Group 5 - Section CFinancial Analysis of Telecom Sector - Airtel, Idea & RCOMMDI Gurgaon

Acknowledgement

We take immense pleasure in extending our sincere gratitude to all those people without whose kind support the completion of this project would not have been possible.

We are highly indebted to our Professor Shalini Kalra Sahi, for her guidance and constant supervision, as well as for providing necessary input regarding the project at all points of time.

We would also like to express our gratitude towards our family for their kind co-operation and encouragement, which helped us in completion of this project.

Our thanks and appreciations go to our beloved classmates in developing the project and all other people who have willingly helped us out with their full abilities.

Yours Sincerely

Shivam SethiPriya JadwaniKishore PisapatiSubramanian G.Prathihasth RekabuSautraya Bhattacharjee

Table of contents

Acknowledgement1

1. Industry Overview3

2. Company Overview4

3. Risk and Return Analysis7-10Beta Value7Risk free rate, Market Risk Premium & Expected Return8Cost of Equity, Cost of Debt & WACC9Systematic and Unsystematic risks11

4. Measuring Investment Returns12-17a) Return on Equity12b) Return on Capital Employed13

5. Capital Structure Choices18-24

6. Analysing Dividends

7. Analysing Working Capital

8. References

Industry overview

India's teledensity has enhanced from under 4% in March 2001 to around 75.23% before the end of March 2014. Cell telephony keeps on being the quickest developing portion in the Indian telecom industry. Duty decrease and decrease in handset expenses has helped the fragment to increase in scale. The cell section is assuming a critical part in the business by making itself accessible in the country and semi urban territories where teledensity is the most minimal. The altered line portion keeps on declining as far as the endorser base. It has declined to 28.59 mn endorsers in March 2014 from 30.21 mn in March 2013. The decrease was chiefly because of substitution of landlines with cell telephones. The extent that remote broadband associations (>=512 kbps) are concerned, India as of now has an endorser base of around 43.2 mn. Broadband entrance got a help from the close out of broadband range. The commitment of information to incomes keeps on growing consistently for all driving telcos. This looks good for the eventual fate of broadband administrations. Consumption of Data Services is developing at an exponential pace. Telephone subscribers (wireless and landline): 957.61 million (Sept 2014) Land lines: 27.41 million (Sept 2014) Cell phones: 930.20 million (Sept 2014) Monthly cell phone addition: 5.88 million (Sept 2014) Teledensity: 76.75% (Sept 2014)

Source:TRAIcompany overview

Bharti Airtel Ltd.Bharti Airtel Limited is an Indian multinational telecommunications Services Company headquartered in New Delhi, India. It operates in 20 countries across South Asia, Africa, and the Channel Islands. It is the largest cellular service provider in India, with 192.22 million subscribers as of August 2013. Airtel is the largest mobile operator in South Asia and the fourth largest in the world by subscriber base. Airtel is credited with pioneering the business strategy of outsourcing all of its business operations except marketing, sales and finance and building the 'minutes factory' model of low cost and high volumes. The strategy has since been adopted by several operators. Airtel's telecom equipment is provided and maintained by Ericsson and Nokia Solutions and Networks whereas IT support is provided by IBM. The transmission towers are maintained by subsidiaries and joint venture companies of Bharti including Bharti Infratel and Indus Towers in India.

Recent Company Developments Airtels One Touch Internet honored as the Best Mobile Service/Application for consumers at GSMAs Global Mobile Awards 2015 Airtel launches 'One Touch Internet' - the simplest way for first time users to learn the internet Bharti Airtel rings loud on subsidiary successfully pricing CHF bond issue Bharti Airtel surges on plan to hike fixed-line broadband rates from April S&P upgrades Bharti Airtels rating to BBB- ; Outlook Stable Bharti Airtel rings loud on forging partnership with Etisalat Airtel crosses 200 million mobile customers mark in India Airtel and Loop Mobile announce agreement to create Mumbais largest mobile network Bharti Airtel soars on acquiring 115.0 MHz spectrum for total consideration of Rs 18,530 crores

Idea Cellular Ltd.IDEA Cellular Ltd is a leading GSM mobile services operator in India with over 72 million subscribers, under brand IDEA. The company is a pan India integrated GSM operator covering the entire telephony landscape of the country, and has NLD and ILD operations. They offer affordable and world-class mobile services to varied segments of mobile users. The company is an Aditya Birla Group Company. They offers basic voice and short message service (SMS) services to high-end value added and general packet radio service (GPRS) services, such as Blackberry, Data card, Mobile TV and Games. Their subsidiaries include Swinder Singh Satara and Co Ltd, Aditya Birla Telecom Ltd, Idea Cellular Services Ltd, Idea Cellular Infrastructure Services Ltd, Idea Cellular Towers Infrastructure Ltd and Carlos Towers Ltd. Idea Cellular Ltd was consolidated in the year 1995 with the name Birla Communications Ltd. The organization acquired licenses for giving GSM-based administrations in the Gujarat and Maharashtra Circles taking after the first GSM permit offering methodology. In the year 1996, the organization changed the name from Birla Communication Ltd to Birla AT&T Communications Ltd taking after joint wander between Grasim Industries and AT&T Corporation. In the year 1997, they started operations in the Gujarat and Maharashtra Circles.

Idea has consistently stayed ahead of the industry in VLR reporting. Ideas thought leadership on Mobile Number Portability (MNP) has enabled it to stay as the top gainer with the highest net gain. Every 4th mobile user who exercises choice through MNP prefers Idea.Idea offers a range of high-speed mobile broadband devices including Android based 3G smart phones, dongles etc. Ideas wide portfolio of 3G smart phones offer the latest in 3G applications and high-end data services such as Idea TV, games, social networking etc. at affordable prices.

Recent Company Developments

Idea Cellular surges on entering into partnership with Gameloft Allotment of Equity Shares under ESOS -2006 Idea Cellular gains on adding 15.32 lakh new mobile subscribers in January Idea Cellular in green on winning 65.2 MHz spectrum Idea wins 900 MHz for Delhi, and 4G in 8 strategic markets

Reliance Communications Ltd.Reliance Communications Ltd.(commonly calledRCOM) is an IndianInternet access(commonly called "broadband") and telecommunications company headquartered inNavi Mumbai,India. RCOM isIndia's second largest telecom operator, only after Bharti Airtel. It is the15th largest mobile phone operatorwith over 150 million subscribers. Established in 2004, it is asubsidiaryof Reliance Anil Dhirubhai Ambani Group.

The company offers the full value chain of wireless (CDMA and GSM), wireline, national long distance, international, voice, data, video, Direct-To-Home (DTH) and internet based communications services under various business units organized into three strategic customer-facing business segments; Wireless, Global and Broadband. These strategic business units are supported by passive infrastructure connected to nationwide backbone of Optic Fibre Network fully integrated network operation system and by the largest retail distribution and customer services facilities. The company also owns through their subsidiaries, a global submarine cable network infrastructure and offers managed services, managed Ethernet and application delivery services.The company is India's first telecom service provider offering nationwide CDMA and GSM mobile services with digital voice clarity. Their mobile portal, R World, offers the widest range of mobile content spanning e-commerce, m-commerce entertainment, music, news, astrology, cricket, bollywood, maps, search, one-click set-up, access to email and social networking.The company offers the most comprehensive portfolio of enterprise voice, data, video, internet and IT infrastructure services catering to large, medium and small enterprises for their communications, networking and IT infrastructure needs. Their product portfolio includes national and international private leased circuits, broadband internet access, audio solutions including Centrex, toll free services, voice VPN, video conferencing , MPLS-VPN, remote access VPN, Global MPLS VPN managed internet data centre (IDC) services to name a few.

Recent Company Developments Reliance Communications surges on reporting 3% rise in Q3 consolidated net profit Vinod Sawhny appointed CEO of RCOM to Lead Company Reliance Globalcom Names Bill Barney as CEO RCOM surges on making full repayment of another syndicated ECB loan of Rs 3,100 crores RCom surges on hiking prices of 3G data packs by 27% RCom surges on the buzz of inking multi-crore deal with AmdocsRisk & Return Analysis

A.) Beta Value

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. The beta values for all the firms represents the consolidated business performance The beta values are calculated based on 1 year daily and three year weekly returns of BSE and company stock returns. 1 year data is from Mar 2014-Feb 2015 and 3 year data is from March 2012- Feb 2015 The beta value has been computed using the formulae:

Where ra- company stock return rb- market return Comparison across companies for risk is purely based on the beta values calculated

Following table lists down the computed beta values for three telecom sector companies Bharti Airtel, Idea Cellular Ltd, and Reliance Communications Ltd.

Reliance Communications Ltd.Idea Cellular Ltd.Bharti Airtel Ltd.

1 year daily data(Mar 2014- Feb 2015)1.480.930.67

3 year weekly data(Mar 2012-Feb 2015)1.720.680.87

Interpretations:

Higher the beta value means higher the stocks volatility with respect to the market index.

Based on the 1 year daily data Reliance has beta value greater than 1 hence it is a riskier stock as compared to Idea and Airtel with beta values less than 1. Idea is more risker than Airtel with higher beta value.

Based on the 3 year weekly data,, again Reliance has beta value greater than 1 hence it is a riskier stock as compared to Idea and Airtel with beta values less than 1. Airtel is more risker than Idea with higher beta value.

B.) Risk Free Rate, Market Risk Premium and Expected Return

The value of Rf is based on 10 year Government Security on 28th Feb 2015. This value equals to 7.72%.

Source: http://www.tradingeconomics.com/india/government-bond-yield

The market risk premium or equity premium is found out to be 9.05%.

Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

The market return is calculated using the risk free rate and market risk premium.Market risk premium = E(Rm)-Rf

Therefore, market return (E(Rm)) = 7.72 + 9.05 = 16.77%.

According to Capital Asset Pricing Model (CAPM), the expected return on an asset is given by:

where: is the expected return on the capital asset is the risk-free rate of interest such as interest arising from government bonds (thebeta) is thesensitivityof the expected excess asset returns to the expected excess market returns, is the expected return of the market is sometimes known as themarket premium(the difference between the expected market rate of return and the risk-free rate of return).

Calculation for Expected returns for each company:

Assumptions:The returns are calculated based on 1 year daily data (Mar 2014-Feb 2015)

AirtelExpected return = Rf + Beta(Rm-Rf) = 7.72 + 0.67*9.05 = 13.78 %

Idea Cellular Ltd.Expected return= Rf + Beta(Rm-Rf) = 7.72 + 0.93*9.05 = 16.14 %

Reliance Communications Ltd.Expected return= Rf + Beta(Rm-Rf) = 7.72 + 1.48*9.05 = 21.12 %

Company NameExpected Returns

Bharti Airtel Ltd.13.78%

Idea Cellular Ltd.16.14%

Reliance Communications Ltd.21.12%

C.) Cost of Equity, Cost of Debt & WACC

Cost of equity for each company will be the same as expected returns calculated above.Company NameCost of equity

Bharti Airtel Ltd.13.78

Idea Cellular Ltd.16.14

Reliance Communications Ltd.21.12

Cost of debt has been calculated using the spread over 10 yr. Government bond. The credit ratings used are latest available ratings for long term debt for each company Source: Capitaline The spread data is based on 27th February 2015 data released by FIMMDA The spread taken is for Corporate and for 10 yr annualized spread

Company NameCredit RatingsSpread (Basis points)

Bharti Airtel Ltd.AA+63

Idea Cellular Ltd.AA104

Reliance CommunicationsA-240

Cost of debt= Risk free rate of 10 yr Government Bond + Spread

Rf = 7.72%

Company NameRisk free rate RfSpread (Basis points)Cost of debt (%)

Bharti Airtel Ltd.7.72638.35

Idea Cellular Ltd.7.721048.76

Reliance Communications Ltd.7.7224010.12

Weighted Average Cost of Capital It includes calculating the cost of capital of a firm in which each category of capital is proportionately weighted. Everything else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.

The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing it:

Where:Re = cost of equity ; Rd = cost of debt ; E = market value of the firm's equityD = market value of the firm's debt ; V = E + D ; E/V = percentage of financing that is equityD/V = percentage of financing that is debt ; Tc = corporate tax rate The D/E ratios taken are for financial year 2013-2014 Corporate Tax rate is taken to be 30% The Debt and equity values for each company are based on the consolidated financial statements

Company NameCost of equity (%)Cost of debt (%)D/EWACC (%)

Bharti Airtel Ltd.13.788.351.279.34%

Idea Cellular Ltd.16.148.761.1410.80%

Reliance Communications Ltd.21.1210.121.1413.64%

D.) Systematic & Unsystematic RisksBeta is a measure of systematic risks and it cannot be diversified. Some of the systematic and unsystematic risks followed by the telecom industry and each company are as follows:Systematic Risk:1) Telecom regulations by TRAI- Recently debate is going on for change in penalty policies for telecom operators, policy about mergers and acquisitions2) Foreign Currency exchange risk3) High inflationary environmentUnsystematic risks:The following could be source of unsystematic risk for the companies in particular.1) Spectrum Auction results2) Change in Credit ratings3) Mergers and Acquisitions4) Achievement in terms of no. of subscribers, quality and honors/awards5) Plans of global expansion 6) Issuance of debt for future investments7) Clearance of older loans/debts8) Allowed limit of FDI in the industry9) Change in leadership

Measuring investment returns

ROE and RONW represent the same ratios The trend has been taken for 5 years from 20010 till 2014 All ROE and ROCE values are based on consolidated financial statements for each company

A. ) Return on Equity (ROE) or Return on Networth (RONW)The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.Return on Equity = Net Income/Shareholder's Equity

Company20142013201220112010

Idea11.416.074.566.988.95

RCOM2.261.60.27-2.440.94

Airtel10.929.8412.2519.0929.28

Until 2012 there has been a fall in the Return of Equity for all the 3 companies, thereafter it saw a boost with Idea having the maxim ROE in March 2014 of 11.41%.Profits After Tax

Company20142013201220112010

Idea1,967.821,010.93722.98898.71953.94

RCOM1,137.007449881,505.004,777.44

Airtel3,019.402,266.904,258.105,899.209,361.52

Explanation:

The ROE for all the 3 companies did not show any positive trends until 2013-14. Due to intense competition in the industry and very low margins there has not been a substantial increase in the net income of the companies. Moreover the investments in the industry are funded by debt rather than using their accumulated reserves and surplus which further reduces the ROE over the years.In recent years, with substantial infrastructure in place and better government policies now, an increase in earnings has been realized for all the 3 companies in 2013-14. Also now that the companies are trying to shelve off debt from their balance sheets the interest expense removed has improved the bottom line and improved the ROE hence boosting the investors confidence in the companies.

B. ) Return on Capital Employed (ROCE)

Capital Employed is defined as total assets less current liabilities. Return on Capital Employed is a ratio that shows the efficiency and profitability of a company's capital investments. The ROCE should always be higher than the rate at which the company borrows money.Thereturn on capital employedis a better measurement than return on equity, becauseROCEshows how well a company is using both its equity and debt to generate a return.Both measures are well-known and trustedbenchmarksused by investors and institutions to decide between competing investment options. All other things being equal, most seasoned investors would choose to invest in a company with a higher ROE and ROC.

Company20142013201220112010

Idea10.738.117.116.159.2

RCOM1.53.481.71-0.582.2

Airtel12.711.6613.2618.0326.27

Both Airtel and RCOM have seen a decline in the Returns on Capital employed but in the last year there has been a rise. As far is Idea is concerned, there is continuous rise in the Returns on Capital Employed. Higher ROCE boosts investor confidence.

Explanation:

1. Change in Gross Block/Capital Employed/Cash flow from Investing Activities.2. Change in Operating Profit or EBIT.

GROSS BLOCK

Company20142013201220112010

Idea51,225.7346,611.0741,097.8233,703.8027,064.66

RCOM114,982.00109,718.00104,571.0086,838.0083,662.90

Airtel197,083.90181,930.90173,221.60155,436.9072,116.34

As we can see from the trend all the 3 companies are investing heavily in the infrastructure to service more and more regions and increase their customer base. This increase in gross block is being fund primarily by the debt hence increasing the total Capital employed. The change in Capital Employed can be seen in the below graph over the years. For Airtel the growth in Capital Employed has been tremendously huge due to its aggressive plans for investment in Africa and its subsidiaries. For RCOM and Idea also the capital employed has increased but not by huge rate.

CAPITAL EMPLOYED

Company20142013201220112010

Idea36559.9827996.5825795.5923239.0217983.64

RCOM6849569802794978287974977.17

Airtel81240.271682.667387.858620.441774

CASH FLOW FROM INVESTING ACTIVITIES

Company20142013201220112010

Idea-6564.62-3410.9-4685.09-8359.18-2937.46

RCOM-2099-2068-4571-6458-1859.11

Airtel-24973.3-18676.1-18379.5-60461.9-13760.3

Airtels CFI value in 2011 is very high as compared to other years as it invested heavily in its goal of Africa expansion. The investments done were primarily in purchase of fixed assets and investment in subsidiaries. Airtel has higher CFI than RCOM and Idea as it is investing heavily in its subsidiaries to globally expand its offerings.

With huge and continuous investments during 2010-2014 for expanding in various circles and increasing their reach to the customers all the 3 companies have increasing gross block and capital employed. The overall profit and operating profit has not steadily grown due to intense competition in the industry and as the companies are still striving for expansion and increasing their reach. This has caused a decrease in ROCE values over the years.

CHANGE IN EBIT

Company20142013201220112010

Idea8,570.896,099.625,092.153,917.943,780.89

RCOM7,670.007,159.006,490.009,154.0010,521.19

Airtel29,065.2024,118.8023,969.2020,419.7017,740.24

The EBIT values for these top 3 players are not showing much change for the past 3 years except for a little rise in Airtels EBIT. The investments made in this time period would reap in profits a later stage hence there is no big change in these earnings. With intense competition and low margins and increased costs due to increased debts, financing costs and other costs increase in no. of subscribers has not shown much boost in the earnings. Hence the numerator for ROCE does not show much change.

Cost of Equity vs. Return on EquityCost of equity is the return that is required by investors/shareholders, or the amount of compensation that an investor expects for making an equity investment in the firms shares. Return on equity is very useful for shareholders and investors who invest in the firms equity as it tells them that how much return they can obtain from their equity investment.The main difference between the two is that cost of equity is the perception that business is a cost, and return on equity in the businesses perception is an income.A company that earns areturn on equityin excess of itscost of equitycapital has added value, that is, a company with a return on equity higher than its cost of capital is a much more financially stable firm.CompanyReturn on Equity (2013-14)Cost of Equity

Idea Cellular Ltd.11.4113.78

Reliance Communications Ltd.2.2616.14

Bharti Airtel Ltd.10.9221.12

As we can infer from above that for all the three companies the cost of raising capital by issuing equity exceeds the return that the equity generates for the financial year 2013-14.This tells us that the companies are not using the shareholders funds well enough to generate profits. And with the cost of equity being higher this leads to a decline in the investing sentiments of the investors as there is a high risk involved in the investment. This shows that none of the companies out of the three are financially stable.

Capital Structure Choices

Thecapital structureis defined as to how a firm finances its overall operations and growth by using different sources of funds namely, debt and equity. Debt usually comes in the form of bond issues or long-term notes payable, whereas, equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

A. ) D/E RatioCompany20142013201220112010

Idea1.140.860.860.880.69

RCOM1.141.110.970.960.69

Airtel1.271.451.361.160.26

Industry1.171.170.940.710.53

The D/E ratio of the industry has been growing each year and is well above 1. This is mainly because each player in the industry is issuing debt to fund its expansion plans to provide services in more and more circles in the country and globally. The telecom sector is currently burdened with debt funding where all the players are focusing only to grab spectrum auctions and pay heavy prices to emerge as top player in the industry as already the margins are low.

IdeaThe D/E ratio has been almost stable but increased above 1 in the past year for Idea cellular Ltd. In the past the increase is because it used the debt to acquire additional spectrum. With the spectrum acquisition the company has extended its 3G spectrum to Delhi service areas. It has also won an additional 157.7 MHz of spectrum in open market auctions.

RCOMThe D/E ratio has been near 1 over the years and has crossed the 1 mark in the past 2 years. This is mainly due to utilizing the debt to spectrum auctions and increasing the presence in various service circles.

AirtelIt features the highest D/E ratio as it has been using the debt to fund its expansion plans globally primarily in Africa and spectrum auctions. The recent decrease in D/E ratio from 1.45 in 2012-13 to 1.27 in 2013-14 is because the company is reinvesting the profits into business. This shows strong confidence on the future outlook of the business.

B. ) Total Debt

Total Debt ( in Rs. Crores)

Company20142013201220112010

Idea18,775.5612,263.2411,249.6910,785.167,859.30

RCOM36,822.0037,478.0035,185.0039,071.3829,715.42

Airtel75,895.8072,960.8069,023.2056,650.1010,288.14

IndustryThe cumulativedebtof telecom companies has risen about 82 per cent to an estimated Rs 2.34 lakh crore in 2013-14 from Rs 1.28 lakh crore in 2008-09. As domestic interest rate is likely to remain elevated for some more time, corporates and banks are hitting the international debt market with renewed interest.As per investment bankers, close to $ 6 billion bond sales were in the pipeline before July 2014 from a clutch of big corporates like Bharti Airtel which raised around $ 2 billion.Reliance Communications (RCom), which had debt of Rs 36,822 crore till March 31, 2014, had about Rs 27,000 crore or about 69 per cent, in foreign currency. About 60 per cent of Idea Cellulars total debt of Rs 12,263 crore is in foreign currency.

IdeaThe debt levels are lowest for idea and have been only increasing to fund its expansion in the country, having presence in various service circles and acquiring various firms and participating in more spectrum auctions to increase their coverage area in line with other operators.

RCOMThe debt levels for Rcom are midway among the 3 companies which is being used for spectrum auction and increasing presence in various service circles.

Airtel The debt levels are increasing tremendously since 2010 as the company went ahead with its Africa venture. They also used the debt for spectrum auctions. Currently Airtel went for a 5% stake sale with Qatar foundation to reduce the debt obligations on their balance sheet to increase the bottom line. Balance sheets of operators are still under pressure. The mobile operators took debt in the process of shoring up funds for the license renewals and payments of one time fees. Bharti Airtel and Idea Cellular have raised money through stake sales and competent placements and in the case of Bharti Airtel, the sale of its tower assets in Africa. As a result of this, all the 3 companies need to lower their debt figures to impact their bottom line, as the competition is intense and margins are low.

C. ) Operating Cash Flow (OCF) RatioA measure of how well current liabilities are covered by the cash flow generated from a company's operations.

The operating cash flow ratio can gauge a company's liquidity in the short term. Using cash flow as opposed to income is better indication of liquidity because cash is how bills are normally paid off.Company20142013201220112010

Idea0.73027710.6419360.45806310.71467840.533891

RCOM0.3356070.21098790.28864690.16222270.4882455

Airtel0.60562110.58777890.64993250.4930610.9152755

IdeaOCF ratio less than 1 and do not have enough operating cash to meet their current liabilities.

RCOMThe Operating cash flow ratio is very low as compared to its peers indicating it does not have enough operating cash to meet its current liabilities

Airtel OCF ratio less than 1 and do not have enough operating cash to meet their current liabilities.

D. ) Cash-Debt Coverage RatioThiscoverage ratiocompares a company's operatingcash flow to its total debt, which, for purposes of this ratio, is defined as the sum of short-term borrowings, the current portion of long-term debt and long-term debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the ratio, the better is the company's ability to carry its total debt.

Company20142013201220112010

Idea0.43068490.50538520.33939420.47224330.3234499

RCOM0.18573140.10067240.16197240.05966930.3159656

Airtel0.34563970.32185780.3263410.3260631.4654408

The Cash debt coverage ratio is extremely low for RCOM and has considerably fallen over the years. Such low values indicate its inability to pay off its total debts through its operating cash flow. RCOM very recently is contemplating debt restructuring with dividing its GSM and CDMA business and selling off CDMA business to lower its debt. The Cash debt coverage ratio for Idea is highest among its peers in recent years.Bharti Airtel was very well able to service its debt using the cash flow from operating activities until 2010 with a cash flow to debt ratio of about 1.46 but it fell significantly over the years due to the increase in the amount of debt issued by the company for various expansion plans.

E. ) Interest Coverage Ratio (ICR)Interest coverage ratio indicates how easily a company is able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. Interest coverage ratio of below 1.5 should raise doubts about the companys ability and interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.Interest Coverage Ratio20142013201220112010

Idea4.032.441.943.433.07

RCOM0.581.321.1-0.541.56

Airtel7.274.915.9827.92-17.84

Bharti Airtels average interest coverage ratio over the last few years saw a rise which indicates that the company has been generating enough for the shareholders after servicing its debt obligations. It seems to have the highest Interest-Coverage ratio among its peers.Where RCOM seems to have the least Interest-Coverage Ratio as compared to Airtel and Idea both, it denotes that the company is not able to meet its debt obligations. The margin of safety that the firm enjoys with respect to its interest payments is very less.The Interest-Coverage ratio for Idea Cellular Ltd. is well above 1.5 and saw a rise in the last few financial years which indicates that the company can easily meet its interest expenses pertaining to its debt obligations.

What should be the Optimal Capital Structure?Some debt is often better than no debt, but too much debt increases bankruptcy risk. To put simply, additional debt lowers the weighted average cost of capital and becomes too risky. Here we see that with increase in total debt of Bharti Airtel Ltd, the weighted average cost of capital (WACC) seems to have fallen significantly.The main benefit of increased debt is the increased benefit from the interest expense as it reduces taxable income. But, with an increased debt load the interest expense rises and the need of cash flow to cover the interest expense also rises. The stockholders are under pressure because if interest increases, EPS decreases, and a lower stock price is valued. If a company, in the worst case, goes bankrupt, the stockholders are the last to be paid, if at all.The optimal capital structure, the ratio of long-term debt to total capital, is difficult to estimate. It depends on two factors mainly; it varies by choice of industry and also by companys growth cycle.Some industries, like that of telecommunications, are more asset-intensive than others (require plant investments and use long term debt). The greater the investment infixed assets(plant, property and equipment), the greater is the average use of debt. This is because banks prefer to make loans against fixed assets rather thanintangibles.Secondly, companies that are start-ups and in their early stage often favor equity over debt because their shareholders will forgo dividend payments in favor of future price returns. But companies already in their mature phase prefer having some debt over no debt.In summary, the optimal capital structure is the mix of debt, preferred stock and common equity that optimizes the stock price of the company.

Dividend and Dividend Policy

Dividend is a payment made by a company to its shareholders usually as a distribution of profits. When a company makes profit it can either re-invest it in the business or it distributes it to its shareholders by way of dividends. The dividend payout ratio is the amount of dividends paid to shareholders relative to the amount of total net profit of a company.

A reduction in dividends paid is not appreciated by investors and usually the stock price moves down as this could point towards difficult times ahead for the company. On the other hand a stable dividend payout ratio indicates a solid dividend policy by the company's management.

DividendDividend %Div YieldDividend Payout ratio

Year EndIdeaRCOMAirtelIdeaRCOMAirtelIdeaRCOMAirtelIdeaRCOMAirtel

2014132.860719.540360.2900.567.86010.9

201399.4352379.835200.270.450.3412.158.337.45

2012052379.8052000.30.3033.336.62

20110103379.80102000.460.28004.92

20100175.44379.80172000.50.32036.634.02

The telecomm industry is a fast-growing industry. From a dividend perspective, what this means is that a company in this sector would prefer to invest in expansion opportunities than pay out dividends with their earnings.

Bharti Airtel

Airtel has been listed for 7 years. Yet, the dividend announced for FY 14 is just Rs 1.80. Till year ending March 2014, Bharti Airtel has declared an equity dividend of 36.00% amounting to Rs 1.80 per share.

The company has a good dividend track report and has consistently declared dividends for the last 5 years. Airtel has followed a constant dividend policy with same dividend and dividend % to maintain investors confidence. It does not base its dividend on its earnings.

The stock price did not fluctuate significantly upon announcement of dividend.

For FY 15, Bharti Airtel sees the need for massive investments data analytics, spectrum and customer relationship management to ride the next wave of growth encompassing the mobile Internet and the data services.

So the dividend per share is likely to stay the same or even reduce.

Split history: Bharti Airtel had last split the face value of its shares from Rs 10 to Rs 5 in 2009.

Idea Cellular Ltd

Idea has given only recently its dividend in 2013 and kept the dividend% low. The company is stillgrowing and has been investing its cash in fixed assets and acquiring firms. It is hard to comment on the dividend policy it will look forward to at this stage.

For the year ending March 2014, Idea Cellular has declared an equity dividend of 4.00% amounting to Rs 0.4 per share

Reliance Communications Ltd

Looking at the pattern of the previous years, the net income has been falling since 2010. The dividend per share has also reduced gradually with each year. So we can say that the dividend policy of the company is dependent on its earnings.

For the year ending March 2014, Reliance Communications has not declared any dividend.The company has a good dividend track report and has consistently declared dividends for the last 5 years but it has been reducing.

Working Capital Analysis

Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business

The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt.

Cash Conversion Cycle (CCC)The cash conversion cycle is a measure of working capital efficiency, often giving valuable clues about the underlying health of a business. The cycle measures the average number of days that working capital is invested in the operating cycle.

It is measured in days and equals DIO + DSO DPO

Idea:20142013201220112010

Working Capital-4752.17-5932.4-5003.11725.413377.57

Current Assets26353.0330051.0325691.2429470.351817.67

Current Liabilities86367.1877807.0183000.380807.2339988.8

Current Ratio0.310.390.310.361.3

Receivable days11.7814.2712.7111.4811.7

Inventory Days0.720.8911.181.38

Payable days41.1642.2260.0479.4679.2

CCC-28.66-27.06-46.33-66.8-66.12

RCOM:20142013201220112010

Working Capital-45210-17680-15840-97010107828.6

Total Current Assets146990136220113510152700200062.3

Total Current Liabilities19220015390012935024971092233.7

Current Ratio(x)0.870.880.70.861.33

Receivable days59.7157.952.3144.9343.37

Inventory Days8.439.159.558.297.43

Payable days58.9248.7139.5340.9148.72

CCC9.2218.3422.3312.312.08

Airtel:20142013201220112010

Working Capital-123692-132219-51265-11550810060

Current Assets6738862038217686116442186439

Current Liabilities191080194257268951231950176379

Current Ratio0.350.320.810.51.06

Receivable days1616131617

Inventory Days0.010.140.290.30.46

Payable days6864678990

CCC-51.99-47.86-53.71-72.7-72.54

As we can see from the above trend the payable days have been reducing for the industry on whole, hence the CCC values are further reducing in absolute terms. One of the explanations could be that due to the rising levels of debt the creditors want their payment to be done quicker than before. The companies which have good supplier relation and have better brand values see this effect less on their CCC values.

Telecom industry is a capital intensive industry, hence the working capital is usually negative. In this case, even though Airtel has the highest negative working capital, it isn't necessarily a bad sign. While the current liabilities of Airtel and RCOM are comparable, the current assets of Airtel are considerably less, as the respective values of current ratio illustrate. This is because of investment in growth plans, and hence is a good sign for the company overall, and Airtel being the biggest in scale has obviously the highest value.

For Reliance, receivable days is extremely high (58) compared to around 10 for Airtel and Idea.

Hence Reliance unlike its peers has positive CCC value meaning it pays off its suppliers before it gets its receivables.

Airtel has low current ratio but its CCC is lowest among its peers. It has also maintained that over the years. This shows that it has enough flexibility to pay its suppliers very much after it gets its receivables.It shows the trust in Airtel as a company by its suppliers.

Idea also has a comparable CCC and current ratio, but the absolute value of CCC has been reducing over the last 5 years, which shows that the pressure from suppliers to pay has been increasing

references

Online Sources:

Capitaline.com, Aceanalyser.com, Livemint.com, Yahoo finance Annual Reports Bharti Airtel Ltd. Idea Cellular Ltd. Reliance Communications Ltd. Fimmda.org (Fixed Income Money Market & Derivatives Association of India) Moneycontrol.com, bseindia.com, money.rediff.com

News Articles: http://www.livemint.com/Opinion/F18LKGFVDRB2dYF1yq1CTN/Where-is-the-telecom-sector-headed.html http://www.business-standard.com/article/companies/telecom-sector-to-see-consolidation-in-near-future-uninor-114092501034_1.html http://telecom.economictimes.indiatimes.com/ http://businesstoday.intoday.in/story/2014-year-roundup-telecom-sector-growth-2g-spectrum-auction/1/213823.html

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