aitel credit rating

8/3/2019 Aitel Credit Rating

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CREDIT RATING OF AIRTEL

Submitted

To

Professor Asit Mohanty

XAVIER INSTITUTE OF MANAGEMENT, BHUBANESWAR

GROUP1

U110010Apil Jain

U110015Ayush Rungta

U110019 - Desaraju Rao

U110025 - K Pallavi Dora

U110030 - Meenakshi Mittal

U110031 - Mohammed Rehan

U110033 - Nitya Mishra

U110034 - Pankaj Arora

U110035Prakhar Agarwal


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U110042Rishi Agarwal

EXECUTIVE SUMMARY

The assignment given was to calculate the credit worthiness of the bank. Hence a detailed

analysis was done on the various ratios which would be needed to ensure that all the facets of

a bank are considered to make a holistic appraisal of the bank.

An analysis of the operating environment of the bank includes both macro and micro factors,

market factors, market position, and financial flexibility. The methodology mainly focuses on

evaluating the financial strength of the entity based on the entitys cash generation and debt

servicing abilities. The analysis is carried out based on the past audited financials. Not only

financial rations, but non-financial dimensions were also considered for the appraisal

The following broad risk parameters were considered for the rating

Business and Industry risk analysis

Inevitably any industry comprises a number of market segments that will exhibit somewhat

better or worse characteristics than the industry as a whole. Consequently, the analysis takes

into consideration the particular segments of the market or industry in which that firm

operates and the extent to which the firms operating environment diverges from the industry

as a whole.

The evaluation of the industry environment requires consideration of the following aspects:

Intensity of competition The relative profitability of the industry The outlook for Industry Profitability Concentration of the market Size of market Barriers to entry and ease of exit Regulatory, accounting & fiscal regimes Market growth potential Threat of substitute products / services

Operating Risk

The companies that operate with high fixed cost in terms of investment in plant and

machinery are subject to higher operating risk. Also the companies which are spread out and

have large number of divisions and impact, any are considered. The other element of the

operational risk is the management of inventory, the process of procurement of raw materials,

quality control, production planning and control, capacity utilization of huge machinery etc.

The companies that have sustainable raw material advantage in terms of location as well aswho have higher productivity due to state of art machinery will score over others.


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People

People factor plays a very critical factor in todays world, where talent is scarce. While the

country may be producing large number of graduates, the employability and finding the right

kind of resource has always been a problem for a number of employers. Effective HR process

management can result in a high competitive advantage. Companies with excellent

recruitment, interview process, training, performance appraisal and motivation plans can

build a successful talent team that cannot be easily replicated by a new company entering the

industry.

Financial Risk Analysis

We looked at a number of financial ratios that give clue for further study of some aspects of

the corporation. The financial ratios that we studied are liquidity ratios, inventory turnover &

asset turnover ratios, asset quality, earnings quality and profitability ratios, leverage and

interest coverage ratio. We discounted the earnings quality as reported by the company, basedon auditor qualifications. We also checked if the accounting numbers show a major deviation

year to year or show a wide departure from the industry averages. We looked at the cash flow

projections as well as the past cash flows

Management Quality

Important considerations include strengths and weakness of key members of management,

depth and stability of top management, and recent and prospective management changes. The

assessment of management is based on such factors as tenure, industry experience, a grasp of

industry issues, and knowledge of customers and their needs. Management's ability andwillingness to develop workable strategies to address its system's needs, to execute

reasonable and effective long-term plans, and to be proactive in leading its company into the

future are assessed.

Final Rating

The final rating obtained was a weighted score of the weighted scores obtained for financial

risk and non-financial risk. The final score obtained was 5.72/6 (or a 95.33%) which

correspond to a AAA rating which implies a minimum risk rating grade. This is owing to the

strong financial management and corporate governance by Airtel which has constantly fared

well in all the aspects since last few years. The industrial processes are also robust which is

evident from the good operating ratios.


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About the Company

Bharti Airtel Limited, commonly known as Airtel, is an Indian telecommunications company

that operates in 20 countries across South Asia, Africa and the Channel Islands. It operates a

GSM network in all countries, providing 2G or 3G services depending upon the country of

operation. Airtel is the fifth largest telecom operator in the world with about 230.8 million

subscribers across 19 countries at the end of June 2011.It is the largest cellular service

provider in India, with over 171.85 million subscribers as of August 2011. Airtel is the 3rd

largest in-country mobile operator by subscriber base, behind China Mobile and China

Unicom.

Airtel is the largest provider of mobile telephony and second largest provider of fixed

telephony in India, and is also a provider of broadband and subscription television services. It

offers its telecom services under the Airtel brand and is headed by Sunil Bharti Mittal. Bharti

Airtel is the first Indian telecom service provider to achieve this Cisco Gold Certification.

To earn Gold Certification, Bharti Airtel had to meet rigorous standards for networking

competency, service, support and customer satisfaction set forth by Cisco.The company also

provides land-line telephone services and broadband Internet access (DSL) in over 96 cities

in India. It also acts as a carrier for national and international long distance communication

services. The company has a submarine cable landing station at Chennai, which connects the

submarine cable connecting Chennai and Singapore.

It is known for being the first mobile phone company in the world to outsource

everything except marketing and sales and finance. Its network (base stations, microwave

links, etc.) are maintained by Ericsson, Nokia Siemens Network and Huawei,business support

by IBM and transmission towers by another company (Bharti Infratel Ltd. in India).Ericsson

agreed for the first time, to be paid by the minute for installation and maintenance of their

equipment rather than being paid up front. This enabled the company to provide pan-India

phone call rates of Rs. 1/minute. Call rates have come down much further.During the last

financial year, Bharti has roped in a strategic partner Alcatel-Lucent to manage the network

infrastructure for the Telemedia Business.

The organisational structure that existed till recently concentrated on the hierarchy of the

operations(not services)inside the company as a whole. The structure depicts the

corresponding operation/region of different in-charges and hence it didn't hold anyone

responsible for each of its services. So, the company found it better to restructure its

organisational chart and it came into implementation from 1 August. The transformed

organisational structure will have two distinct Customer Business Units (CBU) with clear

focus on B2C (Business to Customer) and B2B (Business to Business) segments. Bharti

Airtel's B2C business unit will comprehensively service the retail consumers, homes and

small offices, by combining the erstwhile business units Mobile, Telemedia, Digital TV,


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and other emerging businesses (like M-commerce, M-health, M-advertising etc.). The B2C

organization will consist of Consumer Business and Market Operations.

Airtel is the market leader in India with about 152,495,219 out of the total 745,000,000

subscribers in India or about 20.46% market share as of December 2010.

Company has gone through many mergers and acquisitions in the last few years. In March

2010, Bharti struck a deal to buy the Kuwait firm's mobile operations in 15 African countries,

in India's second biggest overseas acquisition after Tata Steel's $13 billion buy of Corus in

2007. Bharti Airtel completed its $9 billion acquisition of African operations from Kuwait's

Zain, making the firm the world's No. 5 wireless carrier by subscribers.Airtel has reported

that its revenues for the fourth quarter of 2010 grew by 53% to US$3.2 billion compared to

the previous year, newly acquired Zain Africa division contributed US$911 million to the

total. However, net profits dropped by 41% from US$470 million last year to US$291 million

this year due to a US$188 million increase in radio spectrum charges in India and an increase

of US$106 million in debt interest.

On August 11, 2010, Bharti Airtel announced that it would acquire 100% stake in Telecom

Seychelles for US$62 million taking its global presence to 19 countries.


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Rating Model

The weight distribution of the various categories and the scores for Airtel is as follows.

CategoryMax

Score Weight ScoredWeighted

Score

Total

Score(Max 6)

C1 Industry Risk 6 3 6.00 18.00

C2 Business risk 6 2 4.4 8.80 5.72

C3 Management Risk 6 5 5.46 27.30

C4 Financial Risk Category 6 5 5.05 30.30

C5 Facility risk 6 5 6.00 30.00

The Management, financial and facility risk category risk has been given the highest rate as this are

the risk category directly linked to and under the control of the firm and depends on the past

performance and capability of the firm to perform in coming years.

The Industry risk and Business risk have been given low scores owing to uncontrollable factors in

hands of the firm. The score of 5.72/6 corresponds to 95.33% marks and corresponds to rating of

AAA- An exceptionally high position of strength. Very High degree of sustainability (Minimum

Risk).

Weighted

Score Rating Description

6.00- 5.40 AAAAn exceptionally high position of strength. Very High degree of

sustainability..Minimum Risk

5.395.10 AAA high degree of strength on a factor among the peer group. High

degree ofsustainability..Marginal Risk

5.09 - 4.20 AA moderate degree of strength with positive outlookModerate

Risk

4.193.30 BBBA moderate degree of strength with stable or marginally negative

outlook.Average Risk

3.29 -2.40 BBWeakness on a parameter in comparison to peers. Unstable

outlookAcceptable Risk

2.39-1.00 BA fundamental weakness with regard to the factor. Unlikely to

improve under normal circumstances..High Risk

0.90.00 C Caution & Not Acceptable


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INDUSTRY RISK

1 Industry Characteristics (RP)

1.1 Importance to the Economy (RF)

a) Risk Factor :- Importance to the

Economy

- CAGR of more than 19%- Contributes to around 3% of

GDP

- Creates huge opportunity fordirect and indirect employment

Risk Score Weight Weighted

Score

Yes 6 6 30

Not very important 0 6

1.2 Sensitivity of the Industry to Govt. Policies (RF)

b) Risk Factor :- Sensitivity of the Industry to

Govt. Policies

- Independence in setting up call tariff- Contrary to the apprehensions about

MNP, it has not dented the business of

any telecom operator significantly

- Recent corruption in spectrum


Score


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allocation indicates tightening of

noose around the neck in the future

- New guidelines issued by TRAI in2010 about spectrum charges and

M&A will be detrimental, especially

to GSM operatorers

No 6 6 36

Yes 0 6

1.3 Growth outlook (RF)

c) Risk Factor :- Growth Potential/Outlook

- Mobile subscriber base expected to groto 1 bn till 2014

- Saturation in mobile subscriber baseexpected after 2015

- Reduced tariff hurting the bottom-linefor all operators

- Users for the broadband base are goingto reach 100 million mark by 2014,

particularly after the telecom companies

roll out their 3G services


Score

Positive Outlook 6 6 36

Moderate / negative 0 6

Total Weighted Score for Risk Parameter Industry Characteristics = 108/18 = 6


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2 Competitive forces(RP)

a) Risk Factor :- Intensity of Competition

- High competition with increasing number ofplayers

- Focus of competition shifting to tower sharingand value added services

-

MNP has not been able to increasecompetition

- High demand with greater bargaining powerof customers implies consolidation in future


Score

Least Competition 00 6

High Competition 06 6 36

b) Risk Factor :- Barriers to entry for New Players

- High capital investment- Nation-wide network and aggressive sales force

required

- High License fee- Continuously expanding technology implies a

dedicated R&D center

Risk

Score

Weight Weighte

d Score

High Barriers 06 6 36

No/ Medium Barriers 0 6


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a) Risk Factor :- Presence of substitutes/ Threatof Imports

- Products and services from non-traditionaltelecom industries pose serious substitution

threats

- Cable TV and satellite operators, with theirown direct lines into homes, offer broadband

internet services, and satellite links can

substitute for high-speed business networking

needs.

- Delivered by ISPs - not telecom operators -"internet telephony" could take a big bite out

of telecom companies' core voice revenues.

Risk

Score

Weight Weighte

d Score

No Sustitutes 00 6 00

Few / many substitutes available to the borrowers

product

06 6 36

Total Weighted Score for Risk Parameter Competitive forces = 108/18 = 6

3. Industry Financial. (RP)

a) Risk Factor :- ROCE (average for last Three years)

The Return on Capital Employed would be calculated for the

Industry as an average for three years

ROCE = 9.3%

Risk

Score

Weig

ht

Weig

hted

Score


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20% 6 6 36

15% and 20% 3 6

< 15% 0 6

b) Risk Factor :- Profit Margin (average for last Three years)

The actual profit Margin of the Industry for last 3 years is to t be taken

into consideration

Profit Margin - 8%

Risk

Score

Weig

ht

Weig

hted

Score

10% 6 5 30

< 10% 0 5

Total Weighted Score for Risk Parameter Industry Financial = 96/16 =6

c)Risk Factor :- Earning stability

- Increasing competition means lowerrevenue

- Increasing cost of capital due to volatilemarkets

- Substitutes pose a strong threat for thecompany

- HenceNo

Risk Score Weight Weighted Score

Stable Business 6 5 30

No 0 5


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Weighted Average Score of Industry Risk Category

S.

No.

Risk Parameter Risk

Score

Weight Weighted

Score

1 Industry Characteristics

6 6

36

2 Competitive force 6 6 36

3 Industry Financials 6 6 36

1. Total 18 108

Weighted Average Score of Industry Risk Category = 108/18 = 6

Business Risk Category

The business risk of a company is evaluated through a combination of parameters that determine

the companys business position within the industry and its sustainability.

S. No. Risk Parameter Maximum

Marks

1

Business Growth

08

Growth in sales or Growth in income 02

Percentage increase in Operating Profit Margin

(Before Tax) Over the Previous years margin

02

Total Customers Base 02


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Non Voice Revenue as a % of mobile revenues 02

2

Operating Efficiency

08

Population Coverage 02

Management of Operating Costs 02

Average Minutes of Use Per User 01

Prepaid Customers as a % of total customers 01

Average Revenue Per User (ARPU) 01

Technology Adoption & Location Advantage 01

Score Card for Business Growth

Risk Parameter : Business GrowthRisk Factors Range/Value Respective

Score

Score

Growth in sales or income : If the

Growth rate in sales/ income of

the borrowing firm during last

completed year as compared to

the earlier year was

20% (42.11%) 2

2

15% and 20% 1.5

10% and 15% 1

0% and 10% 0.5

0% 0

Percentage increase in

Operating Profit Margin (BeforeTax) Over the Previous years

margin: If the Percentage

increase shows

Increase of 1% 2

0Increase of 0.50% and 1.00% 1.5Increase of 0.25% and 0.50% 1

Increase of 0.10% and 0.25% 0.5

Increase of 0.10% (-8.63%) 0

Total Customers Base ( in cr) 20 2

1.5

15 and 20 (17.87) 1.5

10 and 15 1

0 and 10 0.5

0 0

Non Voice Revenue as a % of

mobile revenues

20% 2

1 15% and 20% 1.5


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10% and 15% (14.6%) 1

0% and 10% 0.5

0% 0

Score Card for Operating Efficiency

Risk Parameter : Operating Efficiency

Risk Factor Range/Value /Situation Respec

tive

Score

Score

Recei

ved

Population Coverage 80% 2

2

60% and 80% 1.5

40% and 60% (14.6%) 1 20% and 40% 0.5

20% 0

Management of Operating Costs: (Operative

costs like Energy/Technology/Employee).

Greater degree of automation normally leads to

optimization of employee costs. Cost of

acquiring technology in technology oriented

industries, engineering, automobiles etc.: this

factor plays an important role. Impact of ITrelated problems and cost of mitigating

measures also needs to be taken into

consideration.

Yes 2

2

No 1

Prepaid Customers as a % of total customers 95% (96.3%) 1

1 90% and 95% 0.75

85% and 90% 0.5

80% and 85% 0.25

80% 0

Average Revenue Per User (ARPU) (in Rs.) 250 1

0.75 150 and 200 (190) 0.75

100 and 150 0.5

50 and 100 0.25

50 0

Average Minutes of Use Per User (in Minutes) 600 1

0.5 450 and 600 0.75

300 and 450 (445) 0.5

150 and 300 0.25

150 0


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Technology Adoption: Adoption of cost

effective technology is very vital in the present

day scenario.

Location Advantage: Location Advantage couldhelp reducing manufacturing cost as well as

selling cost on account of proximity to key

utilities, etc.

1. Availability of utilities such as power etc.2. Working capital management

Yes 1

1

No 0

Total Score = 4.5 + 7.25 = 11.75 out of 16.

MANAGEMENT RISK CATEGORY

S. No. Risk Parameter/ Factors RiskScores

Risk

weight

1. Achievement during last year of targeted NetSales/Income/Receipts as the case may be

5 4

2. Achievement during last year of targeted Net Profits 4 4

3. Capability of the Principal Promoters/Management run thebusiness

4 4

4. No. of years of experience of the Principal Promoters in the line ofbusiness

3 4

5. Financial support to the borrowing firm from the Promoters/Group 3 36. Frequency of change in the Board of Directors 3 37. Qualification of the Board of Directors 3 38. Retention of funds generated from the borrower's business profits 3 2


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9. Transparency in communicating to the Shareholders in the AnnualReport

3 1

1. Achievement during last completed year of targeted Net Sales/Income/Receipts

2. Achievement by Borrower (during last completed year) of targeted Net Profit (after tax)

Risk ScoreWeight Weighted

Score

Achievement (during last completed year) of

targeted Net Sales/Income/Receipts was to be

extent of

100% of the target 5

90% but 100% of target 4 (95%) 4 16

80% but 90% of target 3

70% but 80% of target 2

70% of target 1

Risk

ScoreWeight Weighted

Score

90% and = 100% of the target 4

75% and 90% of the target 3.5(84.5%)

4 14

60% and 75% of the target 3

45% and 60% of the target 2.5

30% and 45% of the target 2

15% and 30% of the target 1.5


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3. Capability of the Promoters/Management to run the business i.e. either they have thebusiness skills to run the business and/or have employed professionals

Risk


Score

Excellent 4 4 16

Very Good 3

Good 2

Satisfactory 1

4. No. of years of experience of the Promoter(s)/Management in the line of business.

5. Financial Support to the borrowing firm from the Promoters/Group

Risk

Score Weight WeightedScore

Whether the promoters or their Group

Concerns are willing to extend financial

support in case of need

Yes

No

03

00

3 9

Whether the promoters or their group

concerns have adequate financial resources to

< 15% of the target 1


Score

10 years 3 4 12

5 years and 10 years 2

5 years 1


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assist the borrower in case of need.

Adequate financial resources

Less than adequate financial resources

No financial resources

03

02

01

3 9

Weighted Score of the Risk Parameter 18/6 = 3 3 9

6. Frequency of change in the Board of Directors

Risk


Score

>5 yrs 3

>4 yrs and 3yrs and


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Score

60% 3

(95%)

2 6

30% and 60% 2

30% 1

9. Transparency in communicating to the Shareholders in the Annual Report


Score

High Transparency 3 1 3

Medium Transparency 2

Transparency only in Financial

Statements

1

Low Transparency 0

Weighted Average Score of MANAGEMENT RISK CATEGORY Risk Category

S. No. Risk Parameter/ Factors RiskScores

Risk

weight

Weighted

Score

1. Achievement during last year of targeted Net

Sales/Income/Receipts as the case may be

4 4 16

2. Achievement during last year of targeted Net Profits 3.5 4 14

3. Capability of the Principal Promoters/Management run

the business

4 4 16

4. No. of years of experience of the Principal Promoters in

the line of business

3 4 12

5. Financial support to the borrowing firm from the 3 3 9


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Promoters/Group

6. Frequency of change in the Board of Directors 2 3 6

7. Qualification of the Board of Directors 3 3 9

8. Retention of funds generated from the borrower's

business profits

3 2 6

9. Transparency in communicating to the Shareholders in

the Annual Report

3 1 3

TOTAL 3.25 28 91

Management Risk : 91/28 = 3.25

Sl.

NoRange

Score to be allotted Weight Weighted Score

1 40% 6 5

2 30% and


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Financial Risk

Profitability (RP)

Operating Profit Margin:

Net Profit Margin

Return on Capital Employed

Sl.

NoRange


1 40% 6 5

2 30% and


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Return on Net worth

Total Weighted Score for Risk Parameter (Profitability) = 128/23 = 5.56

Leverage Ratio

Long Term Debt to Equity Ratio

TOL/TNW

Total Weighted Score for Risk Parameter (Leverage) = 60/11= 5.45

Sl.

NoRange


1 15% 6 (23.84%) 6 36

2 10% and


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Liquidity Ratio

Current RatioSl.No Range


1 1 6 4

2 0.75 and


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Cash Flow Indicator Ratios

Dividend Payout Ratio Net ProfitSl.No. Range

Score to be

allotted Weight Weighted Score

1 5 6(5.38) 6 36

2 4 and


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Auditors Qualifications in the Balance Sheet (RP)

Sl. No Risk Factor :- Qualification by Statutory Auditors (of the

Borrower) in the latest audited Balance Sheet of the Borrower

Major qualifications: such as change in accounting policyaffecting profits adversely, Major deviations in valuation of

Stocks/Other assets, Non-providing or non-availability of critical

information/data for verification by auditors etc.

Minor qualifications: such as Debtors and Creditors balances not

confirmed, stocks not checked physically, etc.

Maximum Marks02

Score

to be

allotte

d

Weigh

t

Weig

hted

Score

1. No qualification of auditor 06 3 182. Minor qualification of auditor 03 3 93. Major qualification of auditor 00 3

Total Weight 3

Total Weighted Score for Risk Parameter (Statutory Auditors) = 18/3 = 6

Audit/Inspection observations in the borrowers account

Risk Factor: Observations of the Bank's internal

inspectors, concurrent auditors, Banks Statutory

auditors, or any other inspecting official with regard to

the borrowers account.

Maximum Marks02

ScoreWeight

Weighted

Score

1 No observation 6 3 18

2 Minor observation 3 3

3 Major observation 0 3

4 Total Weight 3

Total Weighted Score for Risk Parameter (Statutory Auditors) = 18/3 = 6


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Weighted Average Score Financial Risk Category

Total Score in Financial Risk Category = 5.05 (156.61/31)

S.

No. Risk Parameter Score Weight Weighted

Score

1 Profitability 5.56 6 33.36

2 Leverage 5.45 5 27.25

3 Liquidity 2 4 8

4 Efficiency of Working Capital Management 6 4 24

5 Cash Flow Indicators 4.67 6 28

6 Auditors Qualifications in the Balance Sheet 6 3 18

7 Audit/Inspection observations in the borrowersaccount

6 3 18

Total 31 156.61


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Facility Risk

Facility Risk shows the Airtel's response to any bank after availing loan. If it is a new borrower, then

facility risk is not applicable.

Risk Factor: - Conduct and Operations of accounts

Airtel Group and its joint ventures have taken borrowings in various countries towards funding of its

acquisition and working capital requirements. The borrowings comprise of funding arrangements

with various banks and FIIs taken by parent, subsidiaries and joint ventures.

Total borrowings disclosed include

o Unsecured borrowings represented by Rs. 5,468 as of March 31, 2011 (Rs. 3,248 andRs. 8,753 as of March 31, 2010 and March 31, 2009, respectively) and Secured

borrowings represented by Rs. 36,816 as of March 31, 2011 (Rs. 34,541 and Rs.

7,770 as of March 31, 2010 and March 31, 2009, respectively) pertaining to joint

ventures; and

o Unsecured borrowings represented by Rs. 497,080 as of March 31, 2011 (Rs. 49,406and Rs. 110,009 as of March 31, 2010 and March 31, 2009, respectively) and secured

borrowings represented by Rs. 77,344 as of March 31, 2011 (Rs. 14,703 and Rs.

6,489 as of March 31, 2010 and March 31, 2009, respectively) pertaining to Group

excluding joint ventures.

The details of security provided by the Group and its joint venture in various countries, to various

banks on the assets of parent, subsidiaries or JVs are clearly mentioned in the annual report and

to a satisfactory detail. The corporate doesnt have any overdrawing beyond drawing power/limit

but rather has some unused lines of credit. Airtel seems to be complying with timely submission of

stock statements and renewal papers etc.

The details on availability of Personal / Corporate Guarantees to secure proposed exposure,

realisable value of Tangible Collateral Security excluding personal guarantee, frequency of servicing

of existing borrowings etc. arent available in public domain.

However, there have been no irregularities found or report ed in public domain with regard to

Airtels conduct ofaccounts. Hence, it has been given a facility rating score of 20 out of 20.

aitel credit rating

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