Investing.com -- Fitch Ratings has updated its outlook for Telecom Italia (BIT: TLIT ) S.p.A. (TIM) to positive from stable, while maintaining its Long-Term Issuer Default Rating (IDR) at ’BB’. This change in outlook is a result of TIM’s successful deleveraging and the potential for additional debt reduction.

TIM’s net leverage, which is strongly positioned for its ’BB’ rating, is expected to decrease further up to 2027. The company’s free cash flow (FCF) and cash from operations (CFO) metrics are projected to improve, albeit at a slower pace. The company’s consistent operating results and the potential for reduced interest expenses through further deleveraging could enhance these metrics to match those of its direct competitors, potentially driving further positive rating momentum.

TIM’s net debt, as calculated by Fitch, dropped to about EUR8.8 billion in 2024 from about EUR21.3 billion in 2023. This decrease was largely due to the inclusion of the network disposal proceeds and debt deconsolidation. The company’s EBITDA net leverage is expected to be 2.8x for 2025, the first full year of trading with the new business perimeter after disposals. This figure is projected to fall to 2.4x from 2026, helped by the proceeds from the Sparkle Telecom (BCBA: TECO2m ) network disposal.

In 2024, TIM’s cash flow metrics surpassed Fitch’s expectations, with lower capital expenditures and non-recurring items compensating for weaker-than-expected cash from working capital. However, TIM’s cash generation remains low for its rating, considering the cash generation potential of its service-driven business after network disposals.

TIM is expected to further reduce leverage if it receives compensation from a 1998 concession charge dispute that it has won in the first two of three Italian courts. A resolution is expected by the end of 2025.

Poste Italiane S.p.A. is set to become TIM’s majority shareholder, holding just below the 25% threshold for a mandatory tender offer. This change follows stake swaps between the Italian postal services operator and Cassa Depositi e Prestiti SpA (CDP, BBB/Positive) and stake purchases from Vivendi (OTC: VIVHY ) SE. Since beginning the sale of its wireless network assets in 2024, TIM has adhered to its financial policy, enhanced its business profile, and made progress with its deleveraging plan.

TIM’s revenue and profitability increases are expected to be primarily driven by its enterprise division. From 2025 to 2027, average annual revenue is projected to rise by 2%, aligning it with the lower end of company guidance. The fragmented competitive environment is likely to limit consumer business expansion to below 1% a year to 2027. In contrast, the enterprise division is expected to grow 4.5% annually, and at 1%-2% a year in Brazil, despite the steady depreciation of the local currency.

TIM’s operating profile is stronger than Nuuday’s, due to its leading positions in domestic fixed retail and B2B channels, and its ownership of mobile networks in Italy and Brazil. TIM’s domestic market share surpasses Iliad’s, although the latter benefits from investments in fibre and mobile networks in France and has no FX risk. TIM’s business profile is also broadly aligned with Telefonica Deutschland Holding AG (ETR: O2Dn )’s (TEF DE; BBB/Stable), as it is a leader in Italy, whereas TEF DE is one of the top three operators in its domestic market and relies more on wholesale revenues, leading to higher revenue and margin volatility, compared with TIM’s solid retail position.

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