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59908624 15135821-airtel-financial-analysis


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59908624 15135821-airtel-financial-analysis

  1. 1. Financial Accounting Bharti Airtel/u107092/u107093/u107094Financial Accounting Project Report on Bharti Airtel Limited Submitted by: Nidhi Agarwal (u107092) Niraj Kumar Mall (u107093) Nishith Sahu(u107094) 1
  2. 2. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Table of Contents1. ACKNOWLEDGEMENTS 42. OBJECTIVE 53. EXECUTIVE SUMMARY 54. ENVIRONMENT ANALYSIS 6 4.1 GOVERNMENT POLICIES 6 4.2 NEW TELECOM POLICY, 1994 6 4.3 NEW TELECOM POLICY, 1999 7 4.4 BROADBAND POLICY, 2004 85. INDIAN ECONOMY AND THE TELECOM SECTOR 11 5.1 GUIDELINES FOR FOREIGN DIRECT INVESTMENT IN TELECOM SECTOR 18 5.2 TRAI GUIDELINES AND OBJECTIVES 20 5.3 TELECOM DISPUTES SETTLEMENT & APPELLATE TRIBUNAL (TDSAT) 21 5.4 CELLULAR OPERATORS ASSOCIATION OF INDIA (COAI) 216. COMPANY ANALYSIS 22 6.1 ABOUT THE COMPANY 22 6.2 CAPITAL STRUCTURE OF BHARTI-AIRTEL 27 6.3 FINANCIAL STATEMENTS 30 6.4 ACCOUNTING POLICIES 327. Ratio Analysis 38 7.1 LIQUIDITY RATIOS 38 7.1.1 Current Ratio 38 7.1.2 Liquid Ratio 39 7.1.3 Absolute Cash Ratio 40 7.1.4 Debtor Days 40 7.1.5 Creditor Days 41 7.1.6 Inventory Days 42 7.2 SOLVENCY RATIOS 42 7.2.1 Debt Ratio 43 7.2.2 Equity Ratio 43 7.2.3 Debt to Equity Ratio 44 7.2.4 Interest Coverage Ratio 45 7.2.5 Debt Service Coverage Ratio 46 7.3 PROFITABILITY RATIOS 47 7.3.1 Gross Profit (PBDITA) / Sales Ratio 47 7.3.2 Operating Profit (PBIT) / Sales Ratio 48 7.3.3 Net Profit (PAT) / Sales Ratio 49 7.4 RETURN ON INVESTMENT 50 7.4.1 RONW 50 7.4.2 ROCE 51 7.4.3 ROTA 51 7.4.4 EPS 52 7.5 EFFICIENCY RATIOS 53 2
  3. 3. Financial Accounting Bharti Airtel/u107092/u107093/u107094 7.5.1 Total Assets Turnover Ratio 53 7.5.2 Debt Turnover Ratio 54 7.5.3 Fixed Asset Turnover 55 7.5.4 Current Asset Turnover 56 7.5.5 Inventory Turnover 578. DUPONT ANALYSIS 59 8.1 THE DUPONT RATIO DECOMPOSITION 60 8.1.1 Profitability: Net Profit Margin (NPM: PBIT/Sales) 60 8.1.2 Operating Efficiency or Asset Utilization: Total Asset Turnover (Sales/Total Assets) 60 8.1.3 Leverage: The Leverage Multiplier (Total Assets/Capital Employed) 61 8.2 HIGHLIGHTS OF DUPONT ANALYSIS 629. CASH FLOW ANALYSIS 6710. CALCULATION OF EVA 7011. CONCLUSION 7112. APPENDIX 7313. REFERENCES 75 3
  4. 4. Financial Accounting Bharti Airtel/u107092/u107093/u1070941. ACKNOWLEDGEMENTSWe wish to express our heartfelt gratitude and immense respect to Dr. D.V.Ramana, ourFaculty and Mentor in Financial Accounting. His threadbare explanation of the minutestof concepts helped in generating a lot of interest in the subject.We would also like to thank XIMB for providing the necessary infrastructure whichmade our work easier. 4
  5. 5. Financial Accounting Bharti Airtel/u107092/u107093/u1070942. OBJECTIVEThe basic objective of doing the project is to analyze the financial statements of acompany, analyze the environment in which it is operating and evaluate its performanceover the last 3 years. Hence a thorough Environment Industry & Company analysis isdone to understand the external factors influencing the company.3. EXECUTIVE SUMMARYThe environmental analysis would include analyzing the Indian economy, governmentpolicies, FDI norms with regard to telecom sector, TRAI’s objectives & guidelines,COAI data and demography related to cellular coverage.Industry covered Factors behind the telecom growth, Industry Structure (services),Technologies, recent growth trends in the Telecom Sector, GSM Coverage in India andOutlook for the Sector.Then we moved to company analysis where we studied that its strategic business groupprimarily consists of two services namely mobile and infotel services. Infotel services canfurther be classified into Broadband & Telephone services, Enterprise services and Longdistance services. We also studied the shareholding pattern, recent developments in thecompany and the accounting policies of the company.To analyse the performance of the company specifically we covered the following topics:1. Ratio Analysis2. Du Pont Analysis3. Cash Flow AnalysisWe also did a thorough analysis of its competitors like BSNL & VSNL to get a feel ofhow the company is doing though in some places we were handicapped by theunavailability of financial statements of the competitors. 5
  6. 6. Financial Accounting Bharti Airtel/u107092/u107093/u1070944. ENVIRONMENT ANALYSIS4.1 GOVERNMENT POLICIESThe telecom sector in India is at present governed by the legislations viz, The IndianTelegraph Act, 1885 and the Indian Wireless Telegraphy Act, 1933. The reforms processin the telecom sector in India began in early 80s with allowing manufacture of customerpremise equipment by private sector.Telecom Services in the Metro cities of Delhi & Mumbai were corporatised underMahanagar Telephone Nigam Ltd. (MTNL) and International Telecom Services werecorporatised under Videsh Sanchar Nigam Ltd (VSNL). Subsequently, Center forDevelopment of Telematics (C-DOT) was set up in 1984 to develop indigenoustechnology. While the initial mandate of C-DOT in 1984 was to design and developdigital exchanges and facilitate their large scale manufacture by the Indian Industry, thedevelopment of transmission equipment was also added to its scope of work in 1989. Toaccelerate decision making Government also set up a High Powered TelecomCommission in 1989.To meet the resource requirement and achieve the nation’s telecom targets, thegovernment decided to invite the participation of private players, and the telecom sectorwas opened up in 1992. The policy abolished the regime of public sector supremacy andpaved the way for private participation in the economy. Gone were the days of 2 yearwaiting period to get a telephone connection.4.2 NEW TELECOM POLICY, 1994In 1994, the Government announced the National Telecom Policy which defined certainimportant objectives, including availability of telephone on demand, provision of worldclass services at reasonable prices, ensuring India’s emergence as major manufacturing / 6
  7. 7. Financial Accounting Bharti Airtel/u107092/u107093/u107094export base of telecom equipment and universal availability of basic telecom services toall villages. It also announced a series of specific targets to be achieved by 1997. TheNTP 1994 targeted 1 PCO per 500 urban population and coverage of all 6 lac villages.NTP 1994 also recognized that the required resources for achieving these targets wouldnot be available only out of Government sources and concluded that private investmentand involvement of the private sector was required to bridge the resource gap. TheGovernment invited private sector participation in a phased manner from the earlynineties, initially for value added services such as Paging Services and Cellular MobileTelephone Services (CMTS) and thereafter for Basic Telephone Services (BTS). After acompetitive bidding process, licenses were awarded to 8 CMTS operators in the fourmetros, 14 CMTS operators in 18 state circles, 6 BTS operators in 6 state circles and topaging operators in 27 cities and 18 state circles. VSAT services were liberalized forproviding data services to closed user groups. Licenses were issued to 14 operators in theprivate sector.4.3 NEW TELECOM POLICY, 1999Since some of the targets set in the telecom policy of 1994 remained unfulfilled, a newTelecom policy was brought about in 1999. The New Policy Framework focused oncreating an environment, which enabled continued attraction of investment in the sectorand allowed creation of communication infrastructure by leveraging on technologicaldevelopment. The main objectives of NTP-1999 were: Availability of affordable and effective communications for the citizens. To achieve a tele-density of 7 by the year 2005 and 15 by the year 2010; to improve rural tele-density from the level of 0.4 to 4 by the year 2010. Create a modern, efficient and world class Telecommunications infrastructure taking into account the convergence of IT, Media, Telecom and Consumer Electronics. 7
  8. 8. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Convert Public Call Offices (PCOs) into Public Tele-info Centers having multi- media capability like ISDN Services, Remote Database Access, Government and Community Information Systems etc. Transform in a time-bound manner, the Telecommunications Sector to a greater competitive environment in both urban and rural areas providing equal opportunities and level playing field for all players. Strengthen Research and Development efforts in the country and provide an Impetus to build world class manufacturing capabilities. Protect Defense and Security interest of the country. Enable Indian Telecom Companies to become truly Global Players.Towards this end, the New Policy Framework divided the telecom service sector asfollows – Cellular Mobile Service Providers, Fixed Service Providers and Cable Service Providers, collectively referred to as ‘Access Providers’ Radio Paging Service Providers Public Mobile Radio Trunking Service Providers National Long Distance Operators International Long Distance Operators Other Service Providers Global Mobile Personal Communication by Satellite (GMPCS) Service Providers V-SAT based Service ProvidersThe policy led to rapid expansion of telecom services, steep reduction in tariffs,advancement of technology etc.4.4 BROADBAND POLICY, 2004Recognising the potential of ubiquitous Broadband service in growth of GDP andenhancement in quality of life through societal applications including tele-education, tele-medicine, e-governance, entertainment as well as employment generation by way of highspeed access to information and web-based communication, Government finalized a 8
  9. 9. Financial Accounting Bharti Airtel/u107092/u107093/u107094policy to accelerate the growth of Broadband services. Some of the major points taken upin the policy on the technology front were: Greater emphasis on optical fibre-technologies & Digital-subscriber lines(DSL) on copper loop Cable TV network can be used as franchisee network of the service provider for provisioning Broadband services. Very Small Aperture Terminals (VSAT) and Direct-to-Home (DTH) services would be encouraged for penetration of Broadband and Internet services with the added advantage to serve remote and inaccessible areas. Invest in newer technologies and incorporate them at the earliest.National Internet Exchange of India (NIXI) was set up by DIT, Government of India toensure that Internet traffic, originating and destined for India, should be routed withinIndia. The policy targets 20m broadband subscribers by 2010.The government policies over the period can be summed up and shown as below: Pre-reform Partial Deregulation Further Deregulation Take-off Pre-1994 1994-1999 1999 - 2002 2002 onwards • MTNL - • 4 private fixed • Licenses converted to • Calling Party Mumbai and service providers revenue sharing Pays Delhi; DTS with less than 1% • Private sector share less • CDMA launch elsewhere market share than 5% in revenue terms • 3-6 operators in • No mobile • 2 GSM mobile • Competition in NLD and each circle service players in each ILD circle • Intra-circle • NLD - DoT per/ • Licenses on Revenue share merger guidelines BSNL ILD - • 13 players start VSNL mobile service • 4 mobile operators / circle • Unified Licensing • National Telecom • NTP 1999 Policy (NTP) 1994 • BSNL formed 2001 • Broadband policy • TRAI constituted 2004 • Internet Telephony 2002 1997 • FDI - 74% 2005 • FDI - 49 % National Telecom New Telecom Unified Licensing Policy, 1994 Policy, 1999 Regime 9
  10. 10. Financial Accounting Bharti Airtel/u107092/u107093/u107094Some of the other policy initiatives are: Deregulation virtually complete and Unified Licensing regime Interconnection Usage Charge framework in place Exemption from customs duty for import of Mobile Switching Centres Comprehensive Spectrum policy and 3G policy on the anvilIndependent regulation has been a critical factor in the growth. 2006 Number portability Convergence 2005 TRAI’s recommendations Unified Licensing Quality of Service regulation Rural Telephony 2004 Intra-circle merger guidelines Internet / broadband penetration 2003 Calling Party Pays Regime Unified Access Licensing Reference Interconnect Order 2002 • ILD opened to competition • Internet Telephony allowed. Mature regulatory regime and an enabling policy • Reduction in License fees framework already in place 10
  11. 11. Financial Accounting Bharti Airtel/u107092/u107093/u107094 5. INDIAN ECONOMY AND THE TELECOM SECTOR 1. The Indian Economy is galloping at a fast pace over the last few years. 2. It has clocked over 9% growth for the last many years. 3. Such a growing economy offers vast growth opportunities for the telecom industry. The telecom market has grown rapidly in the last few years. Subscriber growth 180 164In CAGR– 38% 120 98Millions 76 60 53 44 0 2002 2003 2004 2005 Aug-06 Revenue growth 20 20 CAGR - 21% 15 15 n 11 illio 10 10 9 $B 5 0 2002 2003 2004 2005 2006 Revenues ~ USD 19.5 bn (FY 2006) 11
  12. 12. Financial Accounting Bharti Airtel/u107092/u107093/u107094 o CAGR (FY 2002-06) - 21% o Have doubled in last 3 years Subscribers ~ 160 million (Aug 2006) o CAGR (FY 2002-06) - 38 % o Nearly quadrupled since FY 02 o 5-6 million being added every month Tele-Density - 14.8 (Aug 2006) o Has doubled in 3 years o Target set for 2007 under NTP 1999 achieved during FY 2005And is poised to be the second-largest network globally by 2008 Telecom Subs cribe rs - Country w ise Decem ber 2005 China 800 743 m subscribers 600 USA 400 360 Japan Rus Ind Germany n. 200 153 134 130 125 0 12
  13. 13. Financial Accounting Bharti Airtel/u107092/u107093/u107094Mobile telephony continues to be the key growth driver. Subscriber Growth - Mobile vs Fixed 175 140 143 Mn. subscribers 105 70 52 42 43 38 35 41 41 7 13 34 0 2002 2003 2004 2005 2006 Fixed (mn. subs) Mobile (mn. subs)Wireless emerging as the preferred mass market format service providers focus onInternet / broadband access to improve fixed line ARPU Progressive regulation o Migration to revenue sharing o Calling Party Pays (CPP) regime o Unified access licensing o Intra-circle merger guidelines Intensifying competition o 3 to 6 players per circle o Presence of CDMA and GSM providers o Significant share of private sector Growing affordability o ARPUs among lowest in the world 13
  14. 14. Financial Accounting Bharti Airtel/u107092/u107093/u107094 o Lower cost of ownership due to Low cost / used handsets o Success of the pre-paid formatGrowing network coverage is triggering further market expansion Segment Cellular reach (2003-04) Cellular reach (End 2006 - Est.) Locations Population Locations Population Urban ~ 1700 of 5200 200 million ~ 4900 towns 300 million towns out of nearly 5200 towns Rural Negligible Negligible ~ 350,000 out of 450 million 607,000 villagesSupport from Universal Service Obligation Fund envisaged for shared networkinfrastructure creation in uncovered rural areas 14
  15. 15. Financial Accounting Bharti Airtel/u107092/u107093/u107094Vibrant and competitive telecom market Subscribers Jul 06 Share (%) (mn)Company Presence Fixed Mobile Fixed Mobile Government owned. Has ramped up BSNL GSM services. National presence 37.4 17.7 74.7% 19.6% (except Mumbai and Delhi) Government owned. Operates in MTNL 3.8 2.0 7.7% 2.3% Delhi and Mumbai. Integrated operator, with presence in Bharti all sectors. Largest mobile services 1.4 19.6 2.7% 21.7% provider. Integrated operator. Plans expansionReliance of GSM network apart from being 3.0 17.3 6.0% 19.2% the largest private CDMA operators. Pure play GSM operator in 11 Hutch 15.4 17.0% circles. IDEA Pure play GSM operator in 6 circles 7.4 8.2% Integrated operator (along with VSNL) with presence in all TTS 4.0 4.9 8.0% 5.4% segments. Provides CDMA services in 20 circles Operates in 2 circles. Announced Aircel Plans to expand GSM footprint in 2.6 2.9% North and North east Spice Pure play GSM player in 2 circles 1.9 2.1% Others 0.4 1.4 Total 50 90 15
  16. 16. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Broadband and internet connectivity are on the verge of take-off. Broadband subscriber growth 2.00 1.5 1.38 Mn. subscribers 6-fold growth 0.75 0.18 0 Mar-05 Mar-06 Nov-06 Several Indian firms are gaining a foothold in the global market. Many Indian service providers are acquiring scale in the International Long Distance market through acquisitions o Acquisitions - FLAG by Reliance, Tyco and Teleglobe by Videsh Sanchar Nigam Limited o VSNL is now the worlds fifth largest carrier of voice globally o Reliance’s FLAG network connects with 28 countries. FLAG’s FALCON cable system when completed would connect 12 countries with 25 international cable landing stations Investments in Infrastructure o Bharti-Singtel and VSNL investments in undersea cable Emerging as Integrated telco, positioning themselves as full service providers o Tata teleservices-VSNL, Bharti, Reliance have end-to-end presence in ILD, NLD and Access; BSNL has announced plans to get into ILD o Focus on corporate connectivity - IPLCs, Frame relay, VPNs o Strong thrust on internet and broadband - both corporate and retail segments 16
  17. 17. Financial Accounting Bharti Airtel/u107092/u107093/u107094Key Indian Companies • BSNL - Incumbent service provider and Worlds 7th largest Telecommunications Company providing comprehensive range of telecom services in India • Services include Wire line, CDMA mobile, GSM Mobile, Internet, Broadband, Carrier service, MPLS-VPN, VSAT, VoIP services, IN Services etc. • MTNL - State owned operator covering the cities of Mumbai an Delhi • Provides both fixed and mobile services • Bharti Airtel - Integrated operator with presence in all segments • Leads the mobile segment in the country • Reliance Communications - Largest player in India in the CDMA segment • Plans a GSM network • Tata Teleservices - Integrated operator (with VSNL) with presence in all segments • Provides CDMA services in 20 circles 17
  18. 18. Financial Accounting Bharti Airtel/u107092/u107093/u1070945.1 GUIDELINES FOR FOREIGN DIRECT INVESTMENT IN TELECOM SECTORThe government has liberalized the FDI rules in the telecom sector. The FDI ceiling hasbeen raised from 49% to 74% in certain telecom services (such as Basic, Cellular,Unified Access Services, National/International Long Distance, V-Sat, Public MobileRadio Trunked Services (PMRTS), Global Mobile Personal Communications Services(GMPCS) and other value added services). The remaining 26 per cent will be owned byresident Indian citizens or an Indian Company (i.e. foreign direct investment does notexceed 49 percent and the management is with the Indian owners). 100% FDI permittedunder automatic route in the manufacturing sectorThe majority Directors on the Board including Chairman, Managing Director and ChiefExecutive Officer (CEO) shall be resident Indian citizens, enforced through licenceagreement.1. Singapore Telecom (SingTel) made an investment of US$1.07 B through a Mauritiusentity for a stake in Bharti Televentures.2. Vodafone acquired a 10% stake in Bharti Televentures for 6700 crore rupees(approximately US$ 1.5B)3. Subsequently, Vodafone made an investment of $12 US B when it acquired acontrolling 67% stake in Hutch Essar.All these have helped the Indian telecom market grow at an astonishing pace. It is the fastest growing market in the world About 6 million mobile subscribers are added every month The mobile sector has grown from around 10 million subscribers in 2002 to reach 150 million subscribers by early 2007 registering an average growth of 90% yoy. The overall fixed and mobile subscribers have risen to more than 200 million by the first quarter of 2007. 18
  19. 19. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Currently, the Indian Telecom market is valued at US$100 B. Two telecom players dominate this market- Bharti Airtel with 27% market share and Reliance Communication with 20% market share. In the mobile phone market there are basically two technologies that are used: GSM and CDMA. GSM is the dominant technology that is used. GSM and CDMA subscription numbers: GSM CDMA GSM Annual CDMA Subscribers Year Subscribers Annual growth (millions) (millions) growth 2000 3.1 94% - - 2001 5.05 76% - - 2002 10.5 91% 0.8 - 2003 22.0 110% 6.4 700% 2004 37.4 70% 10.9 70% 2005 58.5 57% 19.1 75% 2006 105.4 80% 44.2 131% 2007 180.0 71% 85.0 92% 19
  20. 20. Financial Accounting Bharti Airtel/u107092/u107093/u1070945.2 TRAI GUIDELINES AND OBJECTIVESThe Telecom Regulatory Authority of India (TRAI) was formed in January 1997 with aview to providing an effective regulatory framework and adequate safeguards to ensurefair competition and protection of consumer interests. The Government is committed to astrong and independent regulator with comprehensive powers and clear authority toeffectively perform its functions.Objectives Access to telecommunications is of utmost importance for achievement of the country’s social and economic goals. Availability of affordable and effective communications for the citizens is at the core of the vision and goal of the telecom policy Strive to provide a balance between the provision of universal service to all uncovered areas, including the rural areas, and the provision of high level services capable of meeting the needs of the country’s economy Encourage development of telecommunication facilities in remote, hilly and tribal areas of the country Create a modern and efficient telecommunications infrastructure taking into account the convergence of IT, media, telecom and consumer electronics and thereby propel India into becoming an IT superpower Convert PCOs, wherever justified, into Public Teleinfo centres having multimedia capability like ISDN services, remote database access, government and community information systems etc Transform in a time bound manner, the telecommunications sector to a greater competitive environment in both urban and rural areas providing equal opportunities and level playing field for all players Strengthen research and development efforts in the country and provide an impetus to build world class manufacturing capabilities Achieve efficiency and transparency in spectrum management Protect defense and security interests of the country 20
  21. 21. Financial Accounting Bharti Airtel/u107092/u107093/u1070945.3 TELECOM DISPUTES SETTLEMENT & APPELLATE TRIBUNAL (TDSAT)With a view to further strengthen the regulator the TRAI Act, 1997 was amended in theyear 2000 and a separate body viz., The Telecom Dispute Settlement and AppellateTribunal (TDSAT) was constituted for resolution of disputes in Telecom Sector. Theappellate tribunal consists of a chairperson and two members appointed by the IndianParliament. The selection of Chairperson and members of the Appellate tribunal is madeby the Central Government in consultation with the Chief Justice of India.The TDSAT is empowered to adjudicate any dispute between: Licensor and a Licensee. Two or more Service Providers. A Service Provider and a Group of Consumers.5.4 CELLULAR OPERATORS ASSOCIATION OF INDIA (COAI)The Cellular Operators Association of India (COAI) was constituted in 1995 as aregistered, nonprofit, nongovernmental society dedicated to the advancement ofcommunication, particularly modern communication through Cellular Mobile TelephoneServices.With a vision to establish and sustain a world-class cellular infrastructure and facilitateaffordable mobile communication services in India, COAI’ main objectives are to protectthe common & collective interests of its members. Keeping the mandate given to it,COAI is the official voice for the Indian Cellular industry and on its behalf it interactswith: the policy maker, the licensor, the regulator, the spectrum management agency andthe industry (telecom / nontelecom) associations. 21
  22. 22. Financial Accounting Bharti Airtel/u107092/u107093/u1070946. COMPANY ANALYSIS6.1 ABOUT THE COMPANYCompany ProfileBharti Airtel is one of Indias leading private sector providers of telecommunicationsservices based on an aggregate of 48,853,758 customers as on August 31, 2007,consisting of 46,814,745 GSM mobile and 2,039,013 broadband & telephone customers.The businesses at Bharti Airtel have been structured into three individual strategicbusiness units (SBU’s) - mobile services, broadband & telephone services (B&T) &enterprise services. The mobile services group provides GSM mobile services acrossIndia in 23 telecom circles, while the B&T business group provides broadband &telephone services in 94 cities. The enterprise services group has two sub-units - carriers(long distance services) and services to corporates. All these services are provided underthe Airtel brand.Company shares are listed on The Stock Exchange, Mumbai (BSE) and The NationalStock Exchange of India Limited (NSE).Vision & PromiseBy 2010 Airtel will be the most admired brand in India: Loved by more customers Targeted by top talent Benchmarked by more business 22
  23. 23. Financial Accounting Bharti Airtel/u107092/u107093/u107094Company HistoryBharti Tele-Ventures was incorporated on July 7, 1995 as a company with limitedliability under the Companies Act, for promoting telecommunications services. BhartiTele-Ventures received certificate for commencement of business on January 18, 1996.The Company was initially formed as a wholly-owned subsidiary of Bharti TelecomLimited. The chronology of events since Bharti Tele-Ventures was incorporated in 1995is as follows:Calendar year & Events1995 Bharti Cellular launched cellular services AirTel in Delhi1997 British Telecom acquired a 21.05% equity interest in Bharti Cellular1998 Bharti Telecom and British Telecom formed a 51%: 49% joint venture, Bharti BT Internet for providing Internet services2002 Comes out with issue of 18.53 crore equity shares through book building route with a floor price of Rs 45 per share, received bid for 18.55 crore shares. Through the issue, it becomes the first company in India to come out with 100% book building issue2004 Bharti Tele-Ventures enters into a three year service agreement with Ericsson2005 Bharti inks $125-m deal with Nokia for rural network expansion Bharti Tele Ventures announces agreement with Vodafone2007 Bharti Airtel, telecom major, has come out with a slew of initiatives including buying out SingTels 50 per cent stake in joint venture under sea cable company Network i2i for $110 million. 23
  24. 24. Financial Accounting Bharti Airtel/u107092/u107093/u107094Organization Structure 24
  25. 25. Financial Accounting Bharti Airtel/u107092/u107093/u107094Awards and Recognition Wireless service provider of the year 2005 at the Frost and Sulivan Asia- Pacific ICT awards Competitive service provider of the year 2005 at the Frost and Sulivan Asia- Pacific ICT awards The Forbes Global 2000 list for the year 2007 ranked Bharti at 1149Market PerformanceMarket Capitalization (as on July 13, 2007)Approx. Rs. 1,670 billion Closing BSE share price = Rs. 880.75 Sales : $2.62 Billion Profits : $0.46 Billion Assets : $4.46 Billion Market Value : $41 BillionHighlights for Full Year ended March 31, 2007 Overall customer base crosses 3.9 crore. Highest ever-net addition of 1.8 crore customers in a year. Market leader with a market share of all India wireless subscribers at 22.9% (20.4% last year) Total Revenues of Rs. 18,520 crore (up 59% Y-o-Y) EBITDA of Rs. 7,451 crore (up 72% Y-o-Y). Cash Profit of Rs. 7,307 crore (up 79% Y-o-Y). Net Profit of Rs. 4,257 crore (up 89% Y-o-Y). 25
  26. 26. Financial Accounting Bharti Airtel/u107092/u107093/u107094In News: Recently Sunil Bhartis Airtel launched its calling card in America especially for the NRI (Non-resident Indians) and people calling from America to India at a cheaper rate as compared to the tariff offered by other providers. On February 12, 2007 Vodafone sold its 5.6% stake in AirTel back to AirTel for US $1.6 billion; and purchased a controlling stake in rival Hutchison Essar. In its monthly press release, following statistics have been presented for end of April 2007. Bharti Airtel added the highest ever net addition of 53 lakh customers in a single quarter (Q4-FY0607) and also the highest ever net addition of 1.8 crore total subscribers in 2006-07 The company will invest up to $3.5 billion this fiscal (07-08) in network expansion. It has an installed base of 40,000 cellsites and 59% population coverage After the proposed network expansion, an additional 30,000 towers will result in the company achieving 70% population coverage Bharti has over 39 million users as on March 31, 2007 It has set a target of 125 million subscribers by 2010 Prepaid customers account for 88.5% of Bharti’s total subscriber base, an increase from 82.7% a year ago ARPU has dropped to Rs 406 Non-voice revenues, (SMS, voice mail, call management, hello tunes and Airtel Live) constituted 10% of total revenues during Q4, lower than 10.7% in the Q4 of the previous year Blended monthly minutes of usage per customer in Q4 was at 475 minutes Has completed 100% verification of its subscribers and in the process disconnected three lakh subscribers 26
  27. 27. Financial Accounting Bharti Airtel/u107092/u107093/u1070946.2 CAPITAL STRUCTURE OF BHARTI-AIRTEL1. CapitalThe capital structure of Bharti-Airtel is explained below: (In ‘000 Rs.) 2007 2006 2005 Authorised Capital 25,000,000 25,000,000 25,000,000 Issued Capital 18,959,342 18,938,793 18,533,668 Paid up Capital 18,959,342 18,938,793 18,533,668Share-holding Pattern: % of share holding 25.05% 45.48% Promoter holding Institutional investor Others 29.47%2. Nominal Value of Capital • Face Value – The face value of shares remains constant at Rs. 10 throughout this period. • Change in Face value- There is no change in the face value. 27
  28. 28. Financial Accounting Bharti Airtel/u107092/u107093/u1070943. Issue Price of sharesShare PremiumThe Share premium at the beginning of financial year 2005 is Rs. 31,254,879,000. Itchanged to Rs. 38,754,546,000 by the end of the financial year and to Rs. 39,259,225,000at the end of financial year 2006. While no new shares were issued the change is due toother reasons which are illustrated below.4. Dividend DistributionFor the year ending 2005-2006The directors believe that there are tremendous growth opportunities available to thetelecom sector and the Company should leverage these by further expanding andstrengthening its existing network. This will enhance shareholder value in the long-term.Accordingly, the directors did not recommend any dividend for the year ended March 31,2006, in view of the proposed investments in network expansion and operations.However this does not explain the change in share capital. The change in share capitalcan be explained by the following: The Company allotted 2,722,125 Equity Shares of Rs. 10/- each upon merger of Bharti Cellular Limited (BCL) into the Company. During the year the Company allotted 18,242,237 equity shares upon conversion of Foreign Currency Convertible Bonds (FCCBs) by their holders. During the year ended March 31, 2006 the Company had also issued 20,088,445 equity shares of Rs. 10/- each fully paid up to M/s. Shyam Cellular Infrastructures Projects Limited upon conversion of Optionally Convertible Redeemable Debentures (OCRDs). 28
  29. 29. Financial Accounting Bharti Airtel/u107092/u107093/u107094For the year ending 2006-2007The company did not declare any dividends because of the reasons as mentionedpreviously. But during the year, The Company allotted 165400 equity shares on exercise of stock options to the employees of the company under the Company’s ESOP Scheme 2005. The Company also allotted 1889453 equity shares upon conversion of Foreign Currency Convertible Bonds (FCCBs) by their holders.Due to these the corporate actions, the issued, subscribed and paid-up equity share capitalincreased from 1,893,879,304 (March 31, 2006) to 1,895,934,157 equity shares as ofMarch 31, 2007.5. Rights IssueNo rights issue was brought out for the period 2005-2007.6. Market CapitalisationThe company had a market capitalization of over Rs. 760 billion for the year ending 31stMarch 2006 and was among the top 10 listed entities in India. For the year ending 31stMarch 2007, the Company had a market capitalisation of USD 38 bn and is among thetop 5 listed entities in India. 29
  30. 30. Financial Accounting Bharti Airtel/u107092/u107093/u1070947. MV/BV Ratio 31st March 2007 31st March 2006 31st March 2005 Capital +Reserves 1,148,883,838,000 73,623,863,000 53,200,292,000 (in Rs) (A) No. Of Equity 1,895,934,157 1, 893,879,304 1,853,366,767 Shares(B) Book Value(BV) 60.59 38.87 28.70 = A/B Market 730.60 412.85 206.85 Value(MV) MV/BV 12.05 10.62 7.21Thus we see that the MV/BV ratio has shown a positive increase over the periodconsidered.6.3 FINANCIAL STATEMENTSConsolidated Balance Sheet All Figures in ‘000 2007 2006 2005Capital 19,259,346 19,060,053 18,560,889Reserves 95,173,342 54,395,531 34,639,403LTL 55,474,673 49,853,367 50,951,920CL 98,446,711 66,991,634 43,199,744Total 268,354,072 190,300,585 147,351,956Fixed Assets 216,814,497 153,481,269 107,594,459Investments 7,058,179 7,196,981 9,318,953CA 44,454,766 29,622,335 30,438,533Total 268,327,442 190,300,585 147,351,945 30
  31. 31. Financial Accounting Bharti Airtel/u107092/u107093/u107094Consolidated Income Statement All Figures in ‘000 2007 2006 2005Sales 177,944,343 112,905,793 79,441,940COGS 220,849 674,043 721,037OperatingExpenses 105,121,756 71,445,970 48,780,762Depreciation 23,533,010 14,323,385 10,193,626PBIT 43,455,272 25,113,966 18,101,946Interest 2,558,440 2,256,011 2,459,184PBT 46,013,712 22,857,955 15,642,762Tax 6,055,561 2,737,160 3,536,023PAT 40,332,265 20,120,794 12,106,739Consolidated Cash Flow Statement All Figures in ‘000 2007 2006 2005Opening CIH 3,074,285 3,841,352 1,316,310CFF 3,401,320 3,763,474 -4,230,893CFI -79,750,547 -50,843,891 -23,303,010CFO 81,079,547 46,313,349 30,058,945Closing CIH 7,804,605 3,074,284 3,841,352 31
  32. 32. Financial Accounting Bharti Airtel/u107092/u107093/u1070946.4 ACCOUNTING POLICIES1. BASIS OF PREPARATIONThese financial statements have been prepared under the historical cost convention on theaccrual basis of accounting, in accordance with the generally accepted accountingprinciples in India and the provisions of the Companies Act, 1956 as adopted consistentlyby the Company.2. FIXED ASSETSFixed Assets are stated at cost of acquisition and subsequent improvements thereto,including taxes, duties, freight and other incidental expenses related to acquisition andinstallation. Capital work-in-progress is stated at cost. Site restoration cost obligations arecapitalized when it is probable that an outflow of resources will be required to settle theobligation and a reliable estimate of the amount can be made. The fixed component oflicense fee payable by the Company for cellular and basic circles, upon migration to theNational Telecom Policy (NTP 999), i.e. Entry Fee and the one time license fee paid bythe Company for acquiring new licenses (post NTP-99) has been capitalized as an asset.3. DEPRECIATION / AMORTISATIONDepreciation is provided on straight-line method at the rates and in the manner prescribedin Schedule XIV to the Companies Act, 1956 on all assets, except for the following onwhich depreciation is provided on straight line method to write off the cost of the fixedassets over their estimated useful lives as below:Useful livesBuilding 20 yearsBuilding on Leased Land 20 years 32
  33. 33. Financial Accounting Bharti Airtel/u107092/u107093/u107094Office Equipment 5 years/2 yearsComputer / Software 3 yearsVehicles 5 yearsFurniture and Fixtures 5 yearsPlant & Machinery 3 years / 5 years/ 10 years / 15 yearsLeasehold Land Period of leaseLeasehold Improvements Period of lease or 10 years whichever is lessSoftware up to Rs. 500,000 is written off in the year placed in service. Bandwidthcapacity is amortized over the period of the agreement subject to a maximum of 15 years.Additional depreciation is provided as appropriate, towards diminution in value of assets.The Entry Fee capitalised is being amortised equally over the period of the license andthe one time licence fee is being amortized equally over the balance period of licencefrom the date of commencement of commercial operations.The site restoration cost obligation capitalized is being depreciated over the period of theuseful life of the related asset.4. REVENUE RECOGNITION AND RECEIVABLESMobile Services: Service revenue is recognised on completion of provision of services.Service revenue includes income on roaming commission and access charges passed onto other operators, and are net of discounts and waivers. Revenue, net of discount, fromsale of goods is recognised on transfer of all significant risks and rewards to the customerand when no significant uncertainty exists regarding realisation of the consideration.Processing fees on recharge coupon is being recognised over the estimated customerrelationship period or coupon validity period, as applicable.Telephone and Broadband and Enterprise Services Carriers 33
  34. 34. Financial Accounting Bharti Airtel/u107092/u107093/u107094Service revenue is recognised on completion of provision of services. Revenue onaccount of bandwidth service is recognised on time proportion basis in accordance withthe related contracts. Service Revenue includes access charges passed on to otheroperators, and is net of discounts and waivers. Revenue, net of discount, from sale ofgoods is recognized on transfer of all significant risks and rewards to the customer andwhen no significant uncertainty exists regarding realisation of consideration.Enterprise Services CorporateRevenue, net of discount, from sale of goods is recognised on transfer of all significantrisks and rewards to the customer and when no significant uncertainty exists regardingrealisation of consideration.105 Service Revenues includes revenues from registration,installation and provision of Internet and Satellite services. Registration fees isrecognised at the time of dispatch and invoicing of Start up Kits. Installation charges arerecognised as revenue on satisfactory completion of installation of hardware and servicerevenue is recognized from the date of satisfactory installation of equipment and softwareat the customer site and provisioning of Internet and Satellite services. Revenue fromprepaid dialup packs is recognised on the actual usage basis and is net of sales return anddiscount.Activation IncomeActivation revenue and related direct activation costs, not exceeding the activationrevenue, are deferred and amortized over the related estimated customers relationshipperiod, as derived from the estimated customer churn period.Investing and other activitiesIncome on account of interest and other activities are recognised on an accrual basis.Dividends are accounted for when the right to receive the payment is established.Provision for doubtful debtsThe Company provides for amounts outstanding for more than 90 days in case of activesubscribers and for all amounts outstanding from customers who have been deactivated 34
  35. 35. Financial Accounting Bharti Airtel/u107092/u107093/u107094as reduced by security deposits or in specific cases where management is of the view thatthe amounts are not recoverable. For receivables due from the other operators on accountof their NLD and ILD traffic, IUC and roaming charges, the Company provides foramounts outstanding for more than 120 days from the date of billing net of any amountspayable to the operators or in specific cases where management is of the view that theamounts are not recoverable.5. INVENTORIESInventories are valued at the lower of cost and net realisable value. Cost is determined onFirst in First out basis.6. INVESTMENTCurrent Investments are valued at lower of cost and fair market value. Long termInvestments are valued at cost. Provision is made for diminution in value to recognise adecline, if any, other than that of temporary nature.7. LEASESa) Operating LeaseLease rentals in respect of assets taken on Operating Lease are charged to the Profit andLoss Account on a straight-line basis over the lease term.b) Finance LeaseAssets acquired on Finance Lease which transfer risk and rewards of ownership to theCompany are capitalized as assets by the Company at the present value of the relatedlease payments Amortization of capitalized leased assets is computed on the Straight Linemethod over the useful life of the assets. The finance charge is allocated over the leaseterm so as to produce a constant periodic rate of interest on the remaining balance ofliability. 35
  36. 36. Financial Accounting Bharti Airtel/u107092/u107093/u1070948. TAXATIONTax expense for the period, comprising current tax, deferred tax and fringe benefit tax isincluded in determining the net profit/ (loss) for the period. Deferred tax assets arerecognised for all deductible timing differences and carried forward to the extent there isreasonable certainty that sufficient future taxable profit will be available against whichsuch deferred tax assets can be realised. Deferred tax is not recognized for such timingdifferences which reverse during tax holiday period. Deferred tax assets to the extent theypertain to brought forward losses and unabsorbed depreciation, are recognized only to theextent that there is virtual certainty of realisation, based on expected profitability in thefuture as estimated by the Company. Deferred tax assets and liabilities are measured atthe tax rates that have been enacted or substantively enacted by the balance sheet date.9. BORROWING COSTBorrowing cost attributable to the acquisition or construction of a qualifying asset iscapitalised as part of the cost of that asset. Other borrowing costs are recognised as anexpense in the period in which they are incurred.10. IMPAIRMENT OF ASSETSAssets that are subject to amortization are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount may not be recoverable. Animpairment loss is recognized for the amount by which the assets carrying amountexceeds its recoverable amount. The recoverable amount is the higher of the assets fairvalue less costs to sell and value in use. For the purpose of assessing impairment, assetsare grouped at the lowest levels for which there are separately identifiable cash flows(cash generating units). 36
  37. 37. Financial Accounting Bharti Airtel/u107092/u107093/u10709411. EARNING PER SHAREThe earnings considered in ascertaining the Companys Earnings per Share (EPS)comprise the net profit after tax. The number of shares used in computing basic EPS isthe weighted average number of shares outstanding during the year. The diluted EPS iscalculated on the same basis as basic EPS, after adjusting for the effects of potentialdilutive equity shares unless impact is anti dilutive.12. PROVISIONSProvisions are recognised when the Company has a present obligation as a result of pastevents; it is more likely than not that an outflow of resources will be required to settle theobligation; and the amount has been reliably estimated. 37
  38. 38. Financial Accounting Bharti Airtel/u107092/u107093/u1070947. Ratio AnalysisVarious Financial Ratio Analysis are used to analyse the financial performance of BhartiAirtel Ltd. Its performance is also compared against BSNL and VSNL for 3 years from2005 to 2007. Since the financial figures of BSNL was not available for the year 2006-2007, so we tracked back a year and showed its figures for the year 2003-2004.7.1 LIQUIDITY RATIOSLiquidity ratios help in determining the ability of a firm to meet its short term obligations.7.1.1 Current RatioCurrent Ratio = Current Asset / Current LiabilityIt is a simple guide to the ability of a company to meet its short term obligations. Thecurrent ratio is a good diagnostic tool as it measures whether or not your business hasenough resources to pay its bills over the next 12 months. Higher the ratio higher is theliquidity. Current Ratios 2.5 2 Current Ratio 1.5 Bharti Airtel Ltd VSNL 1 BSNL 0.5 0 2003-2004 2004-2005 2005-2006 2006-2007 Period Current Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 0.70 0.44 0.45 VSNL - 1.99 1.32 1.25 BSNL 1.36 1.79 2.02 NA 38
  39. 39. Financial Accounting Bharti Airtel/u107092/u107093/u107094The current ratio of Bharti Airtel Ltd has consistently remained less than 1. So its currentliability is greater than the current assets which implies that its short term liquidityrequirements might be financed by long term sources. In comparison, the current ratios ofVSNL and BSNL are better.7.1.2 Liquid RatioLiquid Ratio = (Current Asset – Inventory) / Current LiabilityA better approach to measure the ability of a company to meet its short term liability isby excluding the inventory from the current asset. This is done because it is unlikely toturn inventory to cash immediately. It is thus a measure of how quickly a company’sasset can be converted to cash. This ratio is also called the acid test and quick ratio. Liquid Ratios 2.5 2 Liquid Ratio 1.5 Bharti Airtel Ltd VSNL 1 BSNL 0.5 0 2003-2004 2004-2005 2005-2006 2006-2007 Period Liquid Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 0.7 0.44 0.45 VSNL - 1.98 1.31 1.25 BSNL 1.24 1.69 1.91 NASince the companies are all service oriented, they do not have inventories and hence theliquid ratios are almost similar to the current ratios calculated above. The liquid ratio of 39
  40. 40. Financial Accounting Bharti Airtel/u107092/u107093/u107094Bharti Airtel Ltd is well below 0.5 which indicates that it is able to meet only half of thecurrent obligations from its current assets. The liquid ratios of VSNL and BSNL aremuch healthier than Bharti Airtel Ltd.7.1.3 Absolute Cash RatioAbsolute Cash Ratio = (Cash + Near Cash Items) / Current RatioThis ratio is still better in calculating the liquidity as it does not take into the debts in thecurrent asset. Absolute Cash Ratios 1.4 1.2 Absolute Cash Ratio 1 Bharti Airtel Ltd 0.8 VSNL 0.6 BSNL 0.4 0.2 0 2003-2004 2004-2005 2005-2006 2006-2007 Period Absolute Current Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 0.09 0.05 0.08 VSNL - 0.08 0.06 0.14 BSNL 0.58 1 1.22 NAAbsolute Current Ratio is very low for Bharti Airtel Ltd and VSNL. This shows that verylittle cash reserve is being maintained to meet the short term obligations.7.1.4 Debtor DaysDebtor Days = Debtors / Sales per dayThis ratio measures the number of times that receivables turn over during the year. Thelower the turnover of receivables, the shorter the time between sale and cash collection. If 40
  41. 41. Financial Accounting Bharti Airtel/u107092/u107093/u107094a companys debtor days is significantly higher than industry norms, the underlyingreason (poor collection methods, high risk customers, low sales) needs to be pinpointed.Debtor Days measures the average time in days that receivables are outstanding. Thehigher the number of days outstanding, the greater the collection risk. Debtor days maysuggest a concern over credit control and collections Debtor Days 90 80 70 Debtor days 60 Bharti Airtel Ltd 50 VSNL 40 30 BSNL 20 10 0 2003-2004 2004-2005 2005-2006 2006-2007 Period Debtor Days 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 32.89 34.79 29.10 VSNL - 57.30 67.14 81.96 BSNL 42.82 67.12 57.25 NAThe Debtor days for Bharti Airtel Ltd has decreased over the last year. In a year creditsales takes place only for 29 days and it is much lower as compared to its competitorsthus indicating it has healthy debt collection practices.7.1.5 Creditor DaysCreditor Days = Creditors / Purchase of goods per dayThis ratio measures the number of times that Accounts Payable turns over during the yearrelative to the Sales. Lower turnover rates suggest a shorter time period between purchase 41
  42. 42. Financial Accounting Bharti Airtel/u107092/u107093/u107094and payment. Higher than industry rates may suggest cash shortages, or expansion oftrade credit. Creditor days tells the average length of time trade debt is outstanding. Creditor Days 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 40.31 82.98 133.20Creditor days for VSNL and BSNL could not be calculated because COGS is notavailable for them. Bharti Airtel Ltd follows a trend of increasing Creditor days thusindicating it takes longer to pay to its creditors. In a year it makes purchases on credit for133 days.7.1.6 Inventory DaysInventory Days = Inventory / COGS per dayA financial measure of a companys performance that gives an idea of how long it takes acompany to turn its inventory into sales. Generally, the lower (shorter) the Inventory daysthe better, but it is important to note that the average varies from one industry to another. Inventory Days 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 159.88 96.09 790.24Inventory days for VSNL and BSNL could not be calculated because COGS is notavailable for them. Bharti Airtel Ltd being a telecom service based company has verylittle inventory. In 2006-2007 the inventories were doubled but the COGS were halved.7.2 SOLVENCY RATIOSIt’s the company’s ability to meet its long term obligations. Also called the capitalstructure it is one of the major financing decisions for the company. A proper mix of debtand equity is said to be always beneficial for the company rather than pure equity.Existence of debt disciplines the management to some extent. 42
  43. 43. Financial Accounting Bharti Airtel/u107092/u107093/u1070947.2.1 Debt RatioDebt Ratio = Debt / Total AssetsThis ratio shows how much the business is in debt, making it a good way to check thebusiness’s long-term solvency. The lower the debt ratio, the less total debt the businesshas in comparison to its asset base. On the other hand, businesses with high debt ratiosare in danger of becoming insolvent and/or going bankrupt. Debt Ratios 0.4 0.35 0.3 Debt Ratio 0.25 Bharti Airtel Ltd 0.2 VSNL 0.15 BSNL 0.1 0.05 0 2003-2004 2004-2005 2005-2006 2006-2007 Period Debt Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 0.35 0.26 0.21 VSNL - 0.01 0.02 0.03 BSNL 0.14 0.11 0.08 NAThe Debt ratio of Bharti Airtel Ltd is higher as compared to VSNL and BSNL but it has adecreasing trend over the past 3 years and is at a healthy level.7.2.2 Equity RatioEquity Ratio = Equity / Total AssetsIt helps in determining the extent of funding from equity channel. 43
  44. 44. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Equity Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 0.36 0.39 0.43 VSNL - 0.75 0.75 0.75 BSNL 0.66 0.69 0.7 NABharti Airtel Ltd uses a good mix of Reserves, Equities and Debts to fund its business.7.2.3 Debt to Equity RatioDebt to Equity Ratio = Debt / EquityThe debt to equity ratio is a financial ratio indicating the relative proportion of equity anddebt used to finance a companys assets. It is considered to be a good practice to use bothDebt (financial leverage) and Equities to finance the assets. 44
  45. 45. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Debt Equity Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 0.97 0.67 0.49 VSNL - 0.01 0.03 0.04 BSNL 0.21 0.16 0.11 NABharti Airtel Ltd has reduced the Debt to Equity ratio consistently. This is because of thecompany is reinvesting the Profits into the business. This shows the strong confidence onthe future outlook of the business.7.2.4 Interest Coverage RatioInterest Coverage Ratio = PBIT / Interest ExpenseA 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. When acompanys interest coverage ratio is 1.5 or lower, its ability to meet interest expenses maybe questionable. An interest coverage ratio below 1 indicates the company is notgenerating sufficient revenues to satisfy interest expenses. 45
  46. 46. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Interest Coverage Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 7.36 11.13 16.99 BSNL 10.29 271.4 8.75 NAThe Interest Coverage Ratio of VSNL is not shown because its interest expense is verylow as compared to its PBIT. Bharti Airtel Ltd has healthy Interest Coverage Ratiobecause of increased profits.7.2.5 Debt Service Coverage RatioDSCR = PBIT / Total Debt ServiceIt is the amount of cash flow available to meet annual interest and principal payments ondebt. Debt service coverage ratio is used by financial lenders as a rule of thumb to give apreliminary assessment of whether a potential borrower is already in too much debt.More specifically, this ratio shows the proportion of income that is already spent on loanservice payments. DSCR 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd 1.16 0.68 0.91 VSNL 16.72 5.21 7.35DSCR of BSNL could not be calculated since the loan repayments were not available.DSCR of Bharti Airtel Ltd is low because of the high loan repayments. The Long termloans are increasing every year and are being used for funding expansion plans. There isconsequently a higher repayment of loans every year. 46
  47. 47. Financial Accounting Bharti Airtel/u107092/u107093/u1070947.3 PROFITABILITY RATIOSProfitability ratios are used to analyse the profitability of the company. Differentstakeholders will have different perspective on the profitability ratios.Shareholders: They may be concerned about the ability of the company to maintain andimprove the value of their investments. They look to the company to generate sufficientprofits for dividend payments and increase in market value of the shares they own.Lenders: They will be interested to see whether the company has the ability to pay theinterests of the debts.Management and employees: They will be interested in knowing the performance of thecompany and its future outlook and profitability gives a good idea about the same.7.3.1 Gross Profit (PBDITA) / Sales RatioGross Profit / Sales = Profit before Depreciation Interest Tax and Amortisation / SalesThis ratio helps in determining extent to which the sales are greater than the operatingexpenses. 47
  48. 48. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Gross Profit/Sales Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 35.62% 34.93% 37.65% VSNL - 33.46% 26.13% 26.11% BSNL 55.89% 48.70% 47.08% NAThe gross profit for Bharti Airtel Ltd has improved as compared to the last year. Theprofitability is extremely good as it is sustained with growing sales.7.3.2 Operating Profit (PBIT) / Sales RatioOperating profit / Sales = Profit before Interest Tax / SalesOperating profit is obtained by deducting the Depreciation and Amortisation from Grossprofit. Operating Profit / Sales Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 22.79% 22.24% 24.42% VSNL - 27.17% 17.17% 16.91% BSNL 26.78% 22.03% 23.74% NA 48
  49. 49. Financial Accounting Bharti Airtel/u107092/u107093/u107094The Operating profit of Bharti Airtel has improved over last years. The depreciation hasmore than doubled over last 2 years because of increase in Assets but the sales hasincrease in sales has ensured a healthy profit.7.3.3 Net Profit (PAT) / Sales RatioNet Profit / Sales = Profit After Tax / RatioNet profit is obtained by deducting the Tax from the operating profit. This is finally theprofit that the company gets to earn after incurring all kinds of expenses. PAT/Sales Ratios 0.3 0.25 PAT/Sales Ratio 0.2 Bharti Airtel Ltd 0.15 VSNL 0.1 BSNL 0.05 0 2003-2004 2004-2005 2005-2006 2006-2007 Period Net Profit / Sales Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 15.24% 17.82% 22.67% VSNL - 19.50% 11.96% 11.01% BSNL 17.62% 28.22% 22.25% NAThe PAT of Bharti Airtel Ltd has significantly improved in the last year. This issignificant especially when the call tariffs are reducing. Increase in sales is the maincontributing factor for increase in profits. 49
  50. 50. Financial Accounting Bharti Airtel/u107092/u107093/u1070947.4 RETURN ON INVESTMENTReturn on Investment shows the profits earned from investments in different perspectivelike Networth, Capital employed and Total assets.7.4.1 RONWRONW = PAT / (Capital + Reserve)This is the best measure of profitability to evaluate overall return. This ratio measuresreturn relative to investment in the company. Return on Net Worth indicates how well acompany leverages the investment in it. RONW 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 23.00% 27.00% 35.00% VSNL - 13.00% 8.00% 7.00% BSNL 9.00% 14.00% 11.00% NARONW for Bharti Airtel Ltd. is much higher as compared to its competitors. This ismainly because the company finances its future investments from its own profits and thePAT has increased by 233% over last 2 years. 50
  51. 51. Financial Accounting Bharti Airtel/u107092/u107093/u1070947.4.2 ROCEROCE = PBIT / (Capital + Reserve + Long Term Liability)ROCE should always be higher than the rate at which the company borrows, otherwiseany increase in borrowing will reduce shareholders earnings. ROCE 0.3 0.25 0.2 Bharti Airtel Ltd ROCE 0.15 VSNL 0.1 BSNL 0.05 0 2003-2004 2004-2005 2005-2006 2006-2007 Period ROCE 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 17.00% 20.00% 26.00% VSNL - 18.00% 11.00% 11.00% BSNL 12.00% 9.00% 11.00% NABharti Airtel Ltd’s ROCE is much higher than the borrowing rate which is around 10%.So the shareholders’ earnings are not reduced.7.4.3 ROTAROTA = PBIT / Total AssetsA ratio that measures a companys profits before interest and taxes (PBIT) against its totalassets. The ratio is considered an indicator of how effectively a company is using itsassets to generate earnings before contractual obligations must be paid.The greater a companys profits in proportion to its assets, the more effectively thatcompany is said to be using its assets. 51
  52. 52. Financial Accounting Bharti Airtel/u107092/u107093/u107094 ROTA 0.18 0.16 0.14 0.12 Bharti Airtel Ltd ROTA 0.1 VSNL 0.08 0.06 BSNL 0.04 0.02 0 2003-2004 2004-2005 2005-2006 2006-2007 Period ROTA 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 0.12 0.13 0.16 VSNL - 0.14 0.09 0.08 BSNL 0.09 0.07 0.08 NABharti Airtel has the highest ROTA as compared to its competitors which indicates that ituses its assets most efficiently. Another positive is that it’s constantly in an increasingtrend.7.4.4 EPSEPS = PAT / No of sharesThe portion of a companys profit allocated to each outstanding share of common stock.EPS serves as an indicator of a companys profitability.Earnings per share is generally considered to be the single most important variable indetermining a shares price.An important aspect of EPS is that the capital that is required to generate the earnings(net income) in the calculation is often ignored. Two companies could generate the sameEPS number, but one could do so with less equity (investment) - that company would be 52
  53. 53. Financial Accounting Bharti Airtel/u107092/u107093/u107094more efficient at using its capital to generate income and, all other things being equal,would be a "better" company. Investors also need to be aware of earnings manipulationthat will affect the quality of the earnings number. It is therefore important not to rely onany one financial measure, but to use it in conjunction with statement analysis and othermeasures. Earnings per Share 30 Earnings per Share (Rs) 25 20 Bharti Airtel Ltd 15 VSNL 10 BSNL 5 0 2003-2004 2004-2005 2005-2006 2006-2007 Period EPS 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 6.39 10.61 21.27 VSNL - 26.54 16.83 16.44 BSNL 4.78 8.15 7.15 NAThe EPS for Bharti Airtel Ltd has significantly increased as compared to the last year.This is because of the doubling of the profits in just 1 year. Since ROTA of Bharti AirtelLtd is also higher as compared to its competitors so it is most efficient and profitable ofthe three companies.7.5 EFFICIENCY RATIOS7.5.1 Total Assets Turnover RatioTotal Assets Turnover Ratio = Sales / Total Assets 53
  54. 54. Financial Accounting Bharti Airtel/u107092/u107093/u107094This ratio tells us how efficiently the company uses its assets to generate sales. Total Assets Turnover Ratios 0.7 Total Assets Turnover Ratio 0.6 0.5 Bharti Airtel Ltd 0.4 VSNL 0.3 BSNL 0.2 0.1 0 2003-2004 2004-2005 2005-2006 2006-2007 Period Total Assets Turnover Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 0.54 0.59 0.66 VSNL - 0.51 0.5 0.5 BSNL 0.35 0.34 0.35 NAThe above ratios indicate that Bharti Airtel Ltd is the most efficient in generating sales.This ratio has consistently increased over the last 3 years.7.5.2 Debt Turnover RatioDebt Turnover Ratio = Sales / DebtThis ratio would be of greater significance to the lenders as it indicates how sales of acompany against the debts. 54
  55. 55. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Debt Turnover Ratios 45 40 Debt Turnover Ratio 35 30 Bharti Airtel Ltd 25 VSNL 20 15 BSNL 10 5 0 2003-2004 2004-2005 2005-2006 2006-2007 Period Debt Turnover Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 1.56 2.26 3.21 VSNL - 38.92 23.13 15.8 BSNL 2.6 3.2 4.47 NABharti Airtel Ltd has been able to increase its Debt Turnover ratio due to sharp increasein its sales as compared to its borrowings.7.5.3 Fixed Asset TurnoverFixed Asset Turnover Ratio = Sales / Fixed AssetsThis ratio gives an indication of how efficiently a company uses its fixed assets in doingits business. 55
  56. 56. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Fixed Assets Turnover Ratios 1.6 Fixed Assets Turnover Ratio 1.4 1.2 1 Bharti Airtel Ltd 0.8 VSNL 0.6 BSNL 0.4 0.2 0 2003-2004 2004-2005 2005-2006 2006-2007 Period Fixed Assets Turnover Ratio 2003-2004 2004-2005 2005-2006 2006-2007 Bharti Airtel Ltd - 0.74 0.74 0.82 VSNL - 1.36 1.27 1.22 BSNL 0.49 0.54 0.63 NABharti Airtel Ltd has improved its Fixed Turnover ratio primarily by increasing its salesas compared to the increase in Fixed assets. It’s more efficient in utilizing its Fixed assetsthan BSNL but less as compared to VSNL.7.5.4 Current Asset TurnoverCurrent Asset Turnover = Sales / Current Assets 56
  57. 57. Financial Accounting Bharti Airtel/u107092/u107093/u107094 Current Assets Turnover Ratios 4.5 Current Assets Turnover 4 3.5 3 Bharti Airtel Ltd 2.5 Ratio VSNL 2 1.5 BSNL 1 0.5 0 2003-2004 2004-2005 2005-2006 2006-2007 PeriodCurrent Assets Turnover Ratio 2003-2004 2004-2005 2005-2006 2006-2007Bharti Airtel Ltd - 2.61 3.81 4VSNL - 1.09 1.66 1.84BSNL 1.24 0.92 0.8 NA7.5.5 Inventory TurnoverInventory Turnover = Sales / InventoryThis financial ratio measures the number of times inventory is turned over during theyear. High inventory turnover suggests good levels of liquidity. Conversely it canindicate a shortage of needed inventory for sales. Low inventory turnover can indicatepoor liquidity, overstocking, or, more optimistically, a planned inventory buildup. 57