Strategic Financial Management

Presented By:- Rupesh Kadam (PG Anvita Jain (PG-11Sneha Jaisinghani 083) Vishakha Jain (PGJignesh Hariya (PG

TELECOM INDUSTRY

TELECOM INDUSTRY
Telecom market is one of the fastest growing markets in the world. Indian telecom network has about 562.21 million connections as on 31 December 2009. With 525.15 million wireless connections, Indian telecom has become the second largest wireless network in the world after China. About 15 million connections are being added every month. Wireless telephones are increasing at faster rate. The share of Wireless telephones as on December 31, 2009 is above 93% of the total phones. The share of private sector in total telephone is about 82.33%.

INDIAN TELECOM INDUSTRY MARKET SHARE

Sales
6.81 10.68 11 16.82 3.09 3.95 19.86

11.17

16.62

Bharti Airtel Reliance Vodafone Idea Bsnl Tata Aircel Uninor Others

TOP FOUR INDIAN TELECOM COMPANIES

 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.

 Reliance Communications Ltd. (commonly called RCOM) is an Indian broadband and telecommunications company headquartered in Navi Mumbai, India. RCOM is the world's 16th largest mobile phone operator with over 150 million subscribers. Established on 2004, a subsidiary of the Reliance Group. The company has five segments:
Wireless segment includes wireless operations of the company; broadband segment includes broadband operations of the company; Global segment include national long distance and international long distance operations of the company and the wholesale operations of its subsidiaries; Investment segment includes investment activities of the Group companies, and Other segment consists of the customer care activities and direct-tohome (DTH) activities

RATIO ANALYSIS

Liquidity Ratios
Current Ratio
Year Current Ratio 2011 1.84 2010 2.17 2009 2.73

The ideal ratio lies between 1.33 2 current asset to protect its 1 current liability. If investors look at the balance sheet it is evident that the manager has been able to increase cash in hand and bank which results in a current ratio of 1.84 for current year 2011, which is a very healthy ratio as compared to industry standard. But this is not a very positive sign as the company has kept idle cash and has not repaid the loans.

Acid Test ratio:Year 2011 2010 2009

Quick ratio

1.81

2.14

2.70

In case of reliance the value for the current year is 1.81 which shows a decreasing trend. If we look at the balance sheet we can conclude that the company is at par with the industry level. In order to be more efficient it should look at this parameter to convert inventories quickly into final product.

Cash Reserve Ratio :Year Cash Reserve Ratio 2011 0.36 2010 0.008 2009 0.05

The CRR of the company has increased from 0.008 to 0.36.This value falls in the ideal value range for this ratio. As per the balance sheet this change is due to the increase in cash in bank and assets available to the company.

Efficiency Ratios
Inventory Turnover Ratio :Year Inventory Conversion Period Year Inventory Turnover Ratio 2011 8.74 2010 6.28 2009 4.31

2011 41.73

2010 58.06

2009 84.66

The Inventory turnover ratio has decreased from 11.71 times to 6.54 times which automatically results in increased inventory conversion period. The manager now hold inventory for 9 days where initially he used to hold for 4 days. But the industry standard is of 15 days hence we can say that the manager has successfully negotiated with the nearby suppliers so that he need not hold high levels of inventory.

Debtors turnover ratio :Year Debtors Turnover Ratio 2011 6.54 2010 8.41 2009 11.7

Year Debtors Collection Period

2011 55.78

2010 43.36

2009 31.15

A decreasing trend in this ratio indicates that the manager has not
been able to recover from debtors efficiently.

 Creditors turnover ratio :Year Creditors Turnover Ratio 2011 0.021529 2010 0.0617 2009 0.0099

Year
Creditors turnover period

2011
557.39

2010
717.76

2009
1207.012

Capital Structuring ratios

Asset Turnover Ratio :Year Asset Turnover Ratio 2011 0.13 2010 0.160 2009 0.164

This ratio has continuously declined as the company has been increasing the assets. These assets have not yet helped to increase the sale proportionally. Here the industry standard is 0.4 while for reliance it is only 0.13 presently.

 Debt Equity Ratio:- An increased dosage of debt as financing for asset had made bit riskier. The increasing level of debt in firms capital structure keeps existing lender doubtful to lend in future and hence creates the pressure within the company for interest payment to creditors.
Year Debt Equity Ratio 2011 2.044 2010 1.56 2009 1.68

Coverage Ratios
Interest Service Coverage Ratio:- The interest coverage ratio of the firm has decreased. This can create a negative impact on the mind of lender and credibility of the company is questioned.
Year 2011 2010 2.50 2009 6.45

Interest Service -10.94 Coverage Ratio

Profitability Ratios
Gross profit Margin Ratio :Year Gross Profit Margin Ratio 2011 18.08 2010 21.11 2009 40.62

A look at the gross profit ratio shows a decreasing trend from 2009-2011of about 100%. Yet this is well above the industry standard of -2.82. This decline maybe due to the manager not being able to manage the uncontrollable expenses like miscellaneous expenses.

Net Profit Margin Ratio :Year Net Profit Margin Ratio 2011 -6.25 2010 3.53 2009 31.83

As we see in the profit and loss statement the reported net profit has declined drastically from Rs. 4802.67 cr to - Rs.757.99 cr which shows a decreasing trend. This decrease in net profit is an important element in decreasing the ROE and ROCE.

Year ROA

2011 -2.45

2010 2.17

2009 2.73

Year ROCE

2011 -2.4

2010 2.17

2009 2.73

Year ROE

2011 -1.57

2010 0.94

2009 9.29

Valuation Ratios
A look at EPS and DPS of the company indicates that the manager is not able to manage its return to the shareholders. In order to increase the confidence of the investors and to sustain in the market it has to implement certain policies to increase the profits which is negative at present. A negative dividend payout ratio(-15%) in March 2011 indicates that the company fails to provide the return to shareholders but in order to sustain the investors it is providing dividend out of reserves.

Year EPS

2011 -3.67

2010 2.32

2009 23.27

Year
DPS

2011
0.55

2010
0.93

2009
0.88

Year Dividend Payout Ratio

2011 -15

2010 40.34

2009 3.78

RATIO ANALYSIS

LIQUIDITY RATIOS
RELATIONSHIP
CURRENT ASSETS/CURRENT LIABILITY QUICK ASSETS/CURRENT LIABILITY CASH RESERVE/CURRENT LIABILITY

RATIO

MAR-11

MAR-10

MAR-09

MAR-08

MAR-07

Current Ratio

0.89

0.80

0.74

0.58

0.49

Quick Ratio

0.89

0.79

0.73

0.57

0.49

Cash reserve ratio 0.006124 0.04630369 0.136789 0.036258 0.073022

LIQUIDITY RATIOS
There is improvement in Current Ratio & Quick Ratio during the period March 07-11. This means manager is able to manage its Current Assets & liabilities to improve its liquidity position. In March-11, it is observed that the Current Ratio is 0.89 with loans & advances, but industry CR is 1.62 which shows it is very high in respect to Airtel. But company has been abled to negotiate with creditors and its debtors collection period is efficient thats why Airtels Current Ratio is low. In march-11, Quick Ratio is 0.89 which is less than Industrys Quick Ratio i e 1.56, but it is equal to Current Ratio that means company does not block too much money in inventory which results in overall efficiency. There is huge dip in Cash Reserve Ratio in 2011 as compared to previous year. So cash & bank balance is not efficient to protect Current Liability. This may be due to investment for further expansion or the companys policy is not for keeping idle cash.

EFFICIENCY RATIOS
RELATIONSHIP RATIO MAR-11 MAR-10 MAR-09 MAR-08 MAR-07 NET CREDIT Debtors turnover SALES/AVERAGE DEBTORS 16.96831 15.2992986 12.78448 Ratio COGS/AVERAGE INVENTORY NET CREDIT PURCHASE/AVERAGE CREDITORS 365DAYS/DTO Inventory turnover Ratio 277.3831 340.261158 342.7555

11.08062 19.058997

89.62354

50.16

Creditors turnover 0.017517 0.02045501 0.02206 Ratio Debtors collection 21.51069 23.8573028 28.55025 period Inventory converse period 1.31587 1.07270545 1.064899

0.003481 0.0128244

32.9404

19.15106

365DAYS/ITO

4.072591 7.2767145

365DAYS/CTO

Creditors turnover 685.0649 586.653272 543.9604 period

3447.692 935.71702

EFFICIENCY RATIOS
There is increase in Debtor Turnover Ratio. However company is collecting efficiently from its debtor as compared to industry. Debtor turnover ratio is increasing because there is increase in sales compared to previous year. There is an increase in Inventory Turnover Ratio as compared to previous year this shows that the Raw materials are quickly converted into final product. so the inventories conversion period has also improved. Creditor Turnover Ratio is decreasing and Creditor Turnover period is increasing that means Company is enjoying larger credit days to pay so it is able to gain more profitability, but it is blocking too much money of creditor that can impact its creditability. Although suppliers are ready to supply its product to the company due to the reputation in the market.

CAPITAL STRUCTURING RATIOS

RELATIONSHIP RATIO MAR-11 MAR-10 MAR-09 MAR-08 MAR-07

EBIT/INTEREST

Interest service coverage Ratio

30.44253 38.7748014 19.73657

18.64067 17.283157

LONG TERM DEBT Debt/equtiy Ratio /NETWORTH

0.27406

0.14292801 0.294032

0.333418 0.4828452

SALES Assets turnover Ratio 0.484979 0.59931198 0.661251 /TOTAL ASSETS

0.632228 0.6450192

CAPITAL STRUCTURING RATIOS

There is fluctuation in Interest Service Coverage ratio because of fluctuation in EBIT. Although it can also be seen that interest is sufficiently protected by EBIT. It can also be seen that company is more dependent on owners fund rather debt. However there is increase in debt which can results in increase in earning to the owners. It has less burden of interest on profits & also unsecured loans is more which shows the credibility of the company. Assets Turnover Ratio is decreasing due to increase in assets which doesnt results in profitabilty yet. It has been at par with the industry standard.

PROFITABILITY RATIOS
RELATIONSHIP (GP/NET SALES) x100 RATIO Gross Profit Margin Ratio MAR-11 MAR-10 MAR-09 MAR-08 MAR-07

37.11851

42.75600612

42.13347

43.39786

42.823476

Net Profit (NP/NET SALES) Margin Ratio X100 (NPBT+INT)/TO TAL ASSETS NPAT/NET WORTH (NPBT+INT)/CA PITAL EMPLOYED SALES/FIXED ASSETS Return on Assets Return on Equity Return on Capital Employed Fixed assets turnover Ratio

20.29919

26.47088558

22.74368

24.23882

22.593088

15.97599

26.29726612

24.46111

27.28805

28.696945

17.49404

25.65832453

28.01277

30.84847

35.245432

16.12649

26.2993434

24.23475

27.35285

29.097748

0.618772

0.80541702

0.913639

0.916255

0.6733933

PROFITABILITY RATIOS
There is fluctuation in GP ratio as well as in NP ratio. This fluctuation is because of fluctuation in GP and NP i e manager doesnt have any control over uncontrollable expenses. But these are very high when compared to industrys ratio so company is being able to generate a good profit, that increases its reputation.

This fluctuation in NP is highly contributing towards fluctuation in Return on Capital Employed and Return on Equity. Reasons can be-Trading on equity but introducing more debt. There is decrease in Fixed assets turnover ratio because company has introduced fixed assets that increase in assets has not yet help to increase in sales propotionately.

VALUATION RATIOS
RELATIONSHIP NPATPREF.DIVIDEND /NO.OF OUT EQ SHARE TOTAL DIVIDEND PROP/NO.OF OUT EQ SHARE RATIO MAR-11 MAR-10 MAR-09 MAR-08 MAR-07

Earning Per Share

20.32

24.82

40.79

32.9

21.27

Dividend Per Share

1.000132

1.00010533 0.999737

DPS/EPS Dividend Payout x100 Ratio

4.921908

4.02943324 2.450936

VALUATION RATIOS
There is decreasing trend in Earning Per Share which shows that manager is not able to increase its return. Even this decrement is justified because outstanding share is increasing during the period. In spite of decreasing Earning Per Share, dividend paid to share holder is increasing to meet share holders expectation. And company is retaining back a part of earning.

DU-PONT CHART

DU PONT CHART EARNINGS POWER

Rate of return on asset-12.78%

Net Profit-0.2029

Total Asset Turn Over Ratio 0.63

/
Total Assets 60075.9crs

PAT-7716.9crs-

Net Sales38015.8 crs

Sales 38015.8 crs

minus
Administration expense-14204.2 crs
0.3736 Fixed Assets 40700.8 crs

Current Assets 19375.1 crs

minus
Selling & Distribution Expense 8137.7 crs
0.2140

0.61877

1.7861

minus
Interest 296.7 crs
30.44253

minus
Taxes 1007.6 crs
0.1152

3.6823

DU-PONT CHART

DU PONT CHART EARNINGS POWER

Rate of return on asset-(1.58)%

Net Profit- (0.0624)

Net Sales12129.77crs

Total Asset Turn Over Ratio-0.2527

Sales12129.77crs / Total Assets47994.72crs

PAT-(757.99)crs

minus
Administration expense9,102.95crs 0.7504

minus
Selling & Distribution Expense 0 0

Fixed Assets28,840.90crs

Current Assets19,153.82 crs

minus
Interest-178.11crs 30.44253 0.4643

0.296541

4.0164

minus
Taxes-0

Analysis
The Du Pont chart shows the interaction of profitability and activity ratios. To maximize Return on Assets Reliance should increase sales price of its products. This will increase the net margin, which will in turn increase the return on assets or it can also go for cost reduction . Increase sales volume. Reliance needs to improve its Debtors turnover ratio ,fixed asset turnover ratio, and inventory turnover ratio to improves its return on investment and its liquidity position.

 Reliance is facing huge loses as its total expenses is more then its income and also its sales is less than Airtels sales. so Reliance should take steps to improve its market share and try to bring down its controllable expenses. Reliances return on assets and return on capital employed is also less than airtels as it heavily rely on debt instead of equity. It impacts on its NPAT. As reliance is facing huge lose so its NPAT is decreasing and their earning per share also decreasing but instead of huge loses they are providing some amount as dividend to share holder of 0.5% i e less than previous years dividend.

 In

terms of liquidity of reliance has to bring down the cash reserves as it is not helping them to generate the return on cash. So, it should undertake the policy of keeping the minimal cash as it is idle in nature and also find the sources of investment or proposal of bringing down the cash reserves in the company. The efficiency position is also not good when compared with the Airtel as it is taking more days to collect from the debtors which shows its inefficiency towards collection and also the credit period is less when compared with the Bharti. However the overall efficiency position is far better than the overall industry position. So, the company needs to take certain efficient steps to improve further the current efficiency level.

The long-term solvency position doesnt look good when we look at the interest coverage ratio, debt/equity ratio as the company is more dependent on the debt rather than owned capital for the working. So there is a more burden of interest which leads to decrease in the profitability of the company and decreases the confidence of the investor on the company which leads to ineffectiveness. The company should take certain steps like it must try to improve its profitability by taking certain measures and improve the credibility in the market and focused more on the equity and involve certain debt to generate overall benefit to the investor and lenders. This will leads to increase in the confidence of investor and it can improve its structure of capital.