Fitch Ratings has affirmed Telefonica Brasil S.A.'s Long-Term National Scale Rating at 'AAA(bra)'.
The Rating Outlook is Stable.
The rating reflects Telefonica Brasil's solid business model, supported by its leading position in the Brazilian telecommunications industry and its conservative financial profile, with robust liquidity and a strong capital structure. Fitch expects the company to report strong operating performance over the next three years, with solid pre-dividend FCF, supported by growth of its post-paid base, fiber-to-the-home (FTTH) broadband services, and new B2B and B2C services. The competitive and regulated telecommunication industry, which is capital-intensive and exposed to rapid technological changes, also is incorporated.
The Stable Outlook incorporates Fitch's expectation that Telefonica Brasil's credit profile will remain strong, with resilient cash flow despite strong dividend distributions and investments having limited impact on leverage.
Key Rating Drivers
Intense Competition: Competition in the Brazilian telecom sector among the three major operators remains intense but rational, limiting companies' pricing power. Under the Vivo brand, Telefonica Brasil has almost 39% mobile market share, followed by Claro, from America Movil S.A.B. de C.V. (A-/Positive) with 34%, and TIM S.A. (AAA[bra]/Stable) with nearly 24%.
Constant investment requirements to expand network capacity are a major barrier to entry. Market dynamics will continue to demand lean operating structures to offer competitive data packages. Fitch expects mobile SIM cards and wired fixed broadband accesses to increase 2% to 3% annually over the next three years, while fixed-lines and traditional pay-TV should decrease 5% to 7%.
Strong Business Profile: Telefonica Brasil is the country's largest carrier, with near 100 million mobile SIM cards, which enables it to adequately dilute fixed costs. The company reports one of the highest average revenue per user in Brazil, at BRL29.2, thanks to its loyal 45% human post-paid and contract client base, with the mobile segment (services and handsets) representing 71% of consolidated revenues. The post-paid base increases to 63% when machine-to-machine and dongles are added.
Nearly 46% of the company's 14 million wired revenue generating units are in the growing FTTH broadband accesses, while the remaining pay-TV and fixed line subscribers are expected to continue experiencing secular disconnections. Others initiatives such as financial services, e-health, e-education, marketplace, cloud, data center and cybersecurity are expected to increase contribution to consolidated results and increase the long-term value of clients by reducing churn.
Low Pressure from 5G Disbursements: Fitch continues to expect no material pressure on Telefonica Brasil's cash flow and capital structure from capex obligations and payments for 5G licenses. The remaining amount for the 5G authorization is BRL1.3 billion, of which BRL351 million is allocated in the short term, while the rest will be paid in annual instalments of BRL61 million until 2040. Annual capex is expected to reach BRL9 billion in 2024 and 2025, in line with 2020-2023 average, aided by the deconsolidation of FiBrasil fiber-optic asset and the slowdown of investments in 4G and 4.5G by the time 5G demand increases.
Strong Operating Cash Flows: Telefonica Brasil's large client base and cost discipline should allow the company to generate robust and growing operating cash flows and FCF before dividends. Fitch projects EBITDA of around BRL16 billion and cash flow from operations (CFFO) of BRL14 billion in 2024, expanding to BRL17 billion and BRL15 billion, respectively, in 2025. FCF is projected to be BRL1 billion in 2024 and BRL1.5 billion in 2025, after an average annual capex and dividends of BRL13 billion. Telefonica Brasil is expected to distribute at least 100% of net profits in 2024-2026 from a combination of dividends, interest on equity, capital reduction, and share buybacks.
Conservative Capital Structure: Fitch expects Telefonica Brasil will maintain net leverage below 0.5x over the next three years, even aiming to maximize total shareholders return. The company's strong FCF forecasts should enable it to amortize debt as it matures with no refinancing needs. Gross and net EBITDA leverage were 0.3x and null, respectively, in the LTM ended March 31, 2024. Fitch projects net debt of around BRL4.5 billion by YE 2024, declining to BRL3 billion in 2025.
Credit Linkage to Telefonica SA: Telefonica Brasil's rating considers the similar credit risk profile of its parent, Telefonica SA (BBB/Stable), as per Fitch's Parent and Subsidiary Linkage Rating Criteria. Telefonica controls 75.3% of Telefonica Brasil. Legal and operational incentives are low due to a lack of debt guarantees and cross-default clauses, as well as no common management structures. Strategic incentives are medium, as Brazil constitutes around 23% of Telefonica's sales and 26% of EBITDA in 2023, though only 3% of the group's total debt, contributing to the overall decline in Telefonica's consolidated net leverage.
Derivation Summary
Telefonica Brasil's rating is commensurate with TIM's credit profile, which benefits from a strong business position as the nation's third-largest mobile carrier, with an estimated 24% market share. Both companies have a robust business and finance credit profile, supported by resilient cash flows, low leverage and strong financial flexibility. The rating is several notches above that of Oi S.A. (D[bra)]), which filed for bankruptcy protection in March 2023.
Telefonica Brasil's rating is equivalent to Localiza Rent a Car S.A. (AAA[bra]/Stable), which operates as the lead participant in the competitive Brazilian fleet and car rental sector. As in telecommunications, the car rental sector is capital-intensive to maintain an updated fleet. Localiza, like Telefonica Brasil and TIM, has low leverage and maintains robust liquidity. Despite its smaller scale compared with Telefonica Brasil, Ache Laboratorios Farmaceuticos S.A.'s rating (AAA[bra]/Stable) reflects its lower business risk amid the defensive nature of the pharmaceutical industry. Ache's operational cash flow is robust and resilient, and its capital structure is conservative.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer Include
Number of SIM cards are 101 million and 103 million in 2024 and 2025, respectively;
Post-paid users represent 64% of the total mobile base in 2024 and 65% in 2025;
Mobile average revenue per user at BRL29.5 in 2024 and BRL30.0 in 2025;
Fixed-services Revenue generating units of 13.2 million in 2024 and 13.3 million in 2025;
Capex of BRL9.0 billion in 2024 and BRL9.2 billion in 2025.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Not applicable, as Telefonica Brasil's National Long-Term Rating is 'AAA(bra)'.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Net leverage sustained above 3.0x, combined with deteriorating liquidity;
Adverse regulatory changes that limit margins;
A downgrade of several notches in Telefonica SA's rating.
Liquidity and Debt Structure
Robust Liquidity: Telefonica Brasil continues to maintain ample leverage headroom to bear investments, debt service, and to distribute high pay-outs without materially changing its robust liquidity and high financial flexibility. The company ended March 31, 2024, with a cash position of BRL6.8 billion and total debt of BRL5.1 billion. During 2Q2024, Telefonica Brasil distributed BRL2.2 billion in interest on equity and has announced BRL1.5 billion capital reduction for July 2024.
Total debt consisted of BRL3.6 billion in debentures (70%), BRL1.3 billion in 5G licenses and obligations (26%), and BRL224 million of other debt (4%). The next material amortization is the first series of the seventh debenture issuance of BRL1.5 billion in July 2025.
Issuer Profile
Telefonica Brasil S.A. is the largest telecom carrier in Brazil with 114 million revenue generating units (RGU), composed of 100 million mobile SIM cards under the Vivo brand (39% mobile market share), and 14 million users of Lines in Service (LIS), fixed-broadband, and pay-TV.
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.
TELEFÓNICA, S.A. 
