Airtel Case on Capital Budgeting:
A detailed analysis
Presented by:
Prajjwol Bikram Khadka
Nancy Rauniyar
Niraj Pandeya
Dhrub Sah
Dhiraj Bhatta
Anjee Manandhar
BACKGROUND OF BHARTI AIRTEL
• Bharti Airtel Limited (Airtel) was set up as public limited
company on July7, 1995 by Sunil Bharti Mittal, who became its
first chairman.
• The company was listed on both Bombay Stock Exchange
Limited (BSE) and the National Stock Exchange of India
Limited (NSE).
• The company Had four key strategic business segments: mobile,
telemedia, enterprise and digital TV.
• Within a very short span of time, it rose to great heights with its
worldwide network of services.
• Management decided to invest in a 3G license and to acquire
Zain, an African telecom company.
INVESTMENT IN 3G SERVICES
• In 2010, the Indian government received around US$15 billion
from the auction of 3G spectrums
• Aircel, Airtel, Vodafone Essar, Idea Cellular, Reliance
Communications, Tata Teleservices and S Tel all won 3G
licenses
• Invest US $2.5 billion in networks rollouts between Q4 2010 and
Q4 2011
• Wireless Intelligence forecasted that India would reach around
400 million 3G connection
• Big investment in new high speed networks and services
concerns of profitability of players, including Airtel especially in
a price sensitive market dominated by prepay users
ZAIN DEAL
• Adopted Inorganic growth strategy to expand through
takeovers,
• Took out a debt of nearly $9 billion dollar on
international markete signaling Aggressive Approach,
• Raised debt from consortium of foreign banks and State
bank of India,
• MARCH 30, 2010:
-Bharti entered the deal to acquire Zain telecom’s operations
in 15 nations, excluding Sudan and Morocco.
• JUNE 8, 2010:
-Bharti Airtel completed the deal for an Enterprise value
$10.7 billion.
• Results:
▫ Second biggest overseas acquisition by Indian Company
after Tata Steel’s $13 billion acquisition of Corus in 2007,
▫ Airtel became fifth largest wireless company of the world,
▫ Airtel gained 42 million new customers in Africa.
ANALYSIS
• Bharti had debt equity ratio of 1.4 which was highest in
the telecom industry,
• Since Bharti acquired Zain, it has struggled to turn
around those operations reporting repeated losses
from the continent,
• While the Africa operation has widened the
companies’ geography, it continues to be a drag on its
balance sheet,
• Reasons for decline:
▫ Lack of market understanding at the time of acquisition,
▫ Zain had not invested much in branding and networking.
QUALCOMM DEALS
• May 24, 2012:
Airtel announced the acquisition of 49% stake in the
broadband wireless access Indian branch of Qualcomm.
• Shares in Airtel valued about $20 billion,
• Capital assets increased, but at the same time, the share of
investment in these capital assets declined from 49.85% in
2010 to 45.58% in 2013,
• Airtel’s assets turnover ration decreased from 1.20 in 2010
to 1.03 in 2013, showing inefficient use.
Profitability and long term viability
• The results of inorganic growth approach were
not satisfactory
• Revenue increased but profit declined
• Airtel lost its market leadership place
• By 2013, Airtel was experiencing a lower than
expected performance in both its domestic and
international business areas.
Uses of capital budgeting tools and
techniques for decision making
• Airtel pursued an aggressive approach for
financing
• The decision should be made considering cash
flow analysis of the projects
Techniques Status
PBP Between 5 to 6 years
NPV Positive
IRR 20%
• Based on the calculation Zain can turn out to be
a good investment for Airtel if present revenue
momentum is maintained
• Profitability is decreasing
• The degree of risks related to capital budgeting
decisions was not incorporated in the decision
making
Financial Ratios Consideration
Key financial ratios
• Debt equity ratio
• Assets turnover ratio
• Fixed assets to net worth ratio
• Return On Total Assets (ROA)
• Return On Equity (R0E)
Debt Equity Ratio
Debt equity ratio = Total Debt/Total equity
Airtel company had 1.4 debt equity ratio which
was highest among the industry
Assets Turnover Ratio
Assets turnover ratio = Sales/Total assets
Year Assets turnover ratio
2010 2013
1.20 1.03
Fixed Assets to Net worth ratio
Fixed assets to net worth = Fixed assets/net worth
Airtel has less than 1 fixed assets to net worth ratio
revealing the poor state of affairs
Return On Assets (ROA)
ROA = Net Income/Total Assets
In 2013, Airtel had 5.50 ROA which is lowest of all
these years
Return On Equity (ROE)
ROE = Net Income/Common equity
Airtel has following ROE in different years
Year ROE
2010 29.40
2013 9.90
Capital Investment financing policy for
long term soundness
• Conservative and aggressive approach are the
two different approaches of financing
• The approach followed by Airtel can be
considered as Aggressive approach because it
took nearly $9 billion to fund the Zain deal of
$10.7 billion
• The debt lead to the huge cash outflow of $200
million
• Buying 3G license In India put extra debt burden
to Airtel
• In addition, the takeover of Qualcomm added
extra debt burden of $1 to $1.2 billion
Impact of capital Investment on the
profitability of Airtel
• With the Zain takeover, Airtel will gain Africa’s
42 million customers and annual revenue of
$3.6 billion.
• There was a jump of around 6% in the market
price of shares of the company after this
takeover.
• Revenue grew by 27.36% in 2013 and net profit
slipped by 49.94%
• There was notable decline in its consolidated net
profits for four quarters in a row although the
revenue have increased annually.
Is inorganic growth right path for Airtel or should it follow
organic growth for long-term growth?
• Growth is classified as organic and inorganic.
• Developing your company’s strengths through
organic growth can make you a stronger player
in your industry whereas growing your business
inorganically immediately expands your assets,
your income and your market presence.
Selection of appropriate growth strategy
• Based on organizational cost-benefit analysis.
• Company are supposed to take risks in order to
grow its business.
• With its internal strength and strong position in
the market, it is hoped that it will use its
resource base effectively to increase future
profits.
• For long term growth, organic growth is the best
approach.
Conclusion and recommendations
• The management must estimate future
requirements of fixed assets correctly.
• The company should try to reduce its debt burden
soon by using internal funds or restructuring its
debts.
• The management should improve its efficiency in
utilizing its fixed assets.
• The company should apply capital budgeting
principles correctly when taking important
decisions.
