Professional Documents
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BHARTI AIRTEL
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 Contents
ABSTRACT...............................................................................................................................................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 2
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 3
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.
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 6
Cash flow and Ratio analysis of the organization Overview of the recent acquisitions by Airtel
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 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.
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 Leasehold Land Building Building on Leased Land Leasehold Improvements Plant & Machinery Computer & Software Office Equipment Furniture and Fixtures Vehicles Useful lives Period of lease 20 years 20 years Period of lease or 10 years whichever is less 3 years to 20 years 3 years 2 years/5 years 5 years 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. 9
Investment
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Operating Leases
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 reassessed 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 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. 12
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Total 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
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)
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.
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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.
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.
LOSS
STATEMENT
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.
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
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
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 18
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 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 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 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 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 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 19
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.
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.
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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.
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 Deal
Bharti 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. 21
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. 22
Note: Wireless subscriber addition in Bangladesh has been very low at 6.6mn over the last 12 months despite being just about 30% penetrated
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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 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 didnt 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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