Credit Research Challenge

2018-19

Team 405

CIN: L74899DL1995PLC070609

AGENDA

• Business Description and Model

• Industry Overview – Africa and India

• Competitive Positioning

• Porter’s Analysis

• Milestones

• Airtel’s Different Business Segment Analysis

• Indian Economy Forecast & Future Opportunities in Telecom Industry

• Jio Impact – ARPU & Customer Share

• Analysis : Dupont, Solvency, Liquidity, Capital Structure, Debt & Cost of Capital

• Rating History of Airtel – Indian & International

• Key Rating Drivers

• Peer Comparison

• Risk Analysis & Probability of Default

• Rating Methodology

• Credit Risk Matrix – Financial, Industry, Business & Management Risk Analysis

• Management & Corporate Governance

• Appendix & References

Business Description

Wireless ServicesPostpaid, Prepaid, International Roaming, VAS

Homes Services (only India)

Fixed-line Telephone and Broadband (DSL)

Digital TV Services

DTH Platform with HD capabilities

Airtel Business (Enterprises and SME’s)

Information and Communication Services

Towers (under subsidiary Bharti Infratel Ltd)

Approximately 40,000 across 22 telecom circles

• India

• Bangladesh

• Sri LankaAsia

• 14 CountriesAfrica

28.4% of

Liberalized Spectrum in

India 20,000+

Employees

(Worldwide)

413 Million+

Customers

(Worldwide)36%

Market Share

(By Revenue)IndiaAirtel Payments Bank was deconsolidated during

the quarter that ended 31st December 2018

Business Model

Key Partners

• Networking Equipment Manufacturers

• 4G Enabled Smartphone Manufacturers

• Network Inframanagement and support

Activities

• Wired and Wireless Services

• Network Infrastructure providers

Customer Segments

• Premium Segment

• Preferential treatment for high ARPU Subscribers

• Target 20% customers who generate 80% of the revenue

Customer Relationships

• Attractive plans and Loyalty Schemes for loyal customers

Value Proposition

For a Subscriber

• Voice Packs

• Data Packs

• Bundled Services

• Broadband

• Digital Tv

• Wired-line

For a Business

• Data and IP

• Voice

Resources

• Strong Management

• Brand Equity

Revenue Sources

• Subscribers

• SMEs and Enterprises

Costs

• Infrastructure Lease and Maintenance

• Insurance

Channels

• Prepaid & Post-paid cards

• Optical fibres

• Network Towers

Industry Overview and Competitive Positioning: Africa

Second-fastest growing

economic zone in the world

420 Million mobile subscribers in

2016, expected to grow to 532

Million by 2020

Data Traffic to grow by a CAGR

of 66% over the period of 2016-

2020

Youth ( A potential long term

Customer ) constitutes 19% of the

total population.

Industry Overview: India

2nd largest telecom market in the

world

2nd largest Smartphone market in

the world

2nd highest internet users in the

world

2nd largest enterprise & SMB

market in the world

Porter’s Analysis

012345

Threat ofSubstitutes

BargainingPower ofSuppliers

CompetitiveRivalry

BargainingPower ofBuyers

Threat of NewEntrants

Threat of Substitutes

Hardly any threat of substitute products

as there is no substitute available in the

market

Competitive Rivalry

1. Customers’ low switching cost and

price sensitivity are increasing

competition among players

2. High exit barriers are also intensifying

competition

Bargaining Power of Buyers

1. Low switching cost and mobile number

portability give customers high bargaining

power

2. Customers are price sensitive

Threat of New Entrants

1. Strict government regulations

2. Extremely high infrastructure setup

cost

3. Difficulty in achieving economies of

scale

Bargaining Power of Suppliers

1. High bargaining power of

suppliers as there are just a few

suppliers in the sector

2. High cost of switching suppliers

Competitive Positioning: India

Market Share by Revenue

Market Share by Subscribers

• Airtel and Tata Teleservices merger is yet to

be materialized, subject to approvals

• Vodafone has merged with Idea to form

Vodafone Idea Ltd

36.9%

MILESTONES

✓ Launch of high capacity direct

terrestrial link between India and China

✓ Rated as India’s Best Enterprise

Connectivity Provider

✓ Launches Global Data Services in

Thailand & Malaysia

2010 2012

2015 2014 2013

2016 2017

2011✓ Launches EIG for

Commercial use

✓ Partners with

Savvis for

enhancing Managed

Service offerings

✓ Became 4th

largest mobile

operator in the

world in terms of

subscribers.

✓ Signs

definitive

agreement to

fully acquire

Warid

Uganda

✓ Airtel crosses 200

million mobile

customer mark in

India

✓ ‘Golden Peacock Award for Sustainability 2015’

✓ Aegis Graham Bell Award 2015 in the mHealth

category

✓ Airtel Ghana won four awards - ‘Telecom Brand

of the Year’ ,‘Marketing Campaign of the Year’,

‘Innovative Enterprise Product of the Year’ ,‘Special

Recognition to the Telecom Industry’

✓ "Certificate of Recognition for Excellence

in Corporate Governance 2016"

✓ ‘Golden Peacock Award for Excellence in

Corporate Governance’ for the year 2016

✓Recognised as the ‘Firm of the Year –

Telecom’ by ICICI Lombard & CNBC-TV18

✓ Ranked amongst top 100 firms in ‘The World’s Most

Awarded the ‘Best Risk Management Practice Award’

in the Telecom category Innovative Companies’ (2017)

by Forbes

✓Ranked 2nd in the annual Brandz ‘Top 50 Most

Valued Indian Brands 2017’

B2C Services Sector (FY 2017-18)

Wireless Services

• Number of subscribers – 12%

• Gross Revenues – 18%

• EBIT – 80%

• Partnerships

• M&A

• Deployment of Massive MIMO

Homes Services

• Number of subscribers – 2%

• Gross Revenues – 8%

• EBIT – 31%

• Introduced new superfastHome Broadband Plan

300 Mbps

• Fixed Line Telephone and Broadband (DSL) Across - 89 cities

• V-Fiber TechnologyFirst operator to deploy Vectorization in India

• DSL represents 94% of Home Customers

Digital TV Services

• Number of subscribers – 10%

• Gross Revenues – 10%

• EBIT – 48%

• Total Channels – 649which includesHD Channels – 75International Channels – 5

• HD Set-top boxes and demand for HD Channels along with the upselling efforts led to ARPU- ₹231

• Warburg Pincus affiliate will acquire a stake of 20% in Bharati Telemedia Ltd (DTH Arm)

B2B Services Sector (FY 2017-18)

Airtel Business

• Gross Revenues – 3%

• EBIT – 37%

• Strategic Alliance - SecurityExclusive partnership with Symantec Corpfor distribution of Enterprise Security Software

• M&AAcquired Gulf Bridge International-Indian legTo serve the exploding data demand in India, Gulf and Africa

• Awarded ‘Best Wholesale Carrier (Global)’ -2017

Towers Infrastructure

• Gross Revenues – 9%

• EBIT – 19%

• Managed through Subsidiary- Bharti Infratel LtdDeploys, Owns and Manages Telecom Towers and Communication Structures for various mobile operators

• M&AAcquired 42% in Indus Towers

• Consolidated Portfolio – 91451 Towers

- 39523 Towers

- 51928 Towers (42%)

Airtel’s Different Business Segment Analysis

1,3

0,2

92.0

7,7

13.0

21,7

31.0

8,6

89.0

-1,5

81.0

1,2

6,2

59.0

12,1

67.0

24,7

46.0

12,4

29.0

1,8

43.0

1,1

1,0

23.0

22,7

37.0

29,1

95.0

6,8

68.0

3,5

77.0

54,0

43.0

31,0

44.0

33,4

77.0

4,7

20.0

5,3

06.0

-58.5%

302.5%

54.1%

-45.7%

435.6%

-100.0%

0.0%

100.0%

200.0%

300.0%

400.0%

500.0%

-20,000.0

0.0

20,000.0

40,000.0

60,000.0

80,000.0

1,00,000.0

1,20,000.0

1,40,000.0

Mobile Services Enterprise Services Passive Infrastructure Home Services Digital TV

FY 2015

FY 2016

FY 2017

FY 2018

% Change

7,8

0,1

80.0

52,4

29.0

22,5

30.0

40,5

50.0

24,6

99.0

8,0

3,9

12.0

62,5

03.0

25,3

95.0

44,3

92.0

29,1

19.0

7,6

9,1

92.0

94,8

55.0

28,3

84.0

27,2

23.0

34,2

40.0

6,4

1,6

43.0

98,2

44.0

33,2

21.0

25,0

56.0

37,5

05.0-17.8%

87.4%

47.5%

-38.2%

51.8%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

0.0

1,00,000.0

2,00,000.0

3,00,000.0

4,00,000.0

5,00,000.0

6,00,000.0

7,00,000.0

8,00,000.0

9,00,000.0

Mobile Services Enterprise Services Passive Infrastructure Home Services Digital TV

FY 2015

FY 2016

FY 2017

FY 2018

% Change

Revenue From

Different Segments

Of Airtel (in millions)

Profit From Different

Segments Of Airtel

(in millions)

Indian Economy Forecast1

48

1.5

6

14

85

.6

16

10

.36

16

38

.76

17

49

.16

19

82

.7

21

34

.75

23

34

.14

25

38

.82

27

62

.31

30

06

.54

32

73

.85

0

500

1000

1500

2000

2500

3000

3500

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Indian GDP Forecast in US$

10.59 1.96 0.3 1.312.9

1.32

5.56

6.21 1.59 31.75

0

10

20

30

FY

01

- F

Y1

1

20

11

- 2

01

2

20

12

- 2

01

3

20

13

- 2

01

4

20

14

- 2

01

5

20

15

- 2

01

6

20

16

- 2

01

7

20

17

- 2

01

8

20

18

- 2

01

9

FY

01

- F

Y1

9

FDI Inflows in telecommunication (US$ Billion)

2.00%

2.40%

2.60% 2.90% 5.00%3.50% 6.30% 6.40% 7.30%11.00%8.50%

15.00% 15.00% 16.20%20.00%

42.00%

45.20% 45.30% 46.00%46.00%

44.00%31.10% 30.70% 27.60%

18.00%

20

05

20

16

20

17

20

18

20

25

F

Indian residents shifting from low to high income groups (%)

Million Household

Next Billion (US$ 2300 - 7700)

Affluent(US$ 15400 - 30800)

Strugglers(<US$ 2300)

Aspirers(US$ 7700-15400)

Elite(>US$ 30800)

❖ GDP per capita of India is expected

to grow at a CAGR of 7.47 per cent

from US$ 1,481.56 in 2012 to US$

3,273.85 in 2023

❖ The emergence of an affluent

middle class is triggering demand for

the mobile and internet segments

❖ FDI inflows into the telecom sector

during April 2000 – June 2018 totaled

to US$ 31.75 billion

Future Opportunities in Telecom Industry

12

00

42

0

44

0

25

0

12

00

56

0

51

0

35

0

14

20

10

00 1

18

0

11

50

3%

10%

15%

22%

0%

5%

10%

15%

20%

25%

0

200

400

600

800

1000

1200

1400

1600

Mobile

Subscriptions

(In Millions)

Smartphone

Subscriptions

(In Millions)

Mobile Broadband

Subscriptions

(In Millions)

LTE Subscriptions

(In Millions)

2017

2018

2024 F

2018-2024

(CAGR)

❖ Increasing mobile subscribers

➢ India’s mobile subscriber base is expected to reach 1,420 million by 2024 from 1,200 million in 2018, with 80 % users having 4G

connections

❖ Increasing mobile data traffic

➢ Data traffic is expected to grow at a CAGR of 26% till 2024.

❖ Rising internet penetration

➢ Number of broadband subscribers expected to reach 1180 million by the end of 2024

❖Telecom Equipment Market

➢ Telecom equipment market is expected to reach US$ 30 billion by 2020

❖ Growing Cashless Transactions

1.8

3

12

0

2

4

6

8

10

12

14

2017 2018 2024 F

Total mobile data traffic (EB/Month)

(1 Exabyte = 10^9 GB)

CAGR - 26%

Jio Impact – ARPU

405060708090100110120130140150160170180

A P R - J U N ' 1 6J A N - M A R ' 1 6O C T - D E C ' 1 5J U L - S E P ' 1 5A P R - J U N ' 1 5J A N - M A R ' 1 5O C T - D E C ' 1 4J U L - S E P ' 1 4A P R - J U N ' 1 4

AVERAGE REVENUE PER USER (IN RUPEES)

Idea Vodafone Bharti Airtel ltd

405060708090100110120130140150160170180

A P R - J U N ' 1 8J A N - M A R ' 1 8O C T - D E C ' 1 7J U L - S E P ' 1 7A P R - J U N ' 1 7J A N - M A R ' 1 7O C T - D E C ' 1 6J U L - S E P ' 1 6

QUARTERS

Pre – Jio

ARPU

Post – Jio

ARPU

Jio Impact – Customer Share

23%

Vodafone Idea

36%

29%

BSNL10%

Tata Tele2%

54%

Vodafone Idea21%

21%

BSNL4%4%

Vodafone Idea2%

22%

BSNL62%

Tata Tele10%

35%

Vodafone28%

Idea24%

BSNL12%

MTNL2%

Wireless

Pre – Jio

30%

Vodafone24%

Idea20%

BSNL15%

Rcom11%

Broadband

16% Vodafone1%

BSNL61%

MTNL15%

Tata7%

Wireline

Pre – Jio

Post – JioPost – Jio

Subscribers Growth Rate

– 17.19%

– 1.89%

The future of Indian

telecom will depend on

what Jio does.

Vodafone India and Idea

Cellular had to merge just

to survive.

Sunil Mittal

Chairman – Bharti Airtel

Pre – Jio

Post – Jio

Airtel lost

5.7 crore customers

in December 2018

Management and Corporate Governance

12 Board

Members

2ExecutiveDirectors

4Non-

ExecutiveDirectors

6Independent

Directors

Rated GVC Level 1 by CRISIL

• Highest Capability ofCorporate Governance

• Highest Capability of Value Creation

Ranked #1 by Transparency International

• Given for Highest Standards of Corporate Governance

• Ranked among 100 emerging marketmultinational companies

Awarded the Golden Peacock 2017

• Awarded for Corporate Sustainability

• Awarded for 29% reduction in CarbonDioxide emission

Dupont Analysis

3.11 3.11 3.27 3.42 3.53

0

1

2

3

4

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

FINANCIAL LEVERAGE 0.50 0.49 0.46

0.420.35

0.0

0.1

0.2

0.3

0.4

0.5

0.6

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

ASSET TURNOVER

3.23

5.636.30

3.98

1.31

0

2

4

6

8

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

PROFIT MARGIN

5.06

9.21

7.056.00

2.63

0

2

4

6

8

10

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

RETURN ON EQUITY Analysis:

❖ The proportion of assets and equities has increased over the years, as the amount invested on

assets is increasing at a higher rate than any increase in equity. These assets are financed

through long term borrowings, which in turn increase the fixed finance cost, which further

decrease profits. There has been a considerable decrease in revenues due to intense

competitive prices and a decrease in subscriber base.

❖ This decrease in operating profits is mainly attributed to lower revenue as the operating cost

have not dramatically changed.

❖ The asset turnover is decreasing, which is due to the continuous decline in profits, along with a

slight increase in fixed assets.

❖ The shareholding of Airtel has not seen high changes, and the profit of the company has been

decreasing. Hence, The general return on equity of Airtel is decreasing.

❖ This will result in a loss of investor confidence.

Solvency Analysis

118.6599.34

139.00 144.34 142.10

0

50

100

150

200

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

DEBT EQUITY RATIO

85.9767.70

123.53 120.59108.42

0.0

50.0

100.0

150.0

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

LONG TERM DEBT/ EQUITY

2.73

2.11

2.96 3.04

3.67

0.0

1.0

2.0

3.0

4.0

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

DEBT / EBITDA

7.638.49

7.16

5.264.69

0.0

2.0

4.0

6.0

8.0

10.0

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

INTEREST COVERAGE Analysis :

❖ The general solvency position is declining, as the rate of increase of

debt is much higher than increase in equity.

❖ However, Airtel has been making consistent efforts to de-leverage.

Hence, its long term debts are decreasing.

❖ The current debt of Airtel is relatively higher. EBIDTA is decreasing at

a continuous rate. Thus Interest coverage is falling, which is not a

good sign for the company as it shows lowered ability to repay interest

expenses. This is mainly due to lowered income, which is resulting in

lower EBIDTA.

Liquidity Analysis

0.30 0.25 0.21 0.180.25

0.0

0.2

0.4

0.6

0.8

1.0

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

QUICK RATIO

0.39 0.420.39

0.29

0.43

0.0

0.1

0.2

0.3

0.4

0.5

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

CURRENT RATIO

0.20

0.15

0.11 0.11

0.17

0.0

0.1

0.1

0.2

0.2

0.3

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

CASH RATIO

18.8518.77

16.3114.87 15.71

0.0

5.0

10.0

15.0

20.0

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

CFO / LIABILITYAnalysis

❖ Increase in cash outflow in 2017 due to purchase of intangible asset and

repayment of borrowings as Airtel made more efforts to deleverage CA

– increase in investments – increasing the current ratio

❖ Airtel has sufficient liquidity to pay off its current debts and other fixed

long term debts

Overall liquidity position is quite satisfactory, as no major expense

regarding purchase of asset is expected

Capital Structure Analysis

Particulars ( In Million Rupees ) 2017-18

Cash and Cash Equivalents 47886

Other bank balances 18820

Current Investments 68978

Total Assets (a) 135684

Non-Current Borrowings 849420

Current Borrowings 129569

Current Maturities of

Non Current Borrowing134346

Total Debt (b) 1113335

Net Debt (C=b-a) 977651

Total Equity 783483

Total Capital 1761134

Gearing Ratio 0.56

50.10%

17.15% 17.04%

8.67%5.21%

0.97% 0.82% 0.04%

IndianPromoters

ForeignPromoters

ForeignInstitutions

National BankMutual Funds

FinancialInstitutions

Others GeneralPublic

GDR

% Shareholding pattern

Market Capitalization

59%

Short Term Debt10%

Long Term Debt31%

Capital Structure-2018

Debt Analysis – Loan Structure

Term Loans8%

Non Connvertible Bond36%

Non Convertible debentures3%

Deferred Payment liabilities43%

Finance Lease Obligations5%

Bank Overdraft2%

Comercial Paper3%

Debt Structure

0 200000 400000 600000 800000 1000000 1200000

Total Borrowings

Repayment Schedule

WithIn 1 Yr Between 1 yr and 2 Yrs Between 2 yr and 5 Yrs Over 5 years

Cost of Capital

12.36%

9.50%8.76% 8.34%

9.79%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2014 2015 2016 2017 2018

Cost of Equity Cost of Debt Weighted Average Cost of Capital

• Cost of Equity is rising from 10.6% to 11.6% due to increase in dividends paid.

• Cost of Debt is rising from 5.4% to 7.2% due to increase in the long term borrowings.

ICRA TypeAmount Rated

(Rs. Crore)Current Rating Dec'18 Aug'18

Commercial

PaperST 10000 A1+ A1+ A1+

Issuer Rating LT NAAA

Stable

AA+

Negative

AA+

Stable

Term Loans LT 4600AA

Stable

AA+

Negative

AA+

Stable

Working Capital LT 2250AA

Stable

AA+

Negative

AA+

Stable

Working Capital ST 250 A1+ A1+ A1+

TypeAmount Rated

(Rs. Crore)Current Rating May'18

Commercial Paper Short Term 10000 A1+ A1+

Non Convertible

DebenturesLong Term 3000

AA

Stable

AA+

Negative

Fund Based FacilitiesLong Term/ Short

Term20000

AA

Stable

AA+

Negative

Rating History – By Indian Organisations

Current Rating Watch

Issuer Rating Ba1 Review for Downgrade

Long Term Rating Ba1 Review for Downgrade

Senior Unsecured Debt Ba1 Review for Downgrade

Rating History – By International Organisations

Type of Risk Current Rating Issuer Credit Rating

Business Risk SatisfactoryBBB -

Financial Risk Significant

Strong market position in the mobile

telephone segment in India

Strength in Africa Operation because

of improving Operating Margins

Robust spectrum portfolio

Healthy financial flexibility

Strength in Africa Operation because

of improving Operating Margins

Continued efforts of de-leveraging

POSITIVE POINTS NEGATIVE POINTS

Key Rating Drivers

✓

✓

✓

✓Competitive Pricing Pressures

Elevated Capital Spending

Exposure to regulatory changes and

technological risks.

Moderate debt protection metrics

Exposed to foreign-exchange and interest-

rate risks

Decline in Indian Wireless Operations

Revenues and ARPU

X

X

X

X

X

X

Key Rating Drivers

Robust

Spectrum

Portfolio

Strength in

Africa

Operations

Healthy

Financial

Flexibility

De-leveraging

Market

Position

In India

Increase

In Revenue

Market

Share

Key Rating Drivers

Moderate

Debt

Protection

Metrics

Foreign

Exchange

and

Interest

Rate Risk

Indian

Wireless

Operations

Revenue

Decline

ARPU

Decline

Regulatory

and

Technology

Changes

Elevated

Capital

Spending

Competitive

Pricing

Pressure

Rating Peer Comparison

CRISIL Amount rated Current Rating

Non Convertible

Debentures

Rs. 38000 Crore

Non Convertible

Debentured

AAA

Stable

8.95% Non-Convertible

DebenturesRs. 15000 Crore

AAA

Stable

Rs.30000 Crore

Commercial PaperRs. 15000 Crore A1+

ICRARated Amount

Rs. Crore

Rating

Action

Non Convertible

Debentures35500

AAA

Stable

CAREAmount Rated

(Rs. Crore)Rating/Outlook

Long Term Bank

Facilities33155.77 AA-

Short term Bank

Facilities18009.57 A1+

Non-convertible

debentures8401 AA-

Commercial papers* 2000 A1+

CRISIL Credit Ratings

Rs.6000 Crore Non

Convertible Debentures

Crisil A+/Negative

(Reaffirmed)

JIO’s Debt has been rated higher

rating as compared to Airtel by

CRISIL & ICRA, with a Stable

Outlook

Vodafone Idea Ltd. has been rated just

below the Airtel debt credit Rating

• Liberalized spectrum holding of 1,108

megahertz (MHz),

• Subscriber market share increased to

23% in November 2018, adding 119.4

million subscribers

• Modest debt protection metrics

• Exposure to technological changes and

regulatory risks

• CRISIL expects net debt to remain over Rs

85,000 crore by the end of fiscal 2019

Risk Analysis

• Adverse regulatory or fiscal taxation developments including compliance risks

RR2: Very High Risk

• Change in Credit RatingFR2: Very High Risk

• Highly Competitive Industry trending towards consolidation

MR2: Very High Risk

• Non-compliance of subscriber verification norms and KYC regulations

OR3: High Risk

• Gaps in internal controls (financial and non-financial)

OR5: High Risk

• Lack of investment in infrastructure capacity building

SR2: Med-High Risk

• Poor quality of network and information technology including reduncies and disaster recoveries

OR1: Med-High Risk

• Increase in cost structures ahead of revenues thereby impacting liquidity

FR1: Med-High Risk

• Inadequate quality of customer lifecycle managementOR2: Medium Risk

• Economic UncertaintiesMR1: Medium Risk

• Lack of Digitization and Innovations around Digital Content

SR1: Low Risk

• Regulatory and political uncertainties & instabilityLR1: Low Risk

• Governance IssuesRR1: Very Low Risk

MR2 RR2

SR1 SR2 FR2

OR2 FR1 OR1

RR1 LR1

MR1 OR3

OR5

High

Impact

Pro

bab

ility

Hig

hM

ediu

mLo

w

Low Medium

Probability of Default

3.65

4.50

2.202.06 2.07 2.06

2.342.06 2.00

1.58

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

ALTMAN'S Z-SCORE Altman’s Z-Score is a combination of 5 financial

ratios used to estimate the likelihood of Financial

Distress

Airtel’s score fell significantly from

FY 2010 – FY 2011, going from

Safe Zone to Grey Zone

Airtel’s score fell significantly further from

FY 2017 – FY 2018, going from

Grey Zone to Danger Zone

Companies in Danger Zone have a Bankruptcy

probability of 72% in the next 2 years

Safe -> Grey Grey -> Danger

Rating Methodology

➢ This rating methodology is aimed to better understand the Approach used by us towards analyzing the business and

financial risk profiles of Airtel.

➢ Our rating methodology for mobile telecom service companies (telco’s) focuses on evaluating the regulatory trends

impacting the industry environment, the issuer’s business position, its spectrum holding across different bands, its

management strategy, and the risks associated with fresh investments.

➢We evaluated the financial risk profile of the issuer by analyzing the sponsors’ strength and commitment to the business,

besides the issuer’s capital structure, profitability, free cash flows, and coverage indicators.

➢ For analytical convenience, the key factors are grouped under four broad heads:

Financial Risk Assessment

Industry Risk Assessment

Business Risk Assessment

Management Quality & Corporate Governance Assessment.

Financial Risk Analysis

• Airtel will focus on retaining its premium 20% customers who generate 80% of their revenueProfitability

• Airtel is well poised to maintain its solvencySolvency

• Low levels of Discretionary Cash Flow can affect the LiquidityLiquidity

• Fall in Enterprise Value can affect the valuationValuation

• Airtel follows a prudent risk management policy, including hedging mechanisms to protect the cash flows.

Foreign Currency Risk

• No Adverse Report provided by the auditorAuditor’s Qualification in Balance Sheet

• Airtel has a highly diverse portfolio which can help it in venturing into new synergiesNew Project Risk

S.No Risk Parameter WAS WeightWeighted

Score

1 Profitability 3.2 5 16

2 Solvency 4 6 24

3 Liquidity 2.5 6 15

4 Valuation Ratio 2 5 10

5 Foreign Currency Risk 4 3 12

6 Auditors Qualifications in B/S 6 3 18

7 New Project Risk 5 3 15

Total 28 110

3.93Score

Risk Category : Financial Risk

• Profitability

o EBIDTA Margin

o ROCE

• Solvency

o Leverage Ratio

o Interest Coverage Ratio

o Debt/EBIDTA Ratio

• Liquidity Ratio

o Funds from Operations/ Debt Ratio

o Discretionary cash flow/ Debt Ratio

• Valuation Ratio

o EV/EBIDTA Ratio

o Foreign Currency Risk

Industry Risk Analysis

• The Telecom Industry in India is highly sensitive to regulations and dependency on foreign countries for technology still continues to be a challenge

Industry Characteristics

• Even though Jio has completely changed the industry dynamics and has amplified the intensity of the competition, Airtel still can contain the threat with diversification and M&aA’s

Competitive Risk

• Continuously falling ARPU’s have had a major impact on the profit margins and earning stability. Stabilization will occur if only Jio decides to increase its prices

Industry Financial

S.No Risk Parameter WAS WeightWeighted

Score

1 Industry Characteristics 3 4 12

2 Competitive Risk 4 6 24

3 Industry Financial 2.67 6 16

Total 16 52

3.25Score

Risk Category : Industry Risk

• Industry Characteristics

o Importance to the Economy

o Sensitivity of Industry to government policies

o Threats of Imports

o Data and Cyber security risk

o Growth potential/Outlook

• Competitive Risk

o Intensity of Competition

o Barriers to entry for new players

• Industry Financials

o Profit margin

o Leverage

o Earning Stability

Business Risk Analysis

• Negative Growth in Revenue and EBITDA Margins coupled with intense competition can stifle business growth

Business Growth

• Airtel has introduced ‘War on Waste’ program to reduce its operational costs. Continued sustained efforts will improve efficiency in the long run

Operating Efficiency

• Airtel has ventured into various businesses ranging from wireless to fixed-line to DTH to towers

Diversified Portfolio

• Airtel has sufficient spectrum for 4G across India and can proceed without participating in any further spectrum auctions for the next 4 years

Spectrum Holding

• With <10% of the customer base being Postpaid users coupled with new Mobile Number Portability norms can allow customers to leave easily

Customer Mix

• Easy documentation and various methods of payments have made customers compliantCustomer Compliance

• Keeping pace with the everchanging technology can be challenging even though Airtel is decently poised on the technological front

Technological Risk

S.No Risk Parameter WAS WeightWeighted

Score

1 Business Growth 1 5 5

2 Operating Efficiency 2.33 6 14

3 Diversified Portfolio Advantage 5 5 25

4 Spectrum Holding 5 6 30

5 Customer Mix 1 3 3

6 Customer Compliance 5 5 25

7 Technological Risk 3 3 9

Total 33 111

3.36Score

Risk Category : Business Risk

• Business Growth

o Growth in Revenue

o EBIDTA Margin

• Operating Efficiency

o Availability of Infrastructure at reasonable cost

o Availability of RM & Labour at reasonable cost

o Adequacy of Marketing, Distribution, Selling,

Storage arrangement.

• Diversified product portfolio

• Spectrum Holding

• Customer Mix

• Customer Compliance

•Technology Risk

Management Risk Analysis

• Massive deviation from their targeted revenue and Growth rate of EBITDA margins, with an immediate bounce-back being very highly unlikely

Finacial TargetsHigh Risk

• The board has a diverse profile both in terms of educational qualifications and work experience

Management CapabilityLow Risk

• The promoters are heavily invested and have a 67% shareholding, however this being a capital intensive industry does mean that the promoters might not be able to push all the way through

Promoter Financial Support

Medium Risk

• Airtel is well versed with it’s strengths and shortcomings and all strategies have been aligned accordingly

Strategic Planning

Low Risk

Sl. No Risk Parameter WAS WeightWeighted

Score

1 Financial Targets 1 6 6

2 Management Capability 5 4 20

3 Promoter Financial Support 3 5 15

4 Strategic Planning 4.5 4 18

Total 19.00 59

3.11Score

Risk Category : Management Risk

• Financial Targets

o Achievement of targeted revenue

o Achievement of % increase in EBIDTA Margin

• Capability of Promoters/Management

• Financial Support from Promoters/Group

• Strategic Planning

o Adequate Succession Plan

o Strategy to Diversify Product Portfolio

o Strategy to grow market position

o Strategy to grow market

Credit Rating Matrix

Financial Risk – 33.33%

We analyzed the Bharti Airtel’s capital structure, including levels of equity and

debt financing.

The process also involved a comparison of the telco’s key financial

parameters and ratios. The key parameters

include, profitability metrics, solvency, debt coverage indicators and

liquidity and cash flow indicators.

Industry Risk – 22.22%

Given the highly capital-intensive nature of the industry and the extensive

marketing costs involved in customer acquisition and retention, the extent of

pricing power of any player in the industry is critical. This in turn is driven by

the prevailing competitive landscape as well as the scale and size of an

individual telco.

In assessing the business risk profiles of Bharti Airtel

we first evaluated the risk factors that are common to the entire industry and

then analyzed the specific issues that define Bharti Airtel’s position. Given

that the mobile telephony industry in India continues to evolve, risk factors

are many, some of which are operating efficiency, Spectrum holding,

customer mix, customer compliance and technology risk

Business Risk – 22.22%

A rating decision is significantly influenced by a telco’s

management strategy for future growth and profitability, and its ability to

execute such strategies. This is particularly important in the telecom industry,

given that it is characterized by rapid changes. We, while evaluating a telco’s

management quality considered factors such as financial targets, capability of

promoters, financial support from promoters and strategic planning

Management Risk – 22.22%

BBB+

3.47

We have given a positive outlook, Rating upgrade might be possible if Airtel arrests the decline in its India mobile

business. Improvement would be indicated by moderating competitive intensity, resulting in modest growth and

capital spending, such that the FFO to Debt stays sustainably above 20%

Appendix & References

✓ Bloomberg Terminal

✓ www.ericsson.com

✓ www.ibef.org

✓ www.crisil.com

✓ www.icra.in

✓ www.careratings.com

✓ www.moodys.com

✓ www.spglobal.com/en/

✓ www.prowessiq.cmie.com

✓ www.coai.com

✓ https://mnacritique.mergersindia.com

THANK YOU