Airtel Project

PROJECT REPORT ON

Page | 1

Contents Introduction...........................................................................................................3 FRICTO Analysis.....................................................................................................5 Flexibility............................................................................................................5 Risk.....................................................................................................................7 Income:...............................................................................................................8 Control:.............................................................................................................11 Timing:.............................................................................................................12 Others...............................................................................................................17 References.......................................................................................................19 References

Page | 2

Introduction Company Profile Bharti airtel limited is a leading global telecommunications company with operations in 19 countries across Asia and Africa. The company offers mobile voice & data services, fixed line, high speed broadband, IPTV, DTH, turnkey telecom solutions for enterprises and national & international long distance services to carriers. Bharti Airtel has been ranked among the six best performing technology companies in the world by business week. Bharti Airtel had 200 million customers across its operations. Company shares are listed on The Stock Exchange, Mumbai (BSE) and The National Stock Exchange of India Limited (NSE) Bharti Airtel won spectrum in 3G auctions in 13 key circles for a total consideration of about 12,000 odd crores, just about US$2.6 billion. On BWA, it acquired spectrum in four circles - Karnataka, Punjab, Kolkata and Maharasthra for a total consideration of just over 3,000 crores which is approximately US$700 million and are in the process of working out the appropriate roaming arrangements for 3G in the remaining nine circles . Post the completion of Zain transaction acquiring operations in 15 countries across Africa on the 8th of June 2010 Airtel becomes the first Indian brand that goes truly global with a footprint that would cover just under 2 billion people. It is also a major Indian MNC in the true sense with operations which will spread across 18 different countries both in the Indian subcontinent and in the continent of Africa with a customer base of over 180 million . Financing and balance sheet position post the closing of the acquisition and the 3G and BWA auctions. The transaction related to the acquisition of the African assets was financed through debt through a consortium of 11 banks led by Standard Chartered and Barclays. The terms of the financing were very competitive with tenure of six years, and an average maturity of 4.75 years. Repayment of the loan was also rear-ended with the first principle repayment to take place only 2.5 years post rollout. It also kept the loan term flexible for voluntary prepayments. Annual debt servicing cost is of approximately $200 million, which will be serviced entirely by the African operations. Financing cost on all other debt for the Indian and South Asian business is sub 5%. Current net debt position including the borrowings for 3G and BWA is approximately $12 billion and with the consolidated EBITDA of approximately $4.7 billion, it results in a current net debt to consolidated EBITDA of approximately 2.6 times, which is a very comfortable position and very much in line with global telco peer group. As a management philosophy Airtel has always been debt averse and post the Zain deal it was very confident that the operating fee cash flows generated by the business that is EBITDA less CapEx of Page | 3

approximately $2 billion annually on a consolidated basis they will be able to bring down the leverage substantially over the next quarters.

Market Capitalization (as on Mar 25, 2011): Approx. Rs.1288 billion Closing BSE share price = Rs. 339.10 Key Financial Ratios Mar’06

Mar’07

Mar’08

Mar’09

Mar’10

D/E

0.65

0.47

0.33

0.28

0.14

Long Term D/E

0.61

0.43

0.30

0.26

0.12

Interest Coverage

12.76

23.45

34.38

46.28

85.82

ROCE (%)

20.74

29.06

27.95

28.40

23.86

EPS

10.62

21.27

32.90

40.79

24.82

Capital Structure Amount in Crores Capital Structure (Existing) Beta (actual)

0.803

Risk Free Return

8.37%

Market Return

15.60%

Cost of Debt

4.55%

Debt cost premium 10% Increase per 10% Increase in Leverage

Leverag e

D/E

Beta

Cost of Equity

Cost of Debt

Cost of Capital

0

0.00

0.91

14.94%

4.55%

14.94%

0.1

0.11

0.85

14.49%

5.01%

13.37%

0.2

0.25

0.78

14.01%

5.51%

11.94%

0.3

0.43

0.71

13.49%

6.06%

10.64%

0.4

0.67

0.63

12.93%

6.66%

9.52%

0.5

1.00

0.55

12.33%

7.33%

8.58%

0.6

1.50

0.46

11.67%

8.06%

7.86%

0.7

2.33

0.36

10.96%

8.87%

7.38%

Optimal Capital Structure

Page | 4

0.8

4.00

0.25

10.18%

9.75%

7.19%

0.9

9.00

0.13

9.32%

10.73%

7.31%

Assuming cost of Debt increases in the same proportion as leverage but in our case in June 2010 the cost of debt has declined significantly

Industry Comparison Relevered Beta (βe)

Levered Beta

Tax Rate (Tc)

D/E

Unlevered Beta

Bharti Airtel Mahanagar Telephone Nigam Ltd*

0.81

33.99%

0.20

0.72

0.802

14.17%

0.93

33.99%

0.00

0.93

0.709

Idea Cellular Ltd Reliance Communications Ltd Tata Tele Services (Maharashtra) Ltd**

1.06

33.99%

0.62

0.75

0.999

0.07

33.99%

0.54

0.05

0.95

33.99%

0.00

Tata Communications

1.05

33.99%

0.35

Company

Cost of Equity

Cost of Debt

D/V

WACC

4.55%

0.17

12.31%

13.49%

0

0.00

13.49%

15.59%

8.64%

0.38

11.81%

0.961

15.32%

4.55%

0.35

11.00%

0.95

0.709

13.49%

8.80%

0.00

13.49%

0.85

0.872

14.68%

7.03%

0.26

12.08%

Industry Average Beta (βa)

0.709

Risk Free Rate (Rf)

8.37%

Market Return (Rm) Corpora te Tax Rate* =

15.60%

33.99 %

* = including cess and surcharges

βe = βa ( 1 + D/E ( 1 - tax rate) ) CAPM Model to estimate Cost of Equity Re = Rf + βe (Rm - Rf) WACC= D/V*(1-Tc)*cost of debt + (1-D/V)*cost of equity

Page | 5

FRICTO Analysis

Flexibility Does increasing debt restrict the firm for seeking more debt in the future due to high debt levels? Does increasing debt violate loan covenants or result in the potential for loan covenants to be violated with poor performance? Companies use flexibility as a very important tool to draw decision on how much debt to raise for future. Companies with existing low levels of debt decide to raise funds while companies with existing high levels of debt are advised not to comprise on their future liquidity. Companies decide on flexibility on the basis of two aspects: • Financial Ratios A very important tool to understand financial flexibility is to consider Gearing (x). It is defined as: Gearing (x) = Debt /EBITDA Gearing determines the amount of time (i.e. number of years a firm shall take to cover its debt from its earnings). Gearing standards determine the present debt status of a company and its industry standards determine the debt a company can take further i.e its financial flexibility Actuals (US $ mn)

Projected

Dec 2009

Mar 2010

June 2010

Sep 2010

Dec 2010

Yearly

Equity

8075

9347

9336

10289

10440

10200

Debt

1023

530

1295

13389

13378

12700

Revenue

2208

2381

2625

3387

3516

13000

EBITDA

875

904

947

1140

1112

5000

EBITDA (LTM)

3654

3786

4503

4570

4645

5000

Debt/Equit y

0.13

0.06

1.38

1.3

1.3

1.36

Gearing (x)

0.28

0.14

2.87

2.93

2.88

2.54

When we look at the above figures we find that in March after having repaid the debt for Wahid Telecom, Bharti had a very low gearing of 0.14 that could be raised further to industry standards of 2.3 – 3. As per the projections of Bharti Zain Deal consolidated Revenues and EBITDA, a dent of $12.7 bn would have still Page | 6

taken gearing to 2.54 (x), which was the industry standards to offer loan. Thus offer Bharti was in a very good position and had enough financial flexibility to be stretched. •

Industry Competitors

March 2010

Bharti

Idea

MTNL

R. Comm

Gearing (x)

0.14

1.0

0.0

1.7

As per the industry competitors rations also, Bharti Airtel Ltd. Was quite less leveraged than other firms to do debt financing further for Zain acquisition and 3G auctioning. •

Credit Ratings

Based on parameters like future Cash Flows, Gearing (x), industry standards, rating agencies identifies the real status of a firm and its position to finance its operations through debt. According to rating agencies, any debt, which keeps gearing ideally below 3, is acceptable provided a good revenue-earning model of the firm. Based on industry standard of Gearing as 2.5 and expected EBITDA of US $5 bn, Bharti could raise US $12.5 billion through industry. Thus looking at the above numbers we can conclude that Bharti was much more flexible to accept debt because of huge positive expected cash flows. Bharti after expectedly raising US $12.5 bn was still in a position to raise another US $2.5 bn through debt financing.

Risk Risk refers to the ability of the firm to meet its fixed financial obligations (i.e., interest, principal repayment, lease payments, preferred dividends, etc.) even in adverse circumstances. The more uncertain a firm’s operating cash flows, the more uncertainty there is about its ability to meet its obligations and the less debt the firm can handle. The cost of capital is the expected return to equity owners (or shareholders) and to debt holders, so WACC tells us the return that both stakeholders - equity owners and lenders - can expect. WACC, in other words, represents the investor's opportunity cost of taking on the risk of putting money into a company. As part of risk analysis, we try to compute financial risk of the company with expected rate of return. Considering an efficient market, we know that weighted average cost of capital will give a good measure of risk and it will grow or fall with corresponding increment or decrement of risk as perceived by market. Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Jun-10

Page | 7

Av Cost of Debt (Kd)

0.0530 93

0.0492 5

0.0385 94

0.040210 66

0.0156591

1.026487

Tax rate

33.99%

33.99%

33.99%

33.99%

33.99%

33.99%

Rf

8.37%

8.37%

8.37%

8.37%

8.37%

8.37%

Rm

15.60%

15.60%

15.60%

15.60%

15.60%

15.60%

D/E

0.65

0.47

0.33

0.28

0.14

D/V

0.3939 39

0.3197 28

0.2481 2

0.21875

0.122807

0.579832

E/V

0.6060 61

0.6802 72

0.7518 8

0.78125

0.877193

0.420168

βe

1.0132 07

0.9289 65

0.8634 44

0.840043 05

0.7745215

1.354855

Cost of Equity (Ke)

0.1569 55

0.1508 64

0.1461 27

0.144435 11

0.1396979

0.181656

WACC

0.1089 3

0.1130 23

0.1161 91

0.118646 23

0.1238114

0.469211

1.38

As can be seen from the above figure Bharti’s D/E ratio shot up in Q1, FY 2011 post Zain deal indicating that the acquisition was funded heavily by debt.

Income: Income pertains to the impact of the different financing alternatives on returns to shareholders as measured by earnings per share (EPS) or return on equity (ROE). Because no additional interest is paid, common stock financing always produces higher earnings after taxes than debt. However, debt financing usually (although not always under all conditions) produces higher ROE and EPS. For the Zain deal, Bharti has used debt as a mode of financing the expansion program. We’ll compare the performance of the Bharti Airtel on a quarterly basis based on the consolidated financial results (international standards as per GAAP) Page | 8

Below table summarizes the EPS and earnings of Bharti Airtel (consolidated). The Zain deal happened in June 2010. Bharti raised 9 billion $ in debt and 1.7 billion $ is assumed on books of Zain

Perio earnin interest % change in % change in d EPS gs charges EPS earnings Dec- 5.69 09 1 22356 4199 5.525681439 -3.679448514 Mar10 5.39 20997 4636 5.289052891 -6.078904992 Jun-10 4.43 16969 6708 17.81076067 -19.18369291 Sep10 4.38 16589 6258 1.128668172 -2.239377689 Dec10 3.43 12129 7856 21.68949772 -26.88528543 All figures in INR millions

The above graph shows that the percentage change in earnings is greater than the % change in earnings in June 2010 implying EPS has increased after the debt financing deal. The drop in earnings in June 2010 can be attributed to increased interest expenses in June 2010 on the new debt it acquired and reduced income from financial activities (inr 4992 million to 2510 million). Hence in this case we cannot say that debt financing has produced higher EPS as the total earnings have declined although the rate of decline of earnings is larger than rate of decline of EPS which shows that EPS has increased. Below table summarizes the various scenarios if Bharti would have financed the deal from 100 % equity (full) or 50 % equity and 50 % debt a. 100 % equity financing Extra equity to be raised assuming shares are issued at market price on June 30 total number of existing shares new shares Total shares

1539923954 3797530000 ( fv = 5) 1539923954 5337453954

Assuming 1 $ = 45INR and interest charges before Debt will remain same i.e. INR 4636 million. Earnings before taxation Finance Period and interest income Dec-09 25070 remain same

Less taxation remain

EPS 5.691 Page | 9

Mar-10

24056 remain same

Jun-10

24917

2510

Sep-10

25586

2939

Dec-10

22965

386

same remain same

5.39 3.50141100 18688.62 2 3.67009817 19588.98 2 2.87520981 15346.3 6

In INR million

From the above table it is clear that equity financing will produce higher earnings after taxes but the EPS goes down as expected. EPS comparison

Earnings Comparison

b. 50 % equity 50 % debt financing Assumptions: 1. Interest charges are calculated assuming base interest charge in March 2010 will continue and the additional interest over and above that will be halved in 50 % debt $ = 45 INR 2. Finance Income remains same Extra equity to be raised assuming shares are issued at market price on June 30 total number of existing shares new shares Total shares

Perio d Dec09

Earnings before taxation and interest

769961977.2 3797530000 769961977.2 4567491977

Interest charges debt financing (100%)

Finance income

interest charges ( interest charges without debt - half of new interest charges) 4199(same as before) 4636 ( same as before)

earnings net

EPS 5.69 22356 1

25070

4465

Mar-10

24056

4992

Jun-10

24917

2510

6708

5672

17839.1

Sep-10 Dec10

25586

2939

6258

5447

18923.96

22965

386

7856

6246

14026.1

20997

Page | 10

5.39 3.90 57 4.14 32 3.07 09

In INR million As clear from the above table the earnings have increased marginally as compared to full equity and full debt scenarios. A comparison of all 3 scenarios:

The above graph clearly validates that earnings increase in case of equity financing and EPS increases in case of debt financing.

Control: Control pertains to how different financing alternatives affect the ownership control of the firm. If management has voting control of the firm’s common stock, it may choose debt over new common equity. Control can also refer to restrictions placed on the activities of the firm by restrictive covenants in loan agreements. The source of funding and share holding pattern for Bharati Airtel is shown in the following tables: (Rs in Crs) Top of Form Bottom of Form Year

Mar 10

Mar 09

Mar 08

Mar 07

1,898.77 37,980.15

1,898.24 27,229.3 9

1,897.9 1 19,825. 24

1,895.9 3 9,562.4 5

0

0

0

0 39,878.9 2

0.29 29,127. 92

2,855.53 4,958.43

Mar 06

Mar 05

SOURCES OF FUNDS : Share Capital Reserves Total Equity Share Warrants Equity Application Money Total Shareholders’ Funds Minority Interest Secured Loans Unsecured Loans Total Debt

5,329.71 10,288.1 4

5,456.38

1,856. 09 2,678. 47

0

0

0

0 11,458 .38

0 7,350.2 6

0 4,534 .56

1,229.75

1.23 21,724 .38 1,014.2 2

194.82

109.1

1,428.73 12,088.4 2 13,517. 15

58.26 9,543.4 9 9,601. 75

245.28 5,040.6 1 5,285. 89

2,839.91

92.45 3,961. 98 1,038. 62 5,000 .60

1,893.88

1,932.93 4,772.8 4 Page | 11

53,022.5 9

Total Liabilities Debt-Equity Ratio Debt-Equity Industry

43,874. 82

32,340 .35

16,939 .09

12,232. 20

9,627 .61

0.2

0.3

0.38

0.54

0.83

0.6

0.35

0.31

0.32

0.29

0.26

0.27

Ratio

Ownership Pattern as on 31-122010 No of Shares

% Share Share Holding Holders

Demat Share

Foreign (Promoter & Group)

862843286

22.7212

4

862843286

Indian (Promoter & Group)

1726970056

45.4761

2

1726970056

Total of Promoter

2589813342

68.1973

6

2589813342

Non Promoter (Institution)

987956308

26.0158

850

987956308

Non Promoter (Non-Institution)

219760446

5.7869

376376

214303146

Total Non Promoter

1207716754

31.8027

377226

1202259454

Total Promoter & Non Promoter

3797530096

100

377232

3792072796

Custodians(Against Receipts)

0

0

0

0

3797530096

100

377232

3792072796

Depository

Grand Total Share Holding Pattern

As on 31st December 2010 , Bharati Airtel’s free float (unrestricted shares of a public company not held by large shareholders) was approximately 32%, with the balance of the shares held by the promoters of the business(Foreign and Indian (Promoter & Group)holds 68% shares). The founder also held the position of Chairman and Managing Director. Institutional investors hold around 26% of the shares, with LIC of India being the Major share holder with a little over 5% holding. Under the current set up the control is firmly on the hands of promoters (foreign and Indian). Before 2007 Bharati Airtel was a highly leveraged firm with 83% of funding done through debit in 2006. This must have come with a lot of restrictive covenants in loan agreements. Over the last five years the company has brought down the Debt- Equity ratio to 20% from a very high leverage of 83% in 2006. The company has taken steps to reduce its debt considerably during the years 200710(during the global financial meltdown period and after). The Debit- Equity ratio is well below the current industry average of 35%.This will considerably reduce the control / restrictions imposed by the debtors. Page | 12

Timing: Bharti Airtel formally announced the deal with Zain on 15 February 2010 after which the stocks fell 3.94% to Rs. 302 on reports Kuwait-based telecom company Zain accepted a $10.7 billion, or around Rs. 49,700 crore offer from Bharti for Zain's African assets. Meanwhile, the BSE Sensex was down 4.55 points, or 0.03%, to 16,148.04. On BSE, 7.55 lakh shares were traded in the counter as against an average daily volume of 13.75 lakh shares in the past one quarter. The stock had hit a 52-week high of Rs. 495 on 19 May 2009 and a 52-week low of Rs. 229.50 on 27 November 2009.The stock had outperformed the market over the past one month till 11 February 2010, falling 4.42% compared with the Sensex's 7.84% fall. It outperformed the market in past one quarter, rising 4.77% as against 4.14% decline in the Sensex.

India's largest listed cellular operator by sales has an equity capital of Rs. 1898.63 crore. Face value per share is Rs. 5.The current price of Rs. 302 discounts the company's Q3 December 2009 annualized EPS of Rs. 24.36, by a PE multiple of 12.39. Bharti has been hunting for emerging market acquisitions as Indian market becomes increasingly competitive, squeezing operators' profit margins. Bharti's planned $24 billion tie-up with South Africa's MTN failed in September 2009, for a second time. Last month, Bharti agreed to buy 70% of Bangladesh's Warid Telecom for an initial investment of $300 million. Bharti has overpaid for this deal. It looks as if they’re desperate to deploy cash and are paying a 55% premium for Zain in comparison with Bharti’s own Page | 13

valuations. The Enterprise Value contains nearly 40% as “goodwill”. Otherwise, the operations are still not profitable: The African assets reported a loss of $35 million in 2008! To add to the misery, the ownership of the Nigerian unit is up in the air; there’s a legal battle on. Nigeria accounts 21% of Zain’s worldwide customers and 16% of its revenue – the largest customer concentration for it, even greater than the home base of Kuwait.

Zain’s situation: • • • • • •

Zain’s entire operations have slumped – the first nine months of 2009 have seen a 17% drop in net profits from 235m KWD to 196m KWD. 9 months in USD: Revenue: $6.1B, EBIDTA: $2.6B, Net Profit: $677 million. 47-50% of all Zain revenue comes from non-African sources (source: Q3 presentation) In Nigeria, they lost 6% of their customers year on year as of September 2009 The ARPUs for Africa lie between $3 and $13 – Nigeria is halfway at $7. In India its ARPU is Rs. 230 or $5. Zain has 42 million customers in Africa. Bharti’s situation:

•

• • •

Bharti supposedly has $1.5B in cash – about 7,000 crores – and the African unit has around $2 billion in debt; so they have to pay about $8 billion – 35,000 crores. Assuming they put in 5,000 cr. as equity, they have to raise 30,000 cr. as debt. Adding that to current debt will mean 39,000 cr in debt; say at 6% they will pay Rs. 2,400 cr as interest costs. For a set of assets that are at this point not even EBIDTA positive, this means Bharti will have to absorb it from its profitable India operations. The India operations will do about 10,000 cr. in net profits this year – that’s a hit of 25% on its profits (until the African operations scale to absorb the losses) With annualized EPS expected around Rs. 25, I’d imagine that 10 P/E is where it should stop falling. But Bharti has no choice really – with Indian competition eating into its profits and market share, it has to go abroad. A few years of pain will happen. Bharti Airtel's net profit rose 14.6% to Rs. 2312.10 crore on a 0.8% decline in sales to Rs. 8755.45 crore in Q3 December 2009 over Q3 December 2008. Zain September 2009 data: A quick look at the Zain September 2009 data – nine months of the year only – gives us a view of what Bharti bought.

Page | 14

This figure shows Bharti Airtel's acquisition of Zain's mobile phone business in Africa. Sure, Bharti stands to gain from purchasing a stake in the African market (which is growing even in recession), but why would Zain sell? As you can see, Zain's African operations are not profitable, while its Middle Eastern activities are heavily profitable, besides Saudi Arabia. The sale will allow them to grow closer to their home market in places like Oman, Yemen, the UAE and Egypt. As you might also notice, Nigeria is the bull in the room. It’s still not profitable with a loss of $88m on revenues of $986m, and accounts for 1/3rd of Zain Africa’s revenues. (Zain does not classify Sudan or Morocco as “Africa”, and is not selling those to Bharti).Yet, Nigeria has hope; Zain has only 25% market share, and the market penetration is just 45% – scope to grow. Average Revenue Per User (ARPU) in Africa ranges from $3 to $10, with Nigeria at $7. This compares favorably with India where Airtel’s ARPU is $5 (Rs. 230).

Page | 15

The story from Mint is that Bharti is looking to finance the Zain deal from a $7 billion USD loan – remaining $2bn will be from Indian rupee loans - at a rate of 300 bps (3.00%) over LIBOR. This is suspect – they were offering to pay 320 points for the smaller $3 bn loan for MTN last year; still, LIBOR is at an all-time low of about 0.88%.

Page | 16

The 10 year average of LIBOR is 3.75% and we shouldn’t expect these low LIBOR rates to last too long. At even 2% of LIBOR and a 300 bps premium and 8% for the Indian bit, Bharti will pay $500m per year in interest. That means they have to improve EBIDTA by $500m just to pay for the deal; currently EBIDTA is $1.3bn, so it’s got to scale by 40% for Bharti to get a chunk. They can definitely improve some bits – tower costs in Africa have been 4x more than India, which can be lowered and internal efficiencies can be improved. The local mafia in Africa will be tougher to handle (they take the lucrative deals and back-peddle commissions) where in India Mittal’s political connections would have helped in the early stages.

Others It talks about the attitude of management and shareholders toward debt and its raise for financing. How will the company’s bond rating be affected with the raise of debt and what implications does it hold on the share prices and other related implications.

The Debt to equity ratio has sharply increased over the last six quarters, for the dec-2010 quarter, the debt financing went as high as over 60%. The sharp rise in the debt financing happened during the first half of 2010, during the times when Bharti was in talk with Kuwait’s Zain telecom for the acquisition of its African business. Attitude of management: • The increasing trend in the debt financing across the timeline clearly indicates Bharti is moving more towards a leveraged firm. It can be seen as a positive confidence of the management towards the organization •

Attraction towards the Zain Deal by Debt Financing Page | 17

Bharti Airtel, clearly motivated by its African dreams, paid a glaring “opportunity cost” to take over Zain Africa. Experts comment that the deal is overpriced and Zain Africa is not a worthy investment. Attitude of the share holders: • The large debt financing is mostly seen as a negative signal to the share holders. It was evident when Bharti’s stock prices fell by over 14% in two days on the BSE, after the announcement of the potential Bharti-Zain deal, which was expected to be financed by a debt of over $10 billion Timing of the Deal: Expansion was necessary Bharti Airtel left the world gasping in horror with its “out of the box” decision to hand over every core function from IT to networks, to IBM in 2004. The idea was to remain and grow as a core telecom company which it did and did with elegance. In the telecom space, Bharti Airtel notched up its 100 millionth customer last May and also overtook BSNL to become India’s largest telco by revenues that year but there was continuous drop in the margin of profit over the years. Reaction of the research houses: • Almost all the research houses have been critical towards this high debt deal. The comments were ranging from “Pained by Zain; Rating Cut” from Bank of America Merill Lynch to “Very expensive diversification” by Credit Suisse Impacts on Credit Ratings: CRISIL On February 19, 2010 credit rating agency CRISIL, the Indian arm of Standard and Poor's, placed Bharti's long-term debt on rating watch with negative implications. This reflects CRISIL's belief that Bharti Airtel's proposed acquisition of Zain Africa BV's business for an enterprise value of US$10.7 billion will be largely debtfunded; the acquisition can thereby adversely affect Bharti Airtel's gearing [debtto-equity ratio] and debt protection indicators over the short term. Bharti Airtel's gearing, after the acquisition, is expected to increase to more than 1 time, from around 0.15 times as on 31 December, 2009 However, this deal was expected to diversify the risk profile of the company. But the huge debt financing bought a lot of financial volatility into Bharti’s Balance sheet. Its evident from the fact that the share prices of Bharti is far more sensitive to the changes of EPS than before 2010. FITCH: Bharti Airtel has been placed on Rating Watch Negative (RWN). The RWN also takes into account the uncertainties surrounding the targeted turnaround of the loss-making operations of Zain's African assets, which reported a decline of 11% and 16% in revenues and EBITDA respectively in 9M 09 y-o-y, and, a net loss of US$37 million during the same period. Post-Zain deal: S&P lowers Airtel's credit rating Page | 18

S&P lowered Bharti's long-term corporate credit rating to 'BB+' from 'BBB-' but said the outlook is stable. A shift to BB rating category indicates that a company has been moved from investment grade to speculative grade. The rating cut has come on back of concerns regarding Zain and 3G funding. The debt funding for Zain is around $9 billion or Rs. 42000 crore at current exchange rate. Add to that, funding required for 3G auction is over Rs. 12,000 crore. Broadband wireless access auctions is still underway and the debt on the books ending March is over 1200 crore Financing through debt is not always good, most of the times the markets and the shareholders take this as a negative signal. An optimum portion of total financing is needed for best results, High debt to equity actually gives an overall bad signal to the investors. It’s purely the management’s decisions to go for the higher debt financing, if there is strong vision and business strategy in place for the risk associated with high debt financing.

References 1. www.capitaline.com/ 2. www.airtel.in/Investor Relations 3. http://www.moneycontrol.com/financials/bhartiairtel/balance-sheet/BA08

Page | 19