitive and regulated telecommunications sector, which is capital intensive and subject to rapid technological changes.
The Stable Outlook incorporates Fitch's expectation that net leverage will not materially increase and should remain below 1.0x, and that the balance sheet is strong enough to execute ongoing investments for the 5G rollout and the integration of Oi S.A.'s (CC[bra]) mobile assets, which is expected to be concluded in 1Q23.
Key Rating Drivers
Intense Competition: The Brazilian telecommunications sector is capital intensive and regulated by the Agencia Nacional de Telecomunicacoes (ANATEL). Three major operators have remained after Oi sold its mobile operation and competition is expected to remain intense, limiting companies' pricing power. Massive investments required to expand network capacity and coverage are a high barrier to entry. After the incorporation of Oi's subscribers, TIM reached 26.5% market share behind Vivo (Telefonica) with 38.2% and Claro (America Movil) with 33.0%.
Changes in the telecommunications market will continue to require carriers to adopt leaner operational structures and offer data packages at competitive prices. Changing consumer habits and sector regulation resulted to fewer prepaid users, with some migration to post-paid. Fitch forecasts total mobile SIM cards in Brazil will increase 3% annually, mostly driven by machine-to-machine (M2M) use. Fitch expects similar increases in broadband users. In contrast, fixed-line and pay-TV users should decrease 7% and 3% per year, respectively.
Strong Business Profile: TIM is the third-largest mobile operator in Brazil, with 68.7 million subscribers. It has solid coverage and network capacity across the country and will benefit from increased spectrum from Oi and the 5G licenses. Mobile represents 90% of TIM's revenue, while fixed-line accounted for 6% in the LTM ended June 30, 2022. TIM has around 764,000 fixed-line customers and 699,000 residential broadband services users. TIM is not exposed to pay-TV revenues, which are trending downward due to new streaming technologies.
Robust Operating Cash Flows: TIM has a proven capacity to generate robust and growing CFFO in various macroeconomic environments. Fitch projects criteria-based EBITDA of BRL7.1 billion and CFFO of BRL6.3 billion in 2022, and BRL7.8 billion and BRL7.3 billion, respectively, in 2023. This compares with EBITDA of BRL6.6 billion and CFFO of BRL7.9 billion in 2021. CFFO incorporates the payment of 5G obligations estimated at BRL2.3 billion, of which R$2.2 billion have already being disbursed in the first half 2022.
The expected 5G investments are unlikely to materially pressure TIM's cash flow. Capex is expected to remain at 19%-22% of net revenues (equivalent to BRL4.3 billion-BRL4.7 billion), aided by network sharing agreements with Telefonica Brasil, additional spectrum from Oi that requires fewer towers and the deconsolidation of fiber-optic infrastructure, following the sale of 51% of I-Systems (formerly FiberCo). TIM's FCF is forecast to remain strong at BRL544 million in 2022, after dividends of BRL1.0 billion. For 2023, FCF is projected to reach BRL500 million, after dividends of BRL2 billion. Fitch expects no dividend pressure from TIM's controlling shareholder.
High Leverage Headroom: TIM's net leverage is expected to remain below 1.0x, despite high investments and acquisitions. Net debt/EBITDA is likely to increase to 0.3x in 2022, from an average of -0.1x in 2018-2021. TIM has reinforced its cash position by issuing new debt for 5G investments and the Oi acquisition. Net debt increased to BRL2.8 billion as of June 30, 2022, from a net cash position of BRL5.6 billion in December 2021, as TIM paid during the first half 2022 about BRL8.7 billion for the spectrum auction and the acquisition of Oi's mobile assets. From July 2022 to June 2024, TIM is expected to pay about BRL536 million related to the 5G obligations.
Linkage to Telecom Italia: TIM's rating reflects the linkage with its parent Telecom Italia S.p.A.'s rating (BB/Negative) as per application of Fitch's Parent and Subsidiary Linkage Rating Criteria. TIM is 67% controlled by Telecom Italia and has a stronger credit profile than its parent. Per Fitch's criteria, legal ring-fencing is considered porous as there is no effective ring-fencing limiting dividends, and access and control is insulated, as TIM's cash management and funding policy is independent from Telecom Italia, with high degree of autonomy.
Derivation Summary
TIM is rated the same as Telefonica Brasil S.A. (AAA[bra]/Stable), which benefits from its leading position in the Brazilian telecom industry and also maintains a conservative capital structure and strong liquidity. TIM's rating is several notches above the fourth-largest carrier in Brazil, Oi, which is attempting to turn around its business after it sold assets, including its mobile operations.
TIM's rating is equivalent to that of Localiza Rent a Car (AAA[bra]/Stable), which operates in the competitive and capital intensive Brazilian fleet and car rental sector. Like TIM, Localiza has robust liquidity. Although Ache Laboratorios Farmaceuticos S.A.'s (AAA[bra]/Stable) scale is smaller than TIM's, the defensive nature of the pharmaceutical industry resulted in low cash flow volatility over the past five years. The company also has a solid position in the Brazilian pharmaceutical market, with a prominent share in the prescription drug segment.
Key Assumptions
Fitch's Key Assumptions Within Its Rating Case for the Issuer Included
Mobile subscribers of 61.5 million in 2022 and 60.7 million in 2023;
Post-paid subscribers representing about 38% of the total mobile base in 2022 and 39% in 2023;
Lines in service total around 796,000 in 2022 and 775,000 in 2023;
TIM Live broadband of 719,000 users in 2022 and 749,000 in 2023;
Capex of BRL4.7 billion in 2022 and BRL4.6 billion in 2023;
Dividends of around BRL1 billion in 2022 and BRL2.0 billion in 2023.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Not applicable since TIM's National Scale Rating is already at 'AAA(bra)'.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Net debt/EBITDA above 2.5x, sustainably;
Adverse regulatory changes that limit margins;
Increasing competition that leads to market share reductions to below 20% and higher subscriber' acquisition costs;
A downgrade of Telecom Italia S.p.A. of more than one notch may lead to a downgrade of TIM.
Liquidity and Debt Structure
Strong Liquidity: Fitch expects TIM to maintain a solid liquidity position and high financial flexibility. At June 30, 2022, cash and marketable securities were BRL2.3 billion and total debt was BRL5.1 billion, of which BRL249 million matures in the short term. Total debt consisted of BRL2.3 billion with three international financial institutions, BRL1.8 billion in debentures, BRL889 million in 4G and 5G licenses, BRL670 million with BNDES and BNB, net of derivatives.
TIM has good access to the debt market. The company issued BRL1.3 billion of new debt and amortized BRL434 million during the first half 2022, and additional debt is expected to be issued during the second half of the year, reinforcing its cash position. Foreign currency debt represented 30% of total debt and is fully hedged.
Issuer Profile
TIM is the third largest mobile operator in Brazil with 69 million subscribers (26.5% market share) and offers fixed line and wired broadband services. TIM is controlled by Telecom Italia S.p.A. with a 67% stake.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONS
Entity / Debt
Rating
Prior
TIM S.A.
Natl LT
AAA(bra)
Affirmed
AAA(bra)
Page
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TIM S.A. 
