DEPARTMENT OF MANAGEMENT STUDIES

IIT DELHI

SML 870: Advanced Financial Management

Term Paper

Valuation of Bharti Airtel as

Business Firm

SUBMITTED BY:

SANDEEP AGARWAL (2007SMT6678)

GAUTAM AGARWAL (2007SMT7024)

ANURAG SINGH CHAUHAN (2007SMT7029)

Problem Statement

Balak Obama has recently joined Bharti Airtel as a Young Business Leader
(YBL). Being an MBA from the reputed Department of Management Studies-
IIT Delhi, he has been trusted with the task of valuation of Bharti Airtel as a
business firm. The following data is available.
Schedules
Balance Sheet (5 yr period)

(Rs in Crs)
Mar Mar Mar Mar Mar
   Year 08(12)  07(12)  06(12)  05(12)  04(12) 
  INCOME :
 Sales Turnover 25,761.11 17,851.60 11,231.47 7,903.03 0
   Excise Duty 0 0 0 0 0
  Net Sales 25,761.11 17,851.60 11,231.47 7,903.03 0
  Other Income 359.91 148.49 94.3 122.02 63.15
 Stock Adjustments 9.05 30.07 -13.84 11.57 0
   Total Income 26,130.07 18,030.16 11,311.93 8,036.62 63.15
  EXPENDITURE :
 Raw Materials 155.3 53.95 54.42 83.7 0
  Power & Fuel Cost 1,045.16 658.78 26.98 16.69 0.38
 Employee Cost 1,306.57 1,102.03 754.99 488.13 16.84
  Other Manufacturing Expenses 8,184.40 5,813.82 4,404.78 3,139.48 1.29
 Selling and Administration Expenses 3,747.17 2,250.33 1,330.07 869.69 15
  Miscellaneous Expenses 1,056.99 887.6 671.92 538.32 4.16
 Less: Pre-operative Expenses
Capitalised 112.4 1.8 0.85 0.03 0
   Total Expenditure 15,383.19 10,764.71 7,242.31 5,135.98 37.67
  Operating Profit 10,746.88 7,265.45 4,069.62 2,900.64 25.48
  Interest 607.76 310.78 236.81 317 21.36
  Gross Profit 10,139.12 6,954.67 3,832.81 2,583.64 4.12
  Depreciation 3,166.58 2,353.30 1,547.02 1,019.36 3.87
  Profit Before Tax 6,972.54 4,601.37 2,285.79 1,564.28 0.25
  Tax 859.36 495.03 166.52 8.61 -0.12
 Deferred Tax -168.24 47.61 88.14 345 0
   Reported Net Profit 6,244.19 4,033.23 2,012.08 1,210.67 0.37
 Extraordinary Items 48.38 31.19 12.57 28.22 13.29
   Adjusted Net Profit 6,195.81 4,002.04 1,999.51 1,182.45 -12.92
 Adjst. below Net Profit -22.25 -5.92 0 -1,750.02 0
   P & L Balance brought forward 5,533.92 1,456.38 -786.43 0.81 0.44
 Statutory Appropriations 0 0 0 0 0
  Appropriations -41.36 -50.23 -230.73 247.89 0
  P & L Balance carried down 11,797.22 5,533.92 1,456.38 -786.43 0.81
   Dividend 0 0 0 0 0
  Preference Dividend 0 0 0 0 0
   Equity Dividend % 0 0 0 0 0
  Earnings Per Share-Unit Curr 32.9 21.27 10.62 6.53 0
   Book Value-Unit Curr 106.34 60.19 38.71 24.44 26.03
 

Profit and Loss Account (5 yr period)

(Rs in Crs)
   Year Mar 08  Mar 07  Mar 06  Mar 05  Mar 04 
  SOURCES OF FUNDS :
 Share Capital 1,897.91 1,895.93 1,893.88 1,856.09 1,853.37
  Reserves Total 18,285.95 9,517.33 5,439.55 2,677.51 2,971.49
  Total Shareholders Funds 20,183.86 11,413.26 7,333.43 4,533.60 4,824.86
  Secured Loans 52.42 266.45 2,863.37 3,959.88 1.36
 Unsecured Loans 6,517.92 5,044.36 1,932.92 1,034.41 625
   Total Debt 6,570.34 5,310.81 4,796.29 4,994.29 626.36
  Total Liabilities 26,754.20 16,724.07 12,129.72 9,527.89 5,451.22
   APPLICATION OF FUNDS :
  Gross Block 28,115.65 26,509.93 17,951.74 13,240.63 31.84
 Less : Accumulated Depreciation 9,085.00 7,204.30 4,944.86 3,475.64 17.28
  Net Block 19,030.65 19,305.63 13,006.88 9,764.99 14.56
  Lease Adjustment 0 0 0 0 0
  Capital Work in Progress 2,751.08 2,375.82 2,341.25 994.46 0.1
 Investments 10,952.85 705.82 719.7 931.9 1,762.67
   Current Assets, Loans &
Advances
  Inventories 59.94 51.55 18.59 31.58 0
 Sundry Debtors 2,776.46 1,873.30 1,076.17 715.74 0
  Cash and Bank 502.94 780.46 307.43 384.14 0.13
 Loans and Advances 4,666.89 2,587.25 1,857.82 1,204.94 3,693.01
   Total Current Assets 8,006.23 5,292.56 3,260.01 2,336.40 3,693.14
  Less : Current Liabilities and
Provisions
 Current Liabilities 11,957.84 9,459.42 6,477.71 4,207.99 13.56
  Provisions 1,965.10 1,262.33 539.3 249.31 6.99
  Total Current Liabilities 13,922.94 10,721.75 7,017.01 4,457.30 20.55
   Net Current Assets -5,916.71 -5,429.19 -3,757.00 -2,120.90 3,672.59
 Miscellaneous Expenses not
written off 0.2 2.66 7.94 58.34 1.3
   Deferred Tax Assets 436.3 143.74 80.73 168.23 0
  Deferred Tax Liability 500.17 380.41 269.78 269.13 0
   Net Deferred Tax -63.87 -236.67 -189.05 -100.9 0
  Total Assets 26,754.20 16,724.07 12,129.72 9,527.89 5,451.22
  Contingent Liabilities 2,148.87 1,615.17 1,501.51 1,594.47 4,874.99

Values of ReturnMarket and Return Bharti Airtel

Month Market Return Bharti Airtel Return
Apr-03 3435.13 0.1556
May-03 3033.47 0.1331
Jun-03 3386.89 0.017
Jul-03 3665.46 0.3012
Aug-03 3977.86 0.3699
Sep-03 4314.74 0.1667
Oct-03 4742.32 0.1741
Nov-03 4951.1 -0.0535
Dec-03 5424.67 0.2848
Jan-04 5954.15 0.2148
Feb-04 5826.74 0.0292
Mar-04 5612.92 -0.0509
Apr-04 5809.01 0.0456
May-04 5204.65 0.1858
Jun-04 4823.87 0.0141
Jul-04 4972.88 0.0916
Aug-04 5144.17 0.0741
Sep-04 5423.27 0.0653
Oct-04 5701.61 0.0767
Nov-04 5960.75 0.0984
Dec-04 6393.85 0.161
Jan-05 6306.99 0.0684
Feb-05 6595.05 0.0227
Mar-05 6679.18 -0.1233
Apr-05 6379.29 0.0015
May-05 6482.66 0.0964
Jun-05 6925.86 0.0893
Jul-05 7336.7 0.1657
Aug-05 7726.03 0.1022
Sep-05 8272.32 0.102
Oct-05 8220.45 -0.0742
Nov-05 8552.09 0.099
Dec-05 9162.07 0.0428
 Jan-06 9539.67 0.0474
Feb-06 10090.08 0.0081
Mar-06 10857.03 0.0415
Apr-06 11741.74 -0.0119
May-06 11599.16 -0.105
Jun-06 9934.75 0.0655
Jul-06 10557.15 0.0347
Aug-06 11305.04 0.0447
Sep-06 12035.69 0.1408
Oct-06 12637.25 0.1307
Nov-06 13434.02 0.1644
Dec-06 13628.3 -0.0021
Jan-07 13984 0.0177
Feb-07 14142.7 0.0088
Mar-07 12857.74 0.0496
Apr-07 13477.79 0.064
May-07 14156.47 0.044
Jun-07 14334.3 -0.014
Jul-07 15253.42 0.0789
Aug-07 14779.05 0.0077
Sep-07 16046.02 0.071
Oct-07 18500.31 0.0682
Nov-07 19259.55 -0.0037
Dec-07 19827.28 0.0587
Jan-08 19325.66 -0.1059
Feb-08 17727.54 -0.0449
Mar-08 15838.38 0.0006

Source: www.capitaline.com
For valuing the firm, Balak Obama did the following forecasts based on the
data that was available.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

PBDIT 4069.62 7265.45 10746.9 13250 16500 19500 21800 24300 25800 27200

Capex 4700 7500 10000 13000 15000 14000 11000 8000 5000 3500

Depreciation 1547 2353 3166 4100 4800 5100 5600 5900 5800 5600

Change in (3757) (5429) (5916) (6600) (7300) (8100) (9000) (9700) (10300) (10800)
NWC
PAT 1690 3292 5084 6131 7839 9447 10854 12266 13334 14400

No. of 250 250 250 250 250 250 250 250 250 250
Shares Crore Crore Crore Crore Crore Crore Crore Crore Crore Crore
EPS 10.62 21.27 32.90 43.00 53.00 64.00 75.00 86.00 92.00 97.00

Other Given Data:

The yield on 10 yr Central Government Bonds is 7.5%. Market Risk premium

corresponding to telecom industry is 9%.Corporate tax rate applicable is 33%.

You are required to assist Balak in valuation of the firm and draw inferences
from the results obtained.
Solution

Calculation of Bharti Airtel’s Weighed Average Cost of Capital (WACC)

1. Calculation of Cost of equity using Capital Asset Pricing Model (CAPM)

Risk Free Rate: 7.5% p.a (Yield on 10yr central govt bonds)

Market Premium: 9 % (for telecom Industry)

Bharti Airtel’s Beta

We use 5-year monthly data for calculating monthly returns on market

(Sensex) and Bharti Airtel

Beta is calculated using regression equation

R Bharti Airtel= α + β*RMarket + ε

Using the regression analysis tool of excel and the above data, value of beta is
obtained

Beta= .793

Cost of equity of Bhart Airtel= Risk free rate + (Market rate – risk free rate)*β

= .075 + .09*.793

= .1464

Therefore, Cost of Equity: 14.64 %

2. Calculation of Cost of Debt

Secured Loans (In Crores)

Debentures @11.7% Rs 50.00

Vehicle Loan @ 13% Rs 2.42

Total Rs 52.42

Unsecured Loans (In Crores)

Bank loan @18% Rs 6517.9

Total Debt Rs 6570.32

Cost of debt = 0.117*(50/6570.32) + 0.13*(2.42/6570.32) +

0.18*(6517.9/6570.32) = 0.1795

Tax Adjusted Cost of Debt = 0.1795 * (1- 0.33)

= 0.1184 = 11.84%

Weighted Average Cost of Capital

Total Debt Rs 6570.32 Crores

Total Equity Rs 20241.4 Crores

Total Rs 26811.72 Crores

Percentage Debt 24.51 %

Percentage Equity 75.49 %

WACC = 0.2451* 11.84 + 0.7549 * 14.64

= 13.95 %

Determination of Goodwill, using Super profit method (In Crs)

Average profits (Rs 10684.28 + Rs 6437.04 + Rs 3913.22 + Rs 2345.15 =
23379.69)/ 4 = Rs 5844.92

Capital Employed = Total Assets – Current Liabilities & Provisions

= 14765.7
Less Normal Profits = 14765.7 * (0.0735 + 0.09)

Rs 2414.19

Super profits Rs 3430.72

Multiplied by annuity for 5 years at 16.35 per cent (*) 3.247

PV of super profits/ Value of Goodwill Rs 11139.5

Economic Value Added

EVA = [Net operating profits after taxes – (Total capital * WACC)]

Determination of Net Operating Profit after Taxes (In Crores)

Sales Revenue Rs 25703.50

Less Operating Expenditure Rs 15018.8

Operating Profit (EBIT) Rs 10684.7

Less Taxes (0.33) Rs 3525.9

Net Operating Profit After Taxes (NOPAT) Rs 7051.9

Determination of EVA

EVA = [7051.9 – (26875.7 * 0.1395)]

= Rs 3297.4 Crores

TV2015 = FCFF2015 / WACC

= 24800/13.95

= 1777.77
Estimates of Free Cash Flow

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
PBDIT 4069.62 7265.45 10746.9 13250 16500 19500 21800 24300 25800 27200
Less 1547 2353 3166 4100 4800 5100 5600 5900 5800 5600
Depreciation
PBIT 2522 4912 7588 9150 11700 14100 16200 18400 20000 21600
Tax (0.33) 832 1620 2504 3019 3861 4653 5346 6133 6666 7200
PAT 1690 3292 5084 6131 7839 9447 10854 12266 13334 14400
Add 1547 2353 3166 4100 4800 5100 5600 5900 5800 5600
Depreciation
Less Change (3757) (5429) (5916) (6600) (7300) (8100) (9000) (9700) (10300) (10800)
in NWC
Less Capex 4700 7500 10000 13000 15000 14000 11000 8000 5000 3500
FCFF 2294 3574 4166 3831 4939 8647 14454 19866 24434 27300
1777
Net Cash 2294 3574 4166 3831 4939 8647 14454 19866 24434 29077
Flows
PV @14% 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270
Present 2011 2748 2812 2268 2563 3943 5782 6972 7525 7851
Value

Valuation of Bharti Airtel : Rs 44474 crores

Inference:
The net worth of the company is Rs 20,859 crores. The value according to our analysis is Rs 44,474
crores. TheReasons for high valuation can be

1) The market value of assets is more than the book value reflected by balance sheet

2) Telecom industry is in a high growth phase in India and Airtel is the market leader.

3) Goodwill is not reflected in the balance sheet but it is of substantial value

However Free Cash Flow method used for the valuation is not sacrosanct, Other methods like
Capitalization method and Net asset method can be used for valuing the firm

Other Insights

1) Bharti Airtel keeps a negative working capital. It can afford to do it as it has a very good credit rating in
the market and is not expected to default.

2) The have not given dividends to the shareholders uptill now that also has been the reason for
appreciation of Share price.

3) Telecom industry requires very high capital investments and because of Bharti Airtel good balance
sheet position it can invest in capital intensive projects.