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Indian Institute of Management, Lucknow
Financial Analysis and Accounting Policies
Submitted to: Prof. Madhumita Chakraborty
On 11th September 2010
Submitted by
Hashim S (PGP26015)
Himanshu Agrawal (PGP26016)
Sabareesh Venugopal (PGP26046)
Saumya Nair (PGP26052)
Sravani Polina (ABM07004)
Section “A” Group 2
Table of ContentsABSTRACT..................................................................................................................................................3
BACKGROUND................................................................................................................................................4
INTRODUCTION TO AIRTEL.........................................................................................................................5
ACCOUNTING POLICIES.............................................................................................................................6
Depreciation / Amortization....................................................................................................................6
Revenue Recognition and Receivables....................................................................................................6
Inventory: Ratios and Costing Methodology...........................................................................................7
Investment................................................................................................................................................7
License Fees- Revenue Share..................................................................................................................7
Foreign Currency Translation and Accounting.......................................................................................7
Operating Leases.....................................................................................................................................8
Taxation...................................................................................................................................................8
Borrowing Cost........................................................................................................................................9
Warranty Provisions................................................................................................................................9
BALANCE SHEET ANALYSIS......................................................................................................................9
Total Shareholders’ Funds.....................................................................................................................10
Long Term Loans..................................................................................................................................10
Total Liabilities......................................................................................................................................11
Share Capital..........................................................................................................................................11
Total Reserve Excluding Retained Earnings.........................................................................................12
Plant and Machinery (Gross Block)......................................................................................................13
Gross Block...........................................................................................................................................13
Current Assets........................................................................................................................................14
Deferred Tax..........................................................................................................................................14
Loans and Advances..............................................................................................................................14
Total Assets...........................................................................................................................................15
PROFIT AND LOSS STATEMENT ANALYSIS..........................................................................................15
Total Revenue........................................................................................................................................15
Total Expenditure..................................................................................................................................16
1
Operating Profit.....................................................................................................................................16
CASH FLOW ANALYSIS............................................................................................................................17
Cash Flow from Operations...................................................................................................................17
Cash Flow from Investment Activities..................................................................................................18
Cash Flow from Financing Activities....................................................................................................18
Liquidity................................................................................................................................................18
RATIO ANALYSIS......................................................................................................................................19
Profitability Ratios.................................................................................................................................19
Net Profit (PAT) / Sales Ratio...............................................................................................19
Fixed Asset Turnover............................................................................................................20
Liquidity Ratios.....................................................................................................................................20
Current Ratio.........................................................................................................................20
Quick Ratio............................................................................................................................20
Debtor Turnover Ratio...........................................................................................................20
Solvency Ratios.....................................................................................................................................21
Debt-to-Equity Ratio.............................................................................................................21
Interest Cover.........................................................................................................................22
Return on Capital Employed.................................................................................................22
THE DUPONT RATIO Analysis..........................................................................................................22
Profitability: Net Profit Margin.............................................................................................23
Operating Efficiency or Asset Utilization: Total Asset Turnover.........................................23
Leverage: The Leverage Multiplier (Total Assets/Capital Employed).................................23
MAJOR ACQUISITIONS.............................................................................................................................24
Bharti Warid Deal..................................................................................................................................24
Bharti Zain Deal....................................................................................................................................26
CONCLUSION............................................................................................................................................29
2
ABSTRACT
Financial analysis is a useful tool used by analysts to dig out information from the balance sheets and the
Profit and Loss statements of the company in order to predict the future of the company and to compare
it against the results of the peer companies and the market scenario. It also gives an indication of the
financial health of the company which would enable the investors to make informed decision to invest in
the company.
The analysis also involves looking at the various accounting policies and practices used by the company
which a huge impact on the final results has shown by a company.
In this report, we analyzed the financial accounting policies and financial statements of Bharti Airtel. An
analysis of key financial ratios like equity to debt ratio, turnover ratio etc is performed to check the
health of Bharti Airtel. A comparison is also drawn between Bharti Airtel and its peer companies like
Vodafone, Idea, and RCOM to understand where Bharti Airtel stands in the market.
3
BACKGROUND
The Indian telecommunications industry is one of the fastest growing in the world. According to the
Telecom Regulatory Authority of India (TRAI), the number of telephone subscriber base in the country
reached 653.92 million as on May 31, 2010, an increase of 2.49 per cent from 638.05 million in April
2010. With this the overall tele-density (telephones per 100 people) has touched 55.38. The wireless
subscriber base has increased to 617.53 million at the end of May 2010 from 601.22 million in April
2010, registering a growth of 2.71 per cent.
The Indian telecommunications industry is one of the fastest growing in the world. According to the
Telecom Regulatory Authority of India (TRAI), the number of telephone subscriber base in the country
reached 653.92 million as on May 31, 2010, an increase of 2.49 per cent from 638.05 million in April
2010. With this the overall tele-density (telephones per 100 people) has touched 55.38. The wireless
subscriber base has increased to 617.53 million at the end of May 2010 from 601.22 million in April
2010, registering a growth of 2.71 per cent.
The key players in this market consist of companies like Bharti Airtel, Vodafone, Reliance
communication, Tata telecommunications, Uninor etc. With the competition level perpetuating in the
market, these companies are under severe price and revenue pressures. Even under these conditions
Bharti Airtel is able to sustain growth and retain its market leader position. In this report, we analyze the
financial accounts and accounting policies of Bharti Airtel from an academic point of view. The
objective in this analysis is to
Understand the accounting policies followed by Bharti Airtel, and identify changes in the
accounting policy, if any,
Analysis of the key items in the Balance sheet and Profit and Loss Statement
Cash flow and Ratio analysis of the organization
Overview of the recent acquisitions by Airtel
4
INTRODUCTION TO AIRTEL
Bharti Airtel Ltd is a provider of telecommunication services with presence in all the 22 licensed
jurisdictions in India and in Sri Lanka. The company is the largest GSM mobile service provider in
India. The company offers an integrated suite of telecom solutions to enterprise customers, in addition to
providing long distance connectivity both nationally and internationally. The company has fourteen
subsidiary companies. The company provides all the services under the Airtel brand. It operates in four
strategic business units, namely Mobile, Tele-media, Enterprise and Digital TV.
Bharti Airtel Ltd was incorporated in the year 1995 with the name Bharti Tele-Ventures Ltd. The
company was promoted by Bharti Telecom Ltd, a company incorporated under the laws of India. The
name of the company was changed from Bharti Tele-Ventures to Bharti Airtel Ltd with effect from
April 24, 2006 in order to reflect their brand essence, objective and the nature of their business activities.
Over years, it has become the largest private telecom service provider in India. Listed on Bombay stock
exchange and National stock exchange, the company floated an Initial public offering (IPO) of
185,336,700 equity shares in 2002 and raised Rs 8,340.15 million through this process. Since then the
company hasn’t offered any more shares in the public market. The share price of Bharti Airtel took a
beating during the recessionary market and fell by more than 50%. Being a robust company, the share
prices of Bharti Airtel are constantly picking up. The recent share price is shown in the below figure.
5
ACCOUNTING POLICIESDepreciation / Amortization Depreciation on fixed assets is provided on the straight line method based on useful lives of
respective assets as estimated by the management or at the rates prescribed under Schedule XIV of the Companies Act, 1956, whichever is higher.
Leasehold land is amortized over the period of lease.
Depreciation rates adopted by the company are as follows:
Asset Type Useful livesLeasehold Land Period of leaseBuilding 20 yearsBuilding on Leased Land 20 years
Leasehold ImprovementsPeriod of lease or 10 years whichever is less
Plant & Machinery 3 years to 20 yearsComputer & Software 3 yearsOffice Equipment 2 years/5 yearsFurniture and Fixtures 5 yearsVehicles 5 years
Software up to Rs.500, 000 is fully depreciated in the financial year placed in service. Bandwidth capacity is amortized on straight line basis over the period of the agreement subject to a
maximum of 18 years. The Entry Fee capitalized is amortized over the period of the license and the one time license fee is
amortized over the balance period of license from the date of commencement of commercial operations.
The site restoration cost obligation capitalized is depreciated over the period of the useful life of the related asset.
Fixed Assets costing up to Rs.5 thousand are being fully depreciated within one year from the date of acquisition.
Revenue Recognition and Receivables MOBILE SERVICES - Service revenue is recognized on completion of provision of services, and on
transfer of all significant risks and rewards to the customer and when no significant uncertainty exists regarding realization of consideration. Revenue from prepaid calling cards packs is recognized on the actual usage basis.
6
ACTIVATION INCOME - Activation revenue and related direct activation costs, not exceeding the activation revenue, are deferred and amortized over the related estimated customer’s relationship period, as derived from the estimated customer churn period.
INVESTING AND OTHER ACTIVITIES - Income on account of interest and other activities are recognized on an accrual basis. Dividends are accounted for when the right to receive the payment is established.
PROVISION FOR DOUBTFUL DEBTS
The Company provides for amounts outstanding for more than 90 days in case of active subscribers, roaming receivables and for entire outstanding from deactivated customers net off security deposits or in specific cases where management is of the view that the amounts from Certain customers are not recoverable.
ACCRUED BILLING REVENUE - Accrued billing revenue represents revenue recognized in respect of Mobile, Broadband and Telephone, and Long Distance services provided from the bill cycle date to the end of each month. These are billed in subsequent periods as per the terms of the billing plans.
Inventory: Ratios and Costing Methodology The inventory (other than inventory with third parties) is physically verified by the management
during the year. Inventory is valued at the lower of cost and net realizablevalue. Cost is determined on First in First out (FIFO) basis.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. The Company provides for obsolete and low-moving inventory based on management estimates of the usability of inventory.
Investment Current Investments are valued at lower of cost and fair market value determined on individual
basis. Long term Investments are valued at cost. Provision is made for diminution in value to recognize a
decline, if any, other than that of temporary nature.
License Fees- Revenue Share The variable License fee computed at prescribed rates of revenue share is charged to the Profit and
Loss Account in the period in which the related revenues are recognized. Revenue for this purpose is defined as adjusted gross revenue as per the respective license agreements.
Foreign Currency Translation and Accounting Initial Recognition
Foreign currency transactions are recorded in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction
Conversion
7
Foreign currency monetary items are reported using the closing rate. Non-monetary items which are carried in terms of historical cost denominated in a foreign currency are reported using the exchange rate at the date of the transaction; and non-monetary items which are carried at fair value or other similar valuation denominated in a foreign currency are reported using the exchange rates that existed when the values were determined.
Exchange differencesExchange differences arising on the settlement of monetary items or on restatement of the Company's monetary items at rates different from those at which they were initially recorded during the period/year, or reported in previous financial statements, are recognized as income or as expenses in the period/year in which they arise.
Operating Leases Where the company is lessee
o Leases where the lessor effectively retains substantially all the risks and benefits of ownership
of the leased term, are classified as operating leases. Lease Rentals with respect to assets taken on Operating Lease are charged to the Profit and Loss Account on a straight-line basis over the lease term.
o Leases which effectively transfer to the Company substantially all the risks and benefits
incidental to ownership of the leased item are classified as finance lease. Assets acquired on Finance Lease which transfers risk and rewards of ownership to the Company are capitalized as assets by the Company at the lower of fair value of the leased property or the present value of the minimum lease payments or where applicable, estimated fair value of such assets.
o Amortization of capitalized leased assets is computed on the Straight Line method over the
useful life of the assets. Where the company is lessor
o Lease income in respect of Operating Lease is recognized in the Profit and Loss Account on a
straight-line basis over the lease term. Finance leases as a dealer lessor are recognized as a sale transaction in the Profit and loss account and are treated as other outright sales.
Taxation Current Income tax is measured at the amount expected to be paid to the tax authorities in
accordance with Indian Income Tax Act, 1961. Deferred income taxes reflects the impact of current year timing differences between taxable
income and accounting income for the year and reversal of timing differences of earlier years. Deferred tax is measured at each balance sheet date based on the tax rates and the tax laws enacted or substantively enacted. Deferred tax assets and deferred tax liabilities across various countries of operation are not set-off against each other as the Group does not have a legal right to do so.
Deferred tax assets are recognized only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized. In situations where the Group has unabsorbed depreciation or carry forward tax losses, all deferred tax
8
assets are recognized only if there is virtual certainty supported by convincing evidence that they can be realized against future taxable profits. Unrecognized deferred tax assets of earlier years are re-assessed and recognized to the extent that it has become reasonably certain that future taxable income will be available against which such deferred tax assets can be realized.
Minimum Alternative tax (MAT) credit is recognized as an asset only when and to the extent there is convincing evidence that the Group will pay normal income tax during the specified period. In the period / year in which the MAT credit becomes eligible to be recognized as an asset in accordance with the recommendations contained in guidance Note issued by the Institute of Chartered Accountants of India, the said asset is created by way of a credit to the Profit and Loss Account and shown as MAT Credit Entitlement.
Borrowing CostBorrowing cost attributable to the acquisition or construction of a qualifying asset is capitalized as part of the cost of that asset. Other borrowing costs are recognized as an expense in the year in which they are incurred.
Warranty ProvisionsProvision for Warranty and ARO is based on past experience and technical estimates. Provisions are recognized when the Group has a present obligation as a result of past event; it is more likely than not that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current best estimates.
BALANCE SHEET ANALYSIS
A Common size Balance Sheet is prepared for each year (with Total Assets as base), and each balance sheet item is compared over the years so as to give a better overall picture of the Financial health of the company. The Common size balance is used, since it gives a better idea of the growth of the company, and help in the easy comprehension of Key Ratios.
The Common size balance sheet is given in Appendix A. It mainly comprises –
1. Liabilities + Equitya. Total Share-Holders Funds
i. Share Capital (Equity Financing)ii. Reserves (Retained Earnings, General Reserve etc.)
b. Long Term Loansi. Secured Loans
ii. Unsecured Loans
9
c. Current Liabilities (Taken to the Assets side as a difference)d. Deferred Tax Liabilities (Taken to the Asset side as a difference)
2. Total Assetsa. Net Block (Plant & Machinery, Less Depreciation etc.)b. Current Assets, Loans & Advancesc. Deferred Tax Asset
The Following analysis is made on common size balance sheets (with Total Assets as base 100) from 2001-02 till 2009-10 data.
The table shows dates in the X-axis, with ‘10’ specifying Mar-2010, and ‘1’ specifying Mar-01, as applicable. All figures are in (Rs. Crores)
Total Shareholders’ Funds
Mar 10
Mar 09
Mar 08
Mar 07
Mar 06
Mar 05
Mar 04
Mar 03
Mar 02
Mar 01
0
20
40
60
80
100
120
Share CapitalReserves TotalTotal Shareholders Funds
It is seen that the Total-Shareholders funds were initially (2001) derived from Reserves (Mainly Paid-In Capital by the Promoters), and as years progressed share capital increased to a sizeable percentage of the Total Shareholders’ Funds. The change in 2005 comes due to the acquisition of CMax Infocom Ltd, a Satellite Internet service provider. It was renamed to SatCom Broadband Equipment Limited.
Long Term Loans
Mar 10
Mar 09
Mar 08
Mar 07
Mar 06
Mar 05
Mar 04
Mar 03
Mar 02
Mar 01
0
10
20
30
40
50
60
Secured LoansUnsecured LoansTotal Debt
It can be seen that the Long Term loans mainly comprise the unsecured loans, over the secured loans. This gives impetus to the fact that CRISIL and ICRA have rated Airtel at the top end of their rating
10
scales, both for short term (P1+ / A1+) as well as long term (AAA / LAAA). The secured loans are mainly from non-convertible debentures and unsecured loans sourced from Banks (~50%) and others (~50%). The Secured Loans (as a % of TA) decreased dramatically in 2005, as per the Management decision. The required funds were obtained from the divestitures in Bharti Telecom Ltd.
Total Liabilities
Mar 10
Mar 09
Mar 08
Mar 07
Mar 06
Mar 05
Mar 04
Mar 03
Mar 02
Mar 01
0
20
40
60
80
100
120
Total Shareholders FundsTotal DebtTotal Liabilities
As it could be seen, the present financial health of the company is very sound, as in 2010 (referred as 10). The Leverage factor of Airtel is seen to be very low, but it could be seen as a deliberate Management decision, considering the highly competitive Telecom market in India. The Total Debt was reduced due to the divestitures in Bharti Telecom Ltd.
Share Capital
402474024640245402444024340242402414024040239402380
500
1000
1500
2000
2500
3000
Equity AuthorisedEquity Paid UpEquity Paid UpEquity Authorised
The Equity Paid-up has more or less been consistent at Rs. 1898.77 cr, out of Rs. 2500cr shares (total value authorized). (10 shows 2010 year)
11
Total Reserve Excluding Retained Earnings
2010 2009 2008 2007 2006 2005 2004 2003 2002 20010
50
100
150
200
250
300
350
400
Debenture Redemption ReserveCapital ReservesTOTAL REVALUATION RESERVE
2010 2009 2008 2007 2006 2005 2004 2003 2002 20010
500
1000
1500
2000
2500
3000
3500
4000
4500
General Reserves
Share Premium
Debenture Redemption Reserve
Capital Reserves
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001-5000
0
5000
10000
15000
20000
25000
30000
35000
40000
Profit & Loss Account BalanceTotal Reserves
The three plots show that Retained Earnings from the bulk of the Total Reserves. However, excluding RE, share premium contributes maximum. Another point to note here is that, in 2005 due to divestitures of Bharti Telecom Ltd. Also the Retained Earnings hit negative, due to costly acquisition of CMax Infocom Ltd.
12
Plant and Machinery (Gross Block)
Mar 10
Mar 09
Mar 08
Mar 07
Mar 06
Mar 05
Mar 04
Mar 03
Mar 02
Mar 01
0
20
40
60
80
100
120
140
160
180
Gross BlockLess : Accumulated DepreciationNet Block
The rapid increase in Gross Block comes with the ‘Goodwill’ Intangible asset (2114 cr. Increase) coming out of the acquisition of CMax Infocom Ltd.
Gross Block
10 9 8 7 6 5 4 3 2 10.00
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
30,000.00
35,000.00
40,000.00
GoodwillPlant and MachineryComputers
The Plant and Machinery shows the ‘Gross value’ (un-depreciated value). However a more relevant graph would be to show the relevance of Good will acquired in 2005.
The ‘Computers’ referred in the Gross Block, as per schedules in the Balance Sheer refers to the Total Hardware, Software, and License costs. License Value (Tangible asset) increased with acquiring of new GSM licenses for Southern states, Bihar, and J&K.
10 9 8 7 6 5 4 3 2 10.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
GoodwillComputersFreehold LandBuildings
13
The plot shows the significance of Goodwill (coming through the acquisition of CMax Infocom Ltd.) in 2005.
Current Assets
Mar 10
Mar 09
Mar 08
Mar 07
Mar 06
Mar 05
Mar 04
Mar 03
Mar 02
Mar 01
0
10
20
30
40
50
60
70
80
InventoriesSundry DebtorsCash and BankLoans and AdvancesTotal Current Assets
The Total Current Assets (as % of the Total Assets) dipped in 2005. This is mainly attributed to the increase in Total Assets, while it is seen that Inventory fairly remained constant throughout the period. The Total assets increased due to increase in goodwill arising out of the CMax Infocom Acquisition.
Deferred Tax
Mar 10
Mar 09
Mar 08
Mar 07
Mar 06
Mar 05
Mar 04
Mar 03
Mar 02
Mar 01
0
0.5
1
1.5
2
2.5
3
3.5
Deferred Tax AssetsDeferred Tax Liability
The company follows a healthy tax deferral policy, as seen. From 2006, onwards, the tax deficit has been closing down and finally on Mar-2010, the Deferred Tax Asset is almost equal to the Deferred Tax Liability.
Loans and Advances
10 9 8 7 6 5 4 3 2 10.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
Loans to SubsidiaryDeposits with GovernmentAdvances recoverable in cash or kindDoutbful Debts Provision
14
The Loans and advances mainly come from the loans given to the subsidiaries. Such loans will not feature in the Consolidated Financial Reports (Balance sheet).
The Sundry Debtors comprise 50% debts more than 6 months, and 50% less than 6 months. Hence the Creditors turnover ratio is higher. The ratio analysis is dealt more in detail in the Ratio Analysis section.
Total Assets
Mar 10
Mar 09
Mar 08
Mar 07
Mar 06
Mar 05
Mar 04
Mar 03
Mar 02
Mar 01
0
10
20
30
40
50
60
70
80
Net BlockInvestmentsST Advances (~ Current Asset)
The Total Assets have spurted up with the goodwill from the acquisition of CMax InfoCom. The investments have also reduced with divestitures in Bharti Telecom Ltd. The Company had also taken a decision (concurrent with paying off long term debts in 2005) to reduce the advances in the short term.
PROFIT AND LOSS STATEMENT ANALYSIS
The Analysis is done on a common-size Profit and Loss Account for a period from Mar-05 to Mar-10. The common size P&L statement mainly comprises –
1. Sales Revenue2. Operating Expenses (Wages, Manufacturing cost)3. Other Expenses (Depreciation, Interest
Total Revenue
Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
20
40
60
80
100
120
Total IncomeSales TurnoverOther Income
15
It is observed that the Sales Turnover (Services Revenue) comprises the bulk of the Total Income. Other income sources, such as sale of goods are negligible.
Total Expenditure
Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
10
20
30
40
50
60
70
Total ExpenditureEmployee CostOther Manufacturing ExpensesSelling and Administration Expenses
The Manufacturing charges form the bulk of the Total Expenditure, as compared to the Employee Costs. The Manufacturing Costs, as per the Balance sheet schedules include Access Charges, Network Operating charges, Sales and Marketing, and a small component of Cost of Goods sold.
Operating Profit
Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
20
40
60
80
100
120
Total IncomeTotal Expenditure
It is seen that the Profit Margin for Airtel is more or less constant throughout the period. Though sales have increased, the Operating Profit has also increased by the same rate.
Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
20
40
60
80
100
120
Sales TurnoverGross ProfitAdjusted Net Profit
16
CASH FLOW ANALYSIS
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-15000
-10000
-5000
0
5000
10000
15000
Cash flow for Bharti Airtel
Net Cash from Operating Activities Net Cash Used in Investing Activities Net Cash Used in Financing Activities
Year
Rs.
In
Cro
res
The Cash Flow Statement for Bharti Airtel shows a very healthy financial position. The Net Cash Flow from Operations is positive enough to be funding their investment operations (Cash Flow from Investment Activities). Another important feature from the Cash Flow analysis is that the Net Cash Flow in Financial Activities suggests that their long term loans are being repaid. This is consistent with the low leverage ratio, and decreasing trend of the long term debts.
Cash Flow from Operations
10 9 8 7 6 5 4 3 2 1
-4000
-2000
0
2000
4000
6000
8000
10000
12000
Net Profit before Tax & Extraor-dinary ItemsDepreciationDirect Taxes Paid
The CFO (Cash Flow from Operations) shows a healthy state, with Net Profit before Tax providing the bulk of the Cash Flow from Operations.
17
Cash Flow from Investment Activities
10 9 8 7 6 5 4 3 2 1
-12000
-10000
-8000
-6000
-4000
-2000
0
2000
Purchased of Fixed Assets
Invest.In Subsidiaires
Loans to Subsidiaires
Sale of Fixed Assets
The Investment Activities comprise mainly the Purchase of Fixed Assets. Other investment activities include investment/loans to subsidiaries.
Cash Flow from Financing Activities
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
Proceed from 0ther Long Term BorrowingsRepayment Of the Long Tem BorrowingsDividend Paid
The Financing Activities show a net negative cash flow (outflow) in 2010. The main reason is that since the net long term debts on the Balance sheet is decreasing, cash is used for the repayment of the long term loans, and the new in-take of long term loans is also reduced.
Liquidity
2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
100200300400500600700800900
13.29 22.52 0.3300000000000010.13
384.14307.429999999999
780.46
502.94
790.08
341.53
Chart Title
Cash and Cash Equivalents at End of the year
Year
Rs. In
Cro
re
s
18
As seen from the figure, it is observed that the liquidity position of Bharti Airtel is very sound. The company has a good cash surplus to sustain its operations. There are fluctuations in the overall cash availability but it is mainly due to the repayment of the long term debts, and other investment activities and the new business/ventures which Airtel is getting involved with. In spite of this, there is an upward trend in the cash flow showing the profitability and good health of the company.
RATIO ANALYSISProfitability RatiosOperating Profit (PBIT) / Sales Ratio
Operating profit is obtained by deducting the depreciation and amortization from Gross profit.
2005 2006 2007 2008 2009 20100.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
Bharti Airtel
The Operating profit of Bharti Airtel has improved over last years. The depreciation has been high because of increase in Assets but at the same time sales has also increased, ensuring a healthy profit
Net Profit (PAT) / Sales RatioThis is finally the profit that the company gets to earn after incurring all kinds of expense.
2005 2006 2007 2008 2009 20100.00
0.05
0.10
0.15
0.20
0.25
0.30
19
PAT of Bharti Airtel has significantly improved in the last year. This is in spite of the reduction in the tariff. Increase in sales is the main contributing factor for increase in profits
Fixed Asset TurnoverFixed Asset Turnover Ratio = Sales / Fixed Assets
2005 2006 2007 2008 2009 20100
0.2
0.4
0.6
0.8
1
1.2
1.4
Bharti AirtelReliance Communications
This ratio gives an indication of how efficiently a company uses its fixed assets in doing its business. Bharti Airtel has a ratio which is higher than the industry levels. Dips in the value have been observed in the years where the company has acquired big assets .In general fixed asset turnover ratio displays an increasing trend
Liquidity Ratios
Current RatioCurrent Ratio= Current Asset / Current Liabilities
Current Ratio is an indication of the ability of the company to meet its short term obligation. Pre 2005, Bharti Airtel maintained a very high current ratio, greater than 1, owing to the industry which was in nascent stage with high advance payments and reduced liabilities. Post 2005, current ratio decreased till 2008 and since then has been showing increasing trend. The company has chosen to maintain the current ratio below 1 which is much lower than the competitors. This implies that the company uses short term loans to fund its current liabilities.
Quick Ratio A better approach to measure the ability of a company to meet its short term liability is by excluding the inventory from the current asset. Since the companies are all service oriented, they do not have inventories and hence the liquid ratios are almost similar to the current ratios calculated above.
Debtor Turnover RatioDebtor Turnover Ratio = Sales /Average Debtor
20
2005 2006 2007 2008 2009 20100
5
10
15
20
25
30
Bharti AirtelReliance Communications
Debtors’ turnover ratio indicates the efficiency of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. This ratio would be of greater significance to the lenders as it indicates how sales of a company against the debts. Bharti Airtel Ltd has been able to increase its Debt Turnover ratio due to sharp increase in its sales as compared to its borrowings.
Solvency Ratios
Debt-to-Equity RatioDebt to Equity Ratio = Debt / Equity
2005 2006 2007 2008 2009 2010 2007 2008 2009 20100
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Bharti AirtelReliance Communications
The debt to equity ratio is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. It is considered to be a good practice to optimally use both Debt (financial leverage) and Equities to finance the assets Bharti Airtel Ltd has reduced the Debt to Equity ratio consistently. This is because of the company is reinvesting the Profits into the business. This shows the strong confidence on the future outlook of the business
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Interest CoverInterest Coverage Ratio = PBIT / Interest Expense
2005 2006 2007 2008 2009 20100
5
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35
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45
Bharti AirtelReliance Communications
A ratio used to determine how easily a company can pay interest on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses and lending to such company is a risky proposition for creditors’ .Bharti Airtel Ltd has healthy Interest Coverage Ratio because of increased profit over the period of time.
Return on Capital EmployedROCE = PBIT / (Capital + Reserve + Long Term Liability)
ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce shareholders' earnings
2005 2006 2007 2008 2009 20100
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Bharti AirtelReliance Communications
Bharti Airtel has been generating higher returns on equity compared to the competitors ROCE of Bharti Airtel is showing a decreasing trend in the recent years owing to the reduction of PBIT. Reduction in margins and near stagnation of the customer base king its toll on the PBIT.
THE DUPONT RATIO AnalysisThe three components of the DuPont ratio, as represented in equation, cover the areas of profitability, operating efficiency and leverage. Then carrying out decomposition we can study the finer implications.
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Profitability: Net Profit Margin Profitability ratio measures the rate at which sales amount is converted into profit. Bharti Airtel has seen a continuous increase in sales owing to the expanding telecom industry .PAT has suffered because of reduced margins as well as expansion activities of the company. Overall the ration is increasing and thus the profitability of the company has been increasing over time.
2005 2006 2007 2008 2009 20100.00
0.05
0.10
0.15
0.20
0.25
0.30
PAT/Sales
Operating Efficiency or Asset Utilization: Total Asset TurnoverTurnover or efficiency ratios are important because they indicate how well the assets of a firm are used to generate sales and/or cash. While profitability is important, it does not always provide the complete picture of how well a company provides a product or service. A company can be very profitable, but not too efficient. Profitability is based upon accounting measures of sales revenue and costs.
2005 2006 2007 2008 2009 20100.00
0.10
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0.50
0.60
0.70
0.80
Sales/Total Assets
Company has been expanding heavily in various geographies and has acquired considerable assets. ARPU has been declining due to tariff war, thus in spite of increase in the customer base, revenue growth have seen saturation.
Leverage: The Leverage Multiplier (Total Assets/Capital Employed)Leverage ratios measure the extent to which a company relies on debt financing in its capital structure. Debt is both beneficial and costly to a firm. The cost of debt is lower than the cost of equity if debt proceeds are invested in projects which return more than the cost of debt, owners keep the residua. But
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ROE = (PAT/Sales) * (Sales/Total Assets) * (Total Assets/Capital Employed) * (Capital employed/Equity)
adding debt creates a fixed payment required of the firm whether or not it is earning an operating profit, and therefore, payments may cut into the equity base and thus increasing the risk.
2005 2006 2007 2008 2009 20100.00
0.50
1.00
1.50
2.00
2.50
Capital Employed /Equity
Bharti Airtel has been conservative in using debt for financing there long term investments. The company has been generating high cash from their operations, been maintaining high general reserves. They have been steadily reducing their leverage.
2005 2006 2007 2008 2009 20100.00
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35.00
40.00
ROE%
As we can see from the above analysis, the company has decent profitability and efficiency figures. Company has been conservative in using debt for financing its activity. ROE is observing a decreasing trend owing to the low leverage maintained.
MAJOR ACQUISITIONSBharti Warid DealBharti bought 70% stake in Warid Telecom in Bangladesh for $300 million. Bangladesh is a fantastic market, 160 million populations, 33% penetration; this entire deal would be funded out of their cash reserves. Analysts said mobile phone density in Bangladesh is only about 33% and the market is primed for rapid growth. The number of mobile phone users is projected to double to 100 million by 2013.
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Bangladesh market and opportunity
Bangladesh with a population of 160mn has 51mn subscribers (Tele-density of 32%) with presence of 6 mobile operators. The competitors for Warid include, Grameen (owned by Telenor), Bangla link (owned by Orascom), Axiata, Teletalk and PBTL. Warid Telecom is the 4th largest operator with just 6% market share. The ARPU in the region at US $2.5-4 is lower than that of Bharti in India at US $5
6%
45%
17%
26%
4% 2%
Bangladesh Mobile Market Share Nov-09Warid Grameen Phone AxiataOrescom PBTL Telenek
Acquisition not meaningful enough considering Bharti’s size
The acquisition of Warid Telecom extends Bharti’s presence to an under-penetrated and high growth market beyond its presence in India and SriLanka. However we believe that the move is neutral for the stock as (1) Warid is a small operator in Bangladesh with just 6% market share (2) The sale of majority stake by Dhabi group at a nominal consideration raises questions the success so far and lack of funding and (3) there would be hardly any profit contribution over the next 2-3 years given small opportunity, low ARPU, decent competition. Incremental EBIDTA contribution from the deal is likely to be just 2%.
Projected Revenue Contribution by Warid to Airtel Revenue
Assuming market grows by 20%, Net addition of Subscribers $32 mnAssuming Warid captures 20% of new subscribers $6.4 mnARPU $2.5Annual Revenue $192 mnBharti's Current Reserve $7.48 bnWarid revenue, as % of Airtel's Current Revenue 2.50%
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Even if we assume that Bangladesh achieves 50% penetration by FY12 and Warid adds 20% of incremental subscribers, then at ARPU of US $2.5 it would clock revenues of US $192mn which is 2.5 -3% of Bharti’s current revenues. At an optimistic EBIDTA margin assumption of 40%, the EBIDTA contribution would barely be ~2% of Bharti’s current run-rate of US $3.5bn EBIDTA. Hence the contribution from Bangladesh would not make meaningful impact on Bharti’s financials.Note: Wireless subscriber addition in Bangladesh has been very low at 6.6mn over the last 12 months despite being just about 30% penetrated
Bharti Zain DealBharti Airtel (Bharti) has acquired the African assets of Zain Telecom (Zain) for US $ 10.7bn. Zain African operations, after reporting strong growth in CY07 and CY08, have deteriorated in CY09. Turning around Zain Africa operations thus assumes critical importance for Bharti to make this acquisition value accretive. The Bharti management has been accredited for its execution capabilities in the Indian territory; however, it has little experience in managing cross-border operations. It therefore remains to be seen if Bharti is able to replicate its domestic growth story in Africa.Zain Group is a mobile telecommunications company founded in 1983 in Kuwait as MTC or Mobile Telecommunications Company, and was later rebranded to Zain in 2007. Zain has commercial presence in 25 countries across Africa and the Middle East, with an estimated work force of 13,000. As of February 2010, about 60% of Zain customers were in Africa although Africa contributed only 15% to the group's net profit. Zain has a total of 65 million customers
Bharti’s Benefits:Africa represents the unexplored continent, full of opportunities. If Bharti can lower Zain costs, it can replicate its Indian model— lower tariffs to get customers to talk more, resulting in higher ARPU (average revenue per user). As compared to India where customers talk for around 400 minutes a month, talk time in Africa is around 150 minutes, around the same it was in India seven-eight years ago.Unlike India, which has 12-13 operators in each area, Africa has three-four. Fixed lines in Africa are even less than in India, so as incomes rise, mobile phones are really the only communication option
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Zain Africa’s wireless telephony services stretches from Sierra Leone in the West to Kenya in the East. Of the 15 countries which are part of deal, the five biggest markets are Nigeria, Democratic Republic of Congo (DRC), Tanzania, Kenya and Uganda and constitute two-thirds of the total subscriber base with penetration rates at about 35 per cent. The average revenue per user (ARPU) for these countries is $5.6, which is lower than the 15-country ARPU average of nearly $8. Except DRC, there are four or less operators in these circles unlike the hyper competition that Bharti has to face back home. On the competition front, except Nigeria and Uganda where it is number two, Zain dominates the other key areas,
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with market shares well in excess of 30 per cent. Operating profit margins in Nigeria and DRC, biggest geographies in the 15-country basket, are at 34 per cent and 21 per cent respectively, which is much less than Bharti’s 40 per cent. Because of the difference, analysts say that if Bharti can improve the operational efficiencies at Zain’s African properties and replicate its low-cost model in the acquired entity, there could be a scope to improve profitability
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CONCLUSION
The Analysis of the Financial Statements of Airtel reveals a story of a company who has weathered successfully the debilitating effects of recession, and has continued and maintained its growth spurt since 2001, where the company went public. The exuberant competition in the Indian Tele-Mobile market has made the Management realize that ensuring the Growth and Expansion into Foreign markets are key factors for Bharti Airtel to maintain its Market Leader position. Bharti Airtel has expanded from a single company in 1995 to a holding company of 22 subsidiaries in 2010. Through the subsidiaries, Bharti Airtel occupies a dominant position in SriLanka, Bangladesh, Singapore, Canada, UK, and in Africa.
The Financial analysis reveals that the company has been able to maintain its Return on Equity at a healthy 25% throughout the period, even with a conservative Leverage ratio. The Financial analysis gives insight on the Management strategy, as on how Airtel has been following a strategy from 2005 to significantly reduce its long term debts, at the same time consolidating its technology by acquiring Communication Technology companies such as CMax InfoCom. Now that in June 2010, with the Bharti-Zain deal, the Management strategy adopted makes complete sense. The Zain deal was financed through long term debts, however since the inherent leverage ratio being low, the company only stood to gain from the Acquisition. Any other company, who didn’t have a decent leverage ratio, would have taken a hit in the stock pricing, but the story was different for Bharti Airtel. With the increased market share, and healthy RoE, Profit Margin, and Leverage ratio, Bharti Airtel looks all set to introduce its Indian Growth story into the under-utilized African economy.
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