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
• Management & Corporate Governance
• 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
• Appendix & References
Business Description

Wireless Services
Postpaid, Prepaid, International Roaming, VAS

Homes Services (only India)

Fixed-line Telephone and Broadband (DSL) • India
Asia • Bangladesh
• Sri Lanka
Digital TV Services
DTH Platform with HD capabilities
Africa • 14 Countries
Airtel Business (Enterprises and SME’s)
Information and Communication Services
28.4% of 413 Million+
Liberalized Customers
Towers (under subsidiary Bharti Infratel Ltd) Spectrum in
Approximately 40,000 across 22 telecom circles India 36% (Worldwide)
20,000+
Market Share
Employees
(By Revenue)
Airtel Payments Bank was deconsolidated during India (Worldwide)
the quarter that ended 31st December 2018
Business Model
Customer Customer
Key Partners Activities Value Proposition
Relationships Segments
• Networking • Wired and For a Subscriber • Attractive plans • Premium
Equipment Wireless Services • Voice Packs and Loyalty Segment
Manufacturers • Network • Data Packs Schemes for
Infrastructure loyal customers • Preferential
• Bundled Services
• 4G Enabled providers treatment for high
Smartphone • Broadband ARPU
Manufacturers • Digital Tv Subscribers
Resources • Wired-line
Channels
• Network Infra • Target 20%
management • Strong • Prepaid & Post- customers who
For a Business paid cards
and support Management generate 80% of
• Data and IP • Optical fibres
• Brand Equity the revenue
• Voice • Network Towers

Costs Revenue Sources

• Infrastructure Lease and Maintenance • Subscribers
• Insurance • SMEs and Enterprises
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
Threat of Substitutes
Hardly any threat of substitute products
as there is no substitute available in the
market

Bargaining Power of Suppliers Competitive Rivalry Bargaining Power of Buyers

1. Customers’ low switching cost and
1. High bargaining power of 1. Low switching cost and mobile number
price sensitivity are increasing
suppliers as there are just a few portability give customers high bargaining
competition among players
suppliers in the sector power
2. High exit barriers are also intensifying
2. High cost of switching suppliers 2. Customers are price sensitive
competition
Threat of
Substitutes
5
Threat of New Entrants
4
3 Bargaining
1. Strict government regulations
Threat of New 2 Power of
Entrants 1 Suppliers 2. Extremely high infrastructure setup
0
cost
Bargaining
Power of
Competitive 3. Difficulty in achieving economies of
Rivalry
Buyers
scale
Competitive Positioning: India
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%

Market Share by Revenue

MILESTONES
2010 2011 2012
✓ Launch of high capacity direct ✓ Launches EIG for ✓ Became 4th
terrestrial link between India and China Commercial use largest mobile
✓ Rated as India’s Best Enterprise ✓ Partners with operator in the
Connectivity Provider Savvis for world in terms of
✓ Launches Global Data Services in enhancing Managed subscribers.
Thailand & Malaysia Service offerings

2015 2014 2013

✓ ‘Golden Peacock Award for Sustainability 2015’ ✓ Airtel crosses 200 ✓ Signs
✓ Aegis Graham Bell Award 2015 in the mHealth million mobile definitive
category customer mark in agreement to
✓ Airtel Ghana won four awards - ‘Telecom Brand India fully acquire
of the Year’ ,‘Marketing Campaign of the Year’, Warid
‘Innovative Enterprise Product of the Year’ ,‘Special Uganda
Recognition to the Telecom Industry’

2016 2017
✓ "Certificate of Recognition for Excellence ✓ Ranked amongst top 100 firms in ‘The World’s Most
in Corporate Governance 2016" Awarded the ‘Best Risk Management Practice Award’
✓ ‘Golden Peacock Award for Excellence in in the Telecom category Innovative Companies’ (2017)
Corporate Governance’ for the year 2016 by Forbes
✓Recognised as the ‘Firm of the Year – ✓Ranked 2nd in the annual Brandz ‘Top 50 Most
Telecom’ by ICICI Lombard & CNBC-TV18 Valued Indian Brands 2017’
B2C Services Sector (FY 2017-18)

Wireless Services Homes Services Digital TV Services

• Number of subscribers – 12% • Number of subscribers – 2% • Number of subscribers – 10%

• Gross Revenues – 18% • Gross Revenues – 8% • Gross Revenues – 10%
• EBIT – 80% • EBIT – 31% • EBIT – 48%

• Partnerships • Introduced new superfast • Total Channels – 649

Home Broadband Plan which includes
HD Channels – 75
300 Mbps International Channels – 5
• M&A • Fixed Line Telephone and • HD Set-top boxes
Broadband (DSL) and demand for HD Channels
Across - 89 cities along with the upselling efforts
led to ARPU- ₹231
• Deployment of Massive MIMO • V-Fiber Technology
First operator to deploy • Warburg Pincus affiliate will
Vectorization in India acquire a stake of 20% in
Bharati Telemedia Ltd (DTH Arm)
• DSL represents 94% of
Home Customers
B2B Services Sector (FY 2017-18)

Airtel Business Towers Infrastructure

• Gross Revenues – 3% • Gross Revenues – 9%

• EBIT – 37% • EBIT – 19%

• Strategic Alliance - Security • Managed through Subsidiary- Bharti Infratel Ltd

Exclusive partnership with Deploys, Owns and Manages Telecom Towers and
Symantec Corp Communication Structures for various mobile operators
for distribution of
Enterprise Security Software • M&A
Acquired 42% in Indus Towers
• M&A
Acquired Gulf Bridge International-Indian leg • Consolidated Portfolio – 91451 Towers
To serve the exploding data demand in
India, Gulf and Africa
- 39523 Towers

• Awarded ‘Best Wholesale Carrier (Global)’ - - 51928 Towers (42%)

2017
 Airtel’s Different Business Segment Analysis

7,80,180.0

8,03,912.0

7,69,192.0
9,00,000.0 100.0%

6,41,643.0
87.4%
8,00,000.0 80.0%
7,00,000.0
60.0%
51.8%
6,00,000.0 47.5% FY 2015
Revenue From 40.0%
5,00,000.0 FY 2016
Different Segments 20.0%
FY 2017
Of Airtel (in millions) 4,00,000.0
0.0% FY 2018
3,00,000.0

98,244.0
94,855.0
-38.2% % Change

62,503.0
52,429.0
-17.8%

44,392.0
40,550.0

37,505.0
34,240.0
-20.0%

33,221.0

29,119.0
28,384.0

27,223.0
25,395.0

25,056.0

24,699.0
22,530.0
2,00,000.0

1,00,000.0 -40.0%

0.0 -60.0%
Mobile Services Enterprise Services Passive Infrastructure Home Services Digital TV
1,30,292.0

1,26,259.0

1,40,000.0 1,11,023.0 500.0%

1,20,000.0 435.6%
400.0%
1,00,000.0
Profit From Different
302.5% 300.0% FY 2015
54,043.0

Segments Of Airtel 80,000.0

(in millions) FY 2016

33,477.0
31,044.0
60,000.0 200.0% FY 2017

29,195.0
24,746.0
22,737.0

21,731.0
FY 2018

12,429.0
12,167.0

40,000.0
% Change

8,689.0
100.0%
7,713.0

6,868.0

5,306.0
4,720.0

3,577.0
1,843.0
20,000.0
54.1%
0.0%
0.0

-1,581.0
Mobile Services Enterprise Services Passive Infrastructure Home Services Digital TV
-20,000.0 -58.5% -45.7% -100.0%
 Indian Economy Forecast
Indian GDP Forecast in US$ FDI Inflows in telecommunication (US$ Billion)
3500 6.21 1.59 31.75
30

3273.85
3000 5.56

3006.54
20 1.32

2762.31
2500 2.9
1.31

2538.82
1.96 0.3

2334.14
2000 10.59

2134.75
10

1982.7
1749.16
1500
1638.76
1610.36
1485.6
1481.56

0
1000

FY01 - FY11

FY01 - FY19
2011 - 2012

2012 - 2013

2013 - 2014

2014 - 2015

2015 - 2016

2016 - 2017

2017 - 2018

2018 - 2019
500

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

❖ GDP per capita of India is expected

to grow at a CAGR of 7.47 per cent
Indian residents shifting from low to high income groups (%)
from US$ 1,481.56 in 2012 to US$
Million Household
3,273.85 in 2023
18.00% Next Billion (US$ 2300 - 7700)
44.00%
31.10% 30.70% 27.60%
Affluent(US$ 15400 - 30800) ❖ The emergence of an affluent
46.00% Strugglers(<US$ 2300) middle class is triggering demand for
45.20% 45.30% 46.00%
Aspirers(US$ 7700-15400) the mobile and internet segments
42.00%
20.00% Elite(>US$ 30800)
8.50%
15.00% 15.00% 16.20%
11.00%
❖ FDI inflows into the telecom sector
6.40% 7.30%
3.50%
2.00%
6.30%
2.60% 2.90% 5.00% during April 2000 – June 2018 totaled
2005

2016

2017

2018

2025F

2.40% to US$ 31.75 billion

 Future Opportunities in Telecom Industry

1420
1600 25%
22% Total mobile data traffic (EB/Month)
1200
1200
(1 Exabyte = 10^9 GB)

1180
1400

1150
20% 14

1000
1200

12
15% 2017 12
1000 15%
800 2018 10 CAGR - 26%

560

510
10% 10% 8

440
600
420

350
2024 F
6

250
400 3%
5%
2018-2024 4

3
200

1.8
(CAGR) 2
0 0%
Mobile Smartphone Mobile Broadband LTE Subscriptions 0
Subscriptions Subscriptions Subscriptions (In Millions) 2017 2018 2024 F
(In Millions) (In Millions) (In Millions)
❖ 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
Jio Impact – ARPU
AVER AG E R EVEN U E PER U SER ( I N RU PEES)
Idea Vodafone Bharti Airtel ltd

180
170
160
150
140
130
120
110
Pre – Jio 100
90
ARPU 80
70
60
50
40
APR-JUN'14 JUL-SEP'14 OCT-DEC'14 JAN-MAR'15 APR-JUN'15 JUL-SEP'15 OCT-DEC'15 JAN-MAR'16 APR-JUN'16

180
170
160
150
140
130
120
Post – Jio 110
100
ARPU 90
80
70
60
50
40
JUL-SEP'16 OCT-DEC'16 JAN-MAR'17 APR-JUN'17 JUL-SEP'17 OCT-DEC'17 JAN-MAR'18 APR-JUN'18
QUARTERS
 Jio Impact – Customer Share
Wireline Broadband
MTNL Wireless
2% Tata 16% Vodafone
BSNL Subscribers Growth Rate 7% 1%
Rcom 30%
12% 11%
MTNL
15% BSNL
Idea
35% 15%
24%
– 17.19%
Vodafone Idea
28% BSNL Vodafone
20%
61%
– 1.89% Airtel lost 24%
Pre – Jio Pre – Jio 5.7 crore customers
in December 2018 Pre – Jio
Post – Jio
Post – Jio
Post – Jio
Tata Tele The future of Indian Tata Tele BSNL
Vodafone Idea
2% 10% 4% 4%
telecom will depend on 2%
23%
BSNL
10%
what Jio does. 22%
21%

29%
Vodafone India and Idea
Cellular had to merge just Vodafone Idea
Vodafone Idea
36% to survive. BSNL
21%
54%
62%

Sunil Mittal
Chairman – Bharti Airtel
Management and Corporate Governance

Rated GVC Level 1 by CRISIL

• Highest Capability of
Corporate Governance
• Highest Capability of Value Creation

12 2
Board Executive Ranked #1 by Transparency International
Members Directors
• Given for Highest Standards of
Corporate Governance
• Ranked among 100 emerging market
multinational companies

Awarded the Golden Peacock 2017

4
6 • Awarded for Corporate Sustainability
Non-
Executive
Independent • Awarded for 29% reduction in Carbon
Directors Dioxide emission
Directors
 Dupont Analysis

FINANCIAL PROFIT MARGIN ASSET TURNOVER

LEVERAGE 8
5.63
6.30
0.6 0.50 0.49 0.46
3.53 0.5 0.42
4 3.11 3.11 3.27 3.42 6 0.35
3.98 0.4
3 4 3.23 0.3
2 0.2
2 1.31
1 0.1
0 0 0.0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

RETURN ON EQUITY Analysis:

10
9.21 ❖ The proportion of assets and equities has increased over the years, as the amount invested on
8 7.05 assets is increasing at a higher rate than any increase in equity. These assets are financed
6.00 through long term borrowings, which in turn increase the fixed finance cost, which further
6 5.06
decrease profits. There has been a considerable decrease in revenues due to intense
4 2.63
competitive prices and a decrease in subscriber base.
2 ❖ This decrease in operating profits is mainly attributed to lower revenue as the operating cost
0 have not dramatically changed.
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
❖ 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

DEBT EQUITY RATIO LO N G T ER M D EBT / EQU I T Y D EBT / EBI T DA

200 150.0 4.0 3.67
123.53 120.59
144.34 142.10 108.42 2.96 3.04
139.00 2.73
150 118.65 85.97 3.0
99.34 100.0 2.11
67.70
100 2.0
50.0
50 1.0

0 0.0 0.0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

I N T ER EST C OVER AG E Analysis :

10.0
7.63
8.49 ❖ The general solvency position is declining, as the rate of increase of
8.0 7.16
debt is much higher than increase in equity.
5.26
6.0 4.69 ❖ However, Airtel has been making consistent efforts to de-leverage.
4.0 Hence, its long term debts are decreasing.
2.0 ❖ The current debt of Airtel is relatively higher. EBIDTA is decreasing at
0.0 a continuous rate. Thus Interest coverage is falling, which is not a
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
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

QUICK RATIO CURRENT RATIO CASH RATIO

1.0 0.5 0.42 0.43 0.3
0.39 0.39 0.20
0.8 0.4 0.2 0.17
0.29 0.15
0.6 0.3 0.2 0.11 0.11
0.4 0.30 0.25 0.25
0.21 0.18 0.2 0.1
0.2 0.1 0.1
0.0 0.0 0.0
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Analysis
CFO / LIABILITY ❖ Increase in cash outflow in 2017 due to purchase of intangible asset and
20.0 16.31
14.87 15.71 repayment of borrowings as Airtel made more efforts to deleverage CA
18.77
15.0 18.85 – increase in investments – increasing the current ratio
10.0 ❖ Airtel has sufficient liquidity to pay off its current debts and other fixed
5.0 long term debts
0.0
Overall liquidity position is quite satisfactory, as no major expense
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 regarding purchase of asset is expected
 Capital Structure Analysis

Particulars ( In Million Rupees ) 2017-18

Cash and Cash Equivalents 47886 50.10%

Other bank balances 18820

17.15% 17.04%
Current Investments 68978 8.67%
5.21%
0.97% 0.82% 0.04%
Total Assets (a) 135684 Indian Foreign Foreign National Bank Financial Others General GDR
Promoters Promoters Institutions Mutual Funds Institutions Public
Non-Current Borrowings 849420 % Shareholding pattern

Current Borrowings 129569

Current Maturities of Capital Structure-2018
134346
Non Current Borrowing Long Term Debt
31%
Total Debt (b) 1113335
Net Debt (C=b-a) 977651
Total Equity 783483 Market
Capitalization
59%
Total Capital 1761134 Short Term Debt
10%
Gearing Ratio 0.56
 Debt Analysis – Loan Structure

Debt Structure
Comercial Paper
3% Term Loans
Bank Overdraft
2%
8% Repayment Schedule
Finance Lease Obligations
5%

Total Borrowings

Non Connvertible Bond

36%
Deferred Payment liabilities
43%

0 200000 400000 600000 800000 1000000 1200000

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

Non Convertible debentures
3%
 Cost of Capital
18%

16%

14%
12.36%
12%

10% 9.79%

8% 9.50%
8.76% 8.34%

6%

4%

2%

0%
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.
Rating History – By Indian Organisations
Amount Rated
Type Current Rating May'18
(Rs. Crore)
Commercial Paper Short Term 10000 A1+ A1+
Non Convertible AA AA+
Long Term 3000
Debentures Stable Negative
Long Term/ Short AA AA+
Fund Based Facilities 20000
Term Stable Negative

Amount Rated
ICRA Type Current Rating Dec'18 Aug'18
(Rs. Crore)
Commercial
ST 10000 A1+ A1+ A1+
Paper
AA AA+ AA+
Issuer Rating LT NA
Stable Negative Stable
AA AA+ AA+
Term Loans LT 4600
Stable Negative Stable
AA AA+ AA+
Working Capital LT 2250
Stable Negative Stable
Working Capital ST 250 A1+ A1+ A1+
Rating History – By International Organisations

Current Rating Watch

Issuer Rating Ba1 Review for Downgrade

Long Term Rating Ba1 Review for Downgrade

Senior Unsecured Debt Ba1 Review for Downgrade

Type of Risk Current Rating Issuer Credit Rating

Business Risk Satisfactory

BBB -
Financial Risk Significant
 Key Rating Drivers
POSITIVE POINTS NEGATIVE POINTS

✓ Strong market position in the mobile X Competitive Pricing Pressures

telephone segment in India
X Elevated Capital Spending
✓ Strength in Africa Operation because X Exposure to regulatory changes and
of improving Operating Margins
technological risks.

✓ Robust spectrum portfolio X Moderate debt protection metrics

Healthy financial flexibility

✓ ofStrength in Africa Operation because X Exposed to foreign-exchange and interest-

rate risks
improving Operating Margins
Continued efforts of de-leveraging
X Decline in Indian Wireless Operations
Revenues and ARPU
Key Rating Drivers

Robust Strength in
De-leveraging Spectrum Africa
Portfolio Operations

Increase
Healthy Market
In Revenue
Financial Position
Market
Flexibility In India
Share
Key Rating Drivers

Foreign
Moderate
Exchange Elevated Competitive
Debt
and Capital Pricing
Protection
Interest Spending Pressure
Metrics Regulatory
Rate Risk
and
Technology ARPU
Changes Decline

Indian
Wireless
Operations
Revenue
Decline
 Rating Peer Comparison
JIO’s Debt has been rated higher
Vodafone Idea Ltd. has been rated just rating as compared to Airtel by
below the Airtel debt credit Rating CRISIL & ICRA, with a Stable
Outlook
• Modest debt protection metrics
• Liberalized spectrum holding of 1,108
• Exposure to technological changes and
megahertz (MHz),
regulatory risks
• Subscriber market share increased to
• CRISIL expects net debt to remain over Rs
23% in November 2018, adding 119.4
85,000 crore by the end of fiscal 2019
million subscribers
CRISIL Credit Ratings Rated Amount Rating
ICRA
Rs. Crore Action

Rs.6000 Crore Non Crisil A+/Negative Non Convertible AAA

35500
Convertible Debentures (Reaffirmed) Debentures Stable
Amount Rated CRISIL Amount rated Current Rating
CARE Rating/Outlook
(Rs. Crore)
Rs. 38000 Crore
Long Term Bank Non Convertible AAA
33155.77 AA- Non Convertible
Facilities Debentures Stable
Debentured
Short term Bank
18009.57 A1+ 8.95% Non-Convertible AAA
Facilities Rs. 15000 Crore
Non-convertible Debentures Stable
8401 AA-
debentures Rs.30000 Crore
Rs. 15000 Crore A1+
Commercial papers* 2000 A1+ Commercial Paper
 Risk Analysis
RR2: Very High Risk • Adverse regulatory or fiscal taxation developments
MR2 RR2
Medium High
including compliance risks
SR1 SR2 FR2 FR2: Very High Risk • Change in Credit Rating
Probability

OR2 FR1 OR1 MR2: Very High Risk • Highly Competitive Industry trending towards
consolidation
RR1 LR1 OR3: High Risk • Non-compliance of subscriber verification norms
and KYC regulations
MR1 OR3
OR5: High Risk • Gaps in internal controls (financial and non-
Low

financial)
OR5 • Lack of investment in infrastructure capacity
SR2: Med-High Risk building
Low Medium High
OR1: Med-High Risk • Poor quality of network and information technology
including reduncies and disaster recoveries
Impact FR1: Med-High Risk • Increase in cost structures ahead of revenues
thereby impacting liquidity
OR2: Medium Risk • Inadequate quality of customer lifecycle management

MR1: Medium Risk • Economic Uncertainties

SR1: Low Risk • Lack of Digitization and Innovations around Digital

Content
LR1: Low Risk • Regulatory and political uncertainties & instability

RR1: Very Low Risk • Governance Issues

Probability of Default
ALTMAN'S Z-SCORE Altman’s Z-Score is a combination of 5 financial
5.00
4.50
ratios used to estimate the likelihood of Financial
4.50 Distress
4.00
3.50 Safe -> Grey Grey -> Danger Airtel’s score fell significantly from
3.65
3.00 FY 2010 – FY 2011, going from
2.50 Safe Zone to Grey Zone
2.00 2.34
2.20
1.50
2.06 2.07 2.06 2.06 2.00 Airtel’s score fell significantly further from
1.00
1.58 FY 2017 – FY 2018, going from
0.50 Grey Zone to Danger Zone
0.00
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 Companies in Danger Zone have a Bankruptcy
probability of 72% in the next 2 years
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
Risk Category : Financial Risk
Weighted • Airtel will focus on retaining its premium 20%
S.No Risk Parameter WAS Weight
Score Profitability customers who generate 80% of their revenue
1 Profitability 3.2 5 16
2 Solvency 4 6 24
3 Liquidity 2.5 6 15 Solvency • Airtel is well poised to maintain its solvency
4 Valuation Ratio 2 5 10
5 Foreign Currency Risk 4 3 12
6 Auditors Qualifications in B/S 6 3 18 • Low levels of Discretionary Cash Flow can affect
Liquidity the Liquidity
7 New Project Risk 5 3 15
Total 28 110
Score 3.93
Valuation • Fall in Enterprise Value can affect the valuation
• Profitability
o EBIDTA Margin
o ROCE • Airtel follows a prudent risk management policy,
• Solvency
Foreign Currency including hedging mechanisms to protect the
o Leverage Ratio Risk cash flows.
o Interest Coverage Ratio
o Debt/EBIDTA Ratio Auditor’s Qualification • No Adverse Report provided by the auditor
• Liquidity Ratio
o Funds from Operations/ Debt Ratio
in Balance Sheet
o Discretionary cash flow/ Debt Ratio
• Valuation Ratio • Airtel has a highly diverse portfolio which can
o EV/EBIDTA Ratio New Project Risk help it in venturing into new synergies
o Foreign Currency Risk
Industry Risk Analysis
Risk Category : Industry Risk
Weighted
S.No Risk Parameter WAS Weight
Score
1 Industry Characteristics 3 4 12 • The Telecom Industry in India is highly
2 Competitive Risk 4 6 24 Industry sensitive to regulations and dependency on
foreign countries for technology still
3 Industry Financial 2.67 6 16 Characteristics continues to be a challenge
Total 16 52
Score 3.25 • Even though Jio has completely changed
Competitive the industry dynamics and has amplified
the intensity of the competition, Airtel still
• Industry Characteristics
o Importance to the Economy
Risk can contain the threat with diversification
and M&aA’s
o Sensitivity of Industry to government policies
o Threats of Imports
• Continuously falling ARPU’s have had a
o Data and Cyber security risk
o Growth potential/Outlook
Industry major impact on the profit margins and
earning stability. Stabilization will occur if
• Competitive Risk Financial only Jio decides to increase its prices
o Intensity of Competition
o Barriers to entry for new players
• Industry Financials
o Profit margin
o Leverage
o Earning Stability
Business Risk Analysis
Risk Category : Business Risk • Negative Growth in Revenue and EBITDA
Weighted Business Growth Margins coupled with intense competition can
S.No Risk Parameter WAS Weight stifle business growth
Score
1 Business Growth 1 5 5
• Airtel has introduced ‘War on Waste’ program to
2 Operating Efficiency 2.33 6 14 reduce its operational costs. Continued
3 Diversified Portfolio Advantage 5 5 25 Operating Efficiency sustained efforts will improve efficiency in the
4 Spectrum Holding 5 6 30 long run
5 Customer Mix 1 3 3
6 Customer Compliance 5 5 25 • Airtel has ventured into various businesses
7 Technological Risk 3 3 9 Diversified Portfolio ranging from wireless to fixed-line to DTH to
towers
Total 33 111
Score 3.36 • Airtel has sufficient spectrum for 4G across India
• Business Growth
Spectrum Holding and can proceed without participating in any
further spectrum auctions for the next 4 years
o Growth in Revenue
o EBIDTA Margin • With <10% of the customer base being
• Operating Efficiency Postpaid users coupled with new Mobile
o Availability of Infrastructure at reasonable cost Customer Mix Number Portability norms can allow customers
o Availability of RM & Labour at reasonable cost to leave easily
o Adequacy of Marketing, Distribution, Selling,
Storage arrangement. • Easy documentation and various methods of
• Diversified product portfolio Customer Compliance payments have made customers compliant
• Spectrum Holding
• Customer Mix • Keeping pace with the everchanging technology
• Customer Compliance Technological Risk can be challenging even though Airtel is decently
•Technology Risk poised on the technological front
Management Risk Analysis

Risk Category : Management Risk

Weighted
Sl. No Risk Parameter WAS Weight
Score • Massive deviation from their targeted
1 Financial Targets 1 6 6 Finacial Targets revenue and Growth rate of EBITDA
2 Management Capability 5 4 20 High Risk margins, with an immediate bounce-back
being very highly unlikely
3 Promoter Financial Support 3 5 15
4 Strategic Planning 4.5 4 18 Management Capability • The board has a diverse profile both in terms
Total 19.00 59 of educational qualifications and work
Low Risk experience
Score 3.11
• The promoters are heavily invested and
Promoter Financial have a 67% shareholding, however this
• Financial Targets Support being a capital intensive industry does
o Achievement of targeted revenue Medium Risk mean that the promoters might not be able
o Achievement of % increase in EBIDTA Margin to push all the way through
• Capability of Promoters/Management
• Financial Support from Promoters/Group
Strategic Planning • Airtel is well versed with it’s strengths and
• Strategic Planning shortcomings and all strategies have been
o Adequate Succession Plan Low Risk aligned accordingly
o Strategy to Diversify Product Portfolio
o Strategy to grow market position
o Strategy to grow market
Credit Rating Matrix
Financial Risk – 33.33% Industry Risk – 22.22%
Given the highly capital-intensive nature of the industry and the extensive
We analyzed the Bharti Airtel’s capital structure, including levels of equity and
marketing costs involved in customer acquisition and retention, the extent of
debt financing.
pricing power of any player in the industry is critical. This in turn is driven by
The process also involved a comparison of the telco’s key financial
the prevailing competitive landscape as well as the scale and size of an
parameters and ratios. The key parameters
individual telco.
include, profitability metrics, solvency, debt coverage indicators and
liquidity and cash flow indicators.

BBB+
In assessing the business risk profiles of Bharti Airtel
3.47 A rating decision is significantly influenced by a telco’s
we first evaluated the risk factors that are common to the entire industry and management strategy for future growth and profitability, and its ability to
then analyzed the specific issues that define Bharti Airtel’s position. Given execute such strategies. This is particularly important in the telecom industry,
that the mobile telephony industry in India continues to evolve, risk factors given that it is characterized by rapid changes. We, while evaluating a telco’s
are many, some of which are operating efficiency, Spectrum holding, management quality considered factors such as financial targets, capability of
customer mix, customer compliance and technology risk promoters, financial support from promoters and strategic planning

Business Risk – 22.22% Management Risk – 22.22%

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/ THANK YOU

✓ www.prowessiq.cmie.com

✓ www.coai.com

✓ https://mnacritique.mergersindia.com