REPORT

Working Capital Management at Bharti Airtel

Submitted by:
Shanmukha Priya Chamarty
Rohtash Singh Rathore

Dept. of Management, BITS Pilani

Corporate Finance & Taxation
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Working Capital Management at Bharti
Airtel
ABOUT THE COMPANY
Founded in 1995, Bharti Airtel Limited (Bharti Airtel or the Company is an integrated
telecommunications company with operations in 20 countries across Asia and Africa. Headquartered in
New Delhi, India, the Company ranks amongst the top 5 mobile service providers globally in terms of
subscribers.

In India, the Companys product offerings include 2G, 3G and 4G services, fixed line, high speed broadband
through DTH, enterprise services including national & international long distance services to carriers. In
the rest of the geographies, it offers 2G, 3G mobile services. All these services are rendered under a unified
brand airtel. The Company also manages passive infrastructure pertaining to telecom operations
through its subsidiary and joint venture entity.

Bharti Airtel had over 262 million customers across its operations at the end of March 2014. The
operations of Bharti Airtel in India and South Asia are divided into two distinct customer business units
with clear focus on B2C (Business to Customer) and B2B (Business to Business) segments. B2C services
includes mobile services; telemedia services; and digital TV services. B2B services includes airtel
business; and passive infrastructure services.

A brief overview of the company is shown below:

2.02 Bn
Addressable
Population

Present in 20 US$14.8 Bn
Countries Revenue

#1 Operator

In India
#2 Operator #3 Operator in the
In Africa World

35.2% EBITDA
margins

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JOURNEY THROUGH THE TIME
The chart below shows how Bharti Airtel Ltd. Progressed over time. The charts divided into three major
phases, as shown below:

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INTRODUCTION TO WORKING CAPITAL MANAGEMENT
Finance is much concerned with the effective utilization of funds. Its focused on the arrangement of funds
at the right time in order that the determined tasks may be carried out satisfactorily. Financial
management plays a vital role; on account of which the liquidity position of a business is affected. The
term liquidity refers to the ability of an organization to pay its current liabilities as they come due. Not only
does financial management aim at the effective utilization but also at money management. If sufficient
funds are available at the time when needed, a company can clear its short-term debts; its operations can
be maintained effectively and so the working capital financing lends a hand for a business to do well.

Working Capital is defined as, The administration of the firms current assets and financing needed to
support current assets. The term working capital is used for day-to-day requirement of funds for a
business. A business needs certain amount of cash for meeting routine payments, providing unforeseen
events or purchasing raw materials for its production. The concept of working capital should be easily
understandable since it is very much connected with our personal lives as well. In the sense, sufficient
money is needed for our cost of living. We would like to collect the money owed to us, at the same time,
we would like to pay whom we owe. If the ready money is not maintained properly or we fail to do so, the
situation is called as bankruptcy or insolvency. The same applies to a business and the task of financial
management in terms of working capital is to maintain sufficient funds for its day-to-day requirements,
while safeguarding the business against the possibility of insolvency. Thus, the term working capital
refers to the excess of the current assets over the current liabilities.

Current assets of a business are those that will be converted in to cash in twelve months period. They
are: Cash, Receivables, inventories, marketable securities and prepayments. Current liabilities are those
that are to be settled in twelve months period. Current liabilities are: Accounts payable, unearned
revenues and wages payable.

Cash is king - despite the fact that the cash has its own costs. Cash is the most liquid asset to be
presented commonly on the balance sheet as the first item. Management of cash is of great essence for
a company. If adequate cash is not available as and when it is needed, the situation leads to bankruptcy.
Management of cash and liquidity involves providing sufficient funds to the business for meeting various
requirements at the right time, such as, repayment of bank loans, payment of taxes, payment of wages,
purchases of raw materials and inventory etc. Moreover, holding the cash entails a precautionary motive
in order to meet unforeseen events. Therefore, the cash must be managed properly and provided for
arising contingencies. Apart from these, cash management also involves speeding cash inflows and
slowing cash outflows. The former case indicates making collections as soon as they come due for
collection while the latter indicates the payments to be made as close to the cut-off-date as possible
but it is not being taken in isolation as it is likely to lose the facility of availing the discounts. So, the
payments are to be made close to the cut-off-date while utilizing the discounts if any. In this manner, in
the former case, the discount is offered for early payment to generate the revenue quickly. In the latter
case, the discount is availed to clear the debts and using the facility of discount. This is how the two-
fold benefit may be obtained.

Next in importance comes the receivables. It is universal truth that every Business has receivables. They
are the dues from the credit customers. There are various reasons for credit sales, such as, to penetrate
and establish in the market, to increase sales, to get more customers and to help customers on whom the
fortune of a business is contingent. While managing receivables, an organization develops the policies
which are beneficial to both customers as well as the organization that makes credit sales. Credit policies
must have few standards, credit period, credit terms, etc so as to manage the receivables in an efficient
manner. Credit standard is meant to the classification of customers depending upon the relationships and

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in terms of risk etc. The credit period is referred to how long a period should be allowed. Credit terms
mean offering discount on early payment or the payment before the cut-off-date. In the point of fact, it
should be understood that making much credit sales leads to great benefits and make profits on the one
hand, while it involves the creation of bad debts or risks on the other. Thus, the best possible way is to be
adopted for receivable is to manage within the accepted level with the establishment of planning as well
as controlling measures.

The impact of inventory management on working capital is vitally important. A company, whether of
trading or of manufacturing, has to carry certain number of inventories. Inventories are classified as
inventory of finished goods, of raw materials or of work in process depending upon the type of business.
A trading company purchases or sells the finished goods whereas the manufacturing company deals with
all types of inventories. At this juncture, it should be noted that having too much or too little inventory
becomes a problematic cause in terms of sales and production. Also, even a little less or more amount of
increase or decrease in the costs of inventories gives rise to a radical change in terms of overall amount
of investments in the inventories. Thus, inventory management involves planning and controlling
functions with regard to the order of quantity of even single unit and the specific task of inventory
management is to answer the questions: when to order the inventory? How much inventory is needed and
if any discounts are likely to be lost by not ordering as per the standard limit of order etc? It is therefore
necessary for the process of inventory management to find satisfying answers to the above questions
pertaining to various costs of the inventories. It is appropriate to mention that there are several techniques
available for the effective management of Inventories with which a management may be benefited.

Mention deserves to be made about the determinants of working capital while the components are being
discussed. The same may be outlined herein briefly.

The working capital is influenced by the nature of business. A trading business needs to invest a great
deal of money in the working capital as compared to the money required in the fixed assets. The similar
case in point is related to a manufacturing business as well.

Business Fluctuations have to do a lot with the management of working capital. The seasonal fluctuations
have a great cause in relation to the production and services of a business. It is during a decline in the
economy, sales will fall resulting in the level of inventories.

To end with, financial management is a distinctive area of business management and the Financial
Manager has a key Role in overall business management ensuring the achievement of business objectives
and wealth or profit maximization. Financial management is an integral part of overall management
affecting the survival, growth and strength of a business. The sole task of financial management is
maximization or optimizing the value of a business firm. If dealt effectively and efficiently, a financial
manager can ward off a large number of problems while safeguarding the business against insolvency.

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WORKING CAPITAL MANAGEMENT AT BHARTI AIRTEL
Circulation system of Working Capital

In the beginning the funds are obtained from the issue of shares, often supplemented by long
term borrowings. Much of these collected funds are used in purchasing fixed assets and
remaining funds are used for day to day operation as pay for raw material, wages overhead
expenses. After this, finished good are ready for sale and by selling the finished goods either
account receivable is created and cash is received. In this process profit is earned. This account
of profit is used for paying taxes, dividend and the balance is ploughed in the business.

Working capital is considered to efficiently circulate when it turns over quickly. As circulation
increases, the investment in current assets will decrease. Current assets turnover ratio speaks
about the efficiency of Airtel in the utilization of current assets. Fast turnover current assets
result in a better rate on investment.

Fig. Shows the Total Asset to Asset Turnover over a period of 5yrs

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Structural transformation: From Treasury to GFRM
It was seven-time major winner Arnold Palmer who said: golf is deceptively simple and endlessly
complicated; it satisfies the soul and frustrates the intellect. It is at the same time rewarding and
maddening. Although, he (probably) did not know it, Palmer was not only describing golf in this phrase,
but also summing up the role of the corporate treasurer.

Bharti Airtel treasury operation, like that of many companies, was more or less a siloed function. Yet, rapid
growth and expansion into new markets was placing increasing and unfamiliar pressures onto the
company financially. The changing and fast-expanding needs of the company resulted in an increasingly
strategic objective and placement of the treasury unit, thus guiding our transformation from treasury to
Group Funding, Risk and Markets (GFRM) in its present form.

In order to completely transform its financial management, as well as, working capital management, they
re-organised and structurally rebuilt treasury as GFRM, clearly aligning and expanding the scope, strategic
priorities and mission of the unit to encompass the new challenges. A foundation of seven key pillars of
GFRM were defined as a starting point, namely: debt management; risk management; working capital
management; ratings management; capital structure management; controls and compliance; and policy
and governance. This transformation can be seen below:

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FINANCIAL AND STOCK PRICE DATA (2012-13 TO 2016-17)
The Company generates healthy operational cash flows and maintains sufficient cash and financing
arrangements to meet its strategic objectives. It deploys a robust cash management system to ensure
timely servicing of its liquidity obligations. The Company has also been able to arrange for adequate
liquidity at an optimized cost to meet its business requirements and has minimized the amount of funds
tied-up in the current assets.

As of March 31, 2016, the Company has cash and cash equivalents of Rs. 763 Cr and short term
investments of Rs. 0.8Cr. During the year ended March 31, 2016, the Company generated operating free
cash flow of Rs. 101,319 MN. The net debt - EBITDA ratio as on March 31, 2016 was at 2.56 and the net
debt - equity ratio was at 1.29. The net debt in USD terms decreased from USD 13,427 MN as on March
31, 2011 to USD 12,714 MN as on March 31, 2016.

A look at the ratios

Liquidity and Solvency Ratios
Current Ratio 0.65 0.73 0.93 0.65 1.02
Quick Ratio 0.66 0.75 0.98 0.75 1.37
Debt Equity Ratio 0.5 0.26 0.13 0.24 0.29
Long Term Debt Equity Ratio 0.49 0.25 0.11 0.18 0.17

Debt Coverage Ratios

Interest Cover 4.01 12.11 7.42 4.91 5.98

Total Debt to Owners Fund 0.5 0.26 0.13 0.24 0.29

Financial Charges Coverage 6.69 17.48 12.83 9.04 10.22

Ratio

Financial Charges Coverage 5.8 15.73 11.35 8.22 9.34

Ratio Post Tax
Management Efficiency Ratios

Inventory Turnover Ratio 11,377.40 5,903.87 45,380.45 21,595.67 1,296.07

Debtors Turnover Ratio 16.98 20.27 22.63 20.7 23.14

Investments Turnover Ratio 11,377.40 5,903.87 45,380.45 21,595.67 1,296.07

Fixed Assets Turnover Ratio 0.79 0.85 0.86 0.82 0.84

Total Assets Turnover Ratio 0.91 0.78 0.84 0.9 0.84

Asset Turnover Ratio 0.54 0.64 0.7 0.69 0.71

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Interpretation (Ratio Analysis)

As shown by current assets turnover ratio, the utilisation of current assets in terms of sales has
shown a decreasing trend which shows that current assets have been effectively used to
achieve sales.

Again, if we look at the efficiency with which individual elements of working capital have been
utilised, the picture of inventory turnover is not very bright and moved on a same trend.

Receivables turnover also shows a declining trend.

As we look at the extent of liquidity of working capital, we notice that the ration shows a
increasing trend.

If we analyze the structural health of working capital, the proportion of current assets to total
assets has been appropriate during this period.

Our analysis above indicates the areas of concern to management in making best possible use
of resources. Decreasing efficiency in the use of current assets hints of the possibility of
problems in working capital management.

Schedule of Changes in Working Capital

Particulars Amount (Rs in Millions)
Assets 31-Mar-12 31-Mar-13 31-Mar-14 31-Mar-15 31-Mar-16
Gross Block 6,69,068.00 7,62,061.00 7,95,743.00 10,00,870.00 14,54,671.00
(-) Acc. Depreciation 2,64,660.00 3,30,235.00 3,96,961.00 4,66,426.00 5,36,526.00
Net Block 4,04,408.00 4,31,826.00 3,98,782.00 5,34,444.00 9,18,145.00
Capital Work in Progress 44,665.00 10,308.00 12,442.00 90,669.00 37,966.00
Investments 1,23,378.00 2,81,991.00 3,45,239.00 4,31,169.00 4,30,269.00
Sundry Debtors 21,345.00 22,468.00 21,655.00 33,110.00 37,930.00
Cash and Bank 4,812.00 3,627.00 4,460.00 3,887.00 521
Loans and Advances 1,08,621.00 25,122.00 36,371.00 63,262.00 75,545.00
Total Current Assets 1,35,099.00 51,238.00 62,497.00 1,00,353.00 1,14,049.00

Current Liabilities 1,15,401.00 1,45,021.00 1,50,690.00 1,98,736.00 2,30,758.00

Provisions 5,570.00 5,461.00 9,453.00 12,349.00 7,727.00
Total Current Liabilities 1,20,971.00 1,50,482.00 1,60,143.00 2,11,085.00 2,38,485.00

Working capital (CA-CL)

Working Capital 14,128.00 -99,244.00 -97,646.00 -110,732.00 -1,24,436.00

The negative working capital may be a bad sign and company has all the probabilities of facing financial
distress or even bankruptcy. Bharti Airtel Limited has a Working Capital of -124436 M INR. This is much
lower than that of the sector, and significantly lower than that of Working Capital industry.

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Cashflow Analysis

Year Mar 12 Mar 13 Mar 14 Mar 15 Mar 16

Cash and Cash Equivalents at 1,280.00 3,548.00 3,279.00 4,458.00 3,887.00

Beginning of the year
Net Cash from Operating 1,14,378.00 1,38,847.00 1,60,220.00 1,79,398.00 2,00,582.00
Activities
Net Cash Used in Investing -1,26,118 -1,07,259 -1,70,863 -1,28,012 -2,22,833
Activities
Net Cash Used in Financing 14,008.00 -31,857.00 11,822.00 -51,957.00 18,885.00
Activities
Net Inc/(Dec) in Cash and Cash 2,268.00 -269 1,179.00 -571 -3,366.00
Equivalent
Cash and Cash Equivalents at 3,548.00 3,279.00 4,458.00 3,887.00 521
End of the year

Interpretation (Cash Flow Statement)

In the year 2016-17 cash from operation is more from previous years. The company should
take appropriate steps in order to continue the trend.
In the 2016-17 company has major spending in terms of spending in form of
Acquisition/subscription/investment in subsidiaries.
Out of total cash flow from operating activities there has been increase in trade and other
payables.

Cash Conversion Cycle for Bharti Airtel

Days Inventory Outstanding (DIO): This addresses the question of how many days it takes to sell the
entire inventory. The smaller this number is, the better.

DIO = Average inventory/COGS per day

Average Inventory = (beginning inventory + ending inventory)/2
= 0.1 days

Days Sales Outstanding (DSO): This looks at the number of days needed to collect on sales and
involves AR. While cash-only sales have a DSO of zero, people do use credit extended by the
company, so this number will be positive. Again, smaller is better.

DSO = Average AR / Revenue per day

Average AR = (beginning AR + ending AR)/2
=21.5 days

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Days Payable Outstanding (DPO): This involves the company's payment of its own bills or AP. If this
can be maximized, the company holds onto cash longer, maximizing its investment potential;
therefore, a longer DPO is better.

DPO = Average AP/COGS per day

Average AP = (beginning AP + ending AP)/2
= 66.9 days

CCC = DIO + DSO DPO = -45.9 days

When compared with the Industry average of -32, Airtel seems to do a lot better than its
competitors.
Stock trends over the last 5 years

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Risk-Return Analysis (with peers)

As seen in the figure below, the risk-return ratio is stable for Airtel, as compared to its competitors,
which are mainly high risk and low return.

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FINANCIAL PROJECTIONS
The graphs/tables below show the financial projections related to Income statement, financial leverage,
and balance sheet over a 3-year period.

Annual Income
Statement Data

Actuals in M INR Estimates in M INR

Fiscal Period March 2014 2015 2016 2017 2018 2019
Sales 858 635 920 394 965 321 975 166 1 002 674 1 073 249
Operating
277 770 158 727 340 933 359 695 354 926 386 646
income (EBITDA)
Operating
121 274 158 572 166 435 153 140 140 758 156 931
profit (EBIT)
Pre-Tax Profit (EBT) 78 643 107 130 120 705 90 122 85 235 108 121

Net income 27 727 51 835 54 842 44 231 40 228 51 648

P/E ratio 45,1 30,4 25,5 29,9 32,2 24,3

EPS (INR) 7,01 13,0 13,7 11,4 10,6 14,0

Dividend per
1,80 3,85 1,36 2,52 2,88 3,33
Share (INR)
Yield 0,57% 0,98% 0,39% 0,74% 0,85% 0,98%

Reference price (INR) 316.15 393.95 349.4 340.25 340.25 340.25

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Financial Leverage

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SUGGESTIONS

As the pace and scale of industry change continue to escalate and the rate of C2C reductions slows down,
Bharti Airtel might to achieve further progress in WC will need to focus on a number of key initiatives.
These include:

Managing WC as a strategic initiative, including taking a balanced approach to cash, costs,

customer experience and risks
Improving billing and collection and enhancing dispute management
Building cash into product design and customer acquisition strategies
Increasing direct-debit penetration and changing advanced billing
Enhancing customer acquisition and risk management processes
Tightening up controls around terms and effective terms
Unifying and harmonizing billing processes to
accelerate invoice production
Consolidating and controlling spend
More effectively managing payment terms for suppliers, including renegotiation of terms
Strengthening relationships with technology leaders to ensure access to their market and product
expertise
Improving demand forecasting processes, working more closely with telecommunications
equipment suppliers and content providers
Introducing vendor-managed inventory techniques
More effectively managing interconnection agreements
Managing consumer financing solutions for devices better
Increasing use of supply chain financing solutions
Aligning executive compensation with the appropriate WC performance measures

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REFERENCES

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