42642177 bharti airtel final project report

7/29/2019 42642177 Bharti Airtel FINAL Project Report

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Indian Institute of Management, Lucknow

BHARTI AIRTELFinancial 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


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Table of ContentsABSTRACT...............................................................................................................................................3

BACKGROUND.................................................................................................................................................4

INTRODUCTIONTO 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

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Total Assets...........................................................................................................................................15

PROFIT AND LOSS STATEMENT ANALYSIS.................................................................................15

Total Revenue........................................................................................................................................15

Total Expenditure..................................................................................................................................16

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

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Bharti Zain Deal....................................................................................................................................26

CONCLUSION.........................................................................................................................................29

CONCLUSION

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 companywhich 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.

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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

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Cash flow and Ratio analysis of the organization

Overview of the recent acquisitions by Airtel

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INTRODUCTIONTO 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 hasnt 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.

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ACCOUNTING POLICIES

Depreciation / 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 lives

Leasehold Land Period of lease

Building 20 years

Building on Leased Land 20 years

Leasehold Improvements

Period of lease or 10 years whichever is

less

Plant & Machinery 3 years to 20 years

Computer & Software 3 yearsOffice Equipment 2 years/5 years

Furniture and Fixtures 5 years

Vehicles 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.

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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 uncertaintyexists regarding realization of consideration. Revenue from prepaid calling cards packs is recognized

on the actual usage basis.

ACTIVATION INCOME - Activation revenue and related direct activation costs, not exceeding the

activation revenue, are deferred and amortized over the related estimated customers relationship

period, as derived from the estimated customer churn period.

INVESTINGANDOTHERACTIVITIES - 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.

PROVISIONFORDOUBTFULDEBTS

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 realizable

value. 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 adecline, if any, other than that of temporary nature.

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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 isdefined 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

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 differences

Exchange 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 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.

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. Amortization of capitalized leased assets is computed on the Straight Line method over the

useful life of the assets.

Where the company is lessor

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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

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 Cost

Borrowing 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 Provisions

Provision 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 notthat 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.

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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 + Equity

a. Total Share-Holders Funds

i. Share Capital (Equity Financing)

ii.Reserves (Retained Earnings, General Reserve etc.)

b. Long Term Loans

i. Secured Loans

ii.Unsecured Loans

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 Assets

a. Net Block (Plant & Machinery, Less Depreciation etc.)

b. Current Assets, Loans & Advances

c. 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

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.

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Long Term Loans

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

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

As it could be seen, the present financial health of the company is very sound, as in 2010 (referred as10). 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

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)

Total Reserve Excluding Retained Earnings

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.

Plant and Machinery (Gross Block)

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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

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.

The plot shows the significance of Goodwill (coming through the acquisition of CMax Infocom Ltd.) in

2005.

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

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

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.

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Total Assets

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 Revenue

2. Operating Expenses (Wages, Manufacturing cost)

3. Other Expenses (Depreciation, Interest

Total Revenue

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

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

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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.

CASH FLOW ANALYSIS

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

The CFO (Cash Flow from Operations) shows a healthy state, with Net Profit before Tax providing the

bulk of the Cash Flow from Operations.

Cash Flow from Investment Activities

The Investment Activities comprise mainly the Purchase of Fixed Assets. Other investment activities

include investment/loans to subsidiaries.

Cash Flow from Financing Activities

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

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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 ANALYSIS

Profitability Ratios

Operating Profit (PBIT) / Sales Ratio

Operating profit is obtained by deducting the depreciation and amortization from Gross profit.

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 Ratio

This is finally the profit that the company gets to earn after incurring all kinds of

expense.

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 Turnover

Fixed Asset Turnover Ratio = Sales / Fixed Assets

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

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Liquidity Ratios

Current Ratio

Current 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 theinventory 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 Ratio

Debtor Turnover Ratio = Sales /Average Debtor

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 AirtelLtd 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 Ratio

Debt to Equity Ratio = Debt / Equity

The debt to equity ratio is a financial ratio indicating the relative proportion of equity and debt used tofinance 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 Cover

Interest Coverage Ratio = PBIT / Interest Expense

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 Employed

ROCE = 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

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.

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.

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ROE = (PAT/Sales) * (Sales/Total Assets) * (Total Assets/Capital Employed) * (Capital employed/Equity)


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Operating Efficiency or Asset Utilization: Total Asset Turnover

Turnover 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 completepicture 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.

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

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.

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.

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 ACQUISITIONS

Bharti 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 opportunityBangladesh 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

Acquisition not meaningful enough considering Bhartis size

The acquisition of Warid Telecom extends Bhartis 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% ofnew subscribers $6.4 mn

ARPU $2.5

Annual Revenue $192 mn

Bharti's Current Reserve $7.48 bn

Warid revenue, as % of Airtel'sCurrent Revenue 2.50%

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 Bhartis current revenues. At an optimistic EBIDTA margin assumption of 40%, the EBIDTA

contribution would barely be ~2% of Bhartis current run-rate of US $3.5bn EBIDTA. Hence the

contribution from Bangladesh would not make meaningful impact on Bhartis financials.

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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

Bhartis 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 Africas 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,

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 Bhartis 40 per cent. Because of the difference, analysts say that if Bharti can improve the operational

efficiencies at Zains 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 inAfrica.

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 didnt have a decent leverage ratio, would havetaken 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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