Annual Report Analysis - Bharti Airtel :: Edelweiss

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Bharti Airtel’s (Bharti) annual report highlights significant exposure to USD loans due to the Zain acquisition. Choice of functional currency as USD for Bharti Airtel International (Netherlands) B.V. (Netherland arm) immunizes income statement from MTM gains/losses arising due to forex volatility. However, if the INR/USD stays at the current level and INR cash flows are used to service debt, it will lead to higher cash outflow of ~ INR42bn.

Cash profit/loss on repayment of USD loan not to impact P&L

Bharti’s loan book jumped 6x from INR101.9bn in FY10 to INR616.7bn in FY11 (~73% of which is USD denominated) due to the Zain acquisition. A major portion of incremental USD debt, guaranteed by the parent, is lying with Netherland arm. Since the functional currency of the subsidiary is USD, MTM forex fluctuations will be accounted through the foreign currency translation reserve.

Since Netherland arm is not generating cash flow, we are of the view that loan repayment will be via INR cash flows. If USD continues to appreciate, Bharti will incur actual cash loss which will be taken directly through reserves and will not impact P&L. At the current exchange rate this will result in additional cash outflow of ~INR42bn (cumulative MTM impact from the date of acquisition). The company is due to repay borrowings of ~INR40bn in CY13, ~INR80bn in CY14, ~INR120bn in CY15 and ~INR160bn in CY16.

Goodwill ~80% of networth

Bharti’s goodwill surged significantly to INR388.1bn in FY11 (FY10: INR42.2bn); 79.6% of networth (FY10: 10.0%). The company acquired 100% stake in Zain for USD9bn (INR421.9bn), on which goodwill of INR344.7bn has been recognised.

Working capital requirement increases but for current liabilities

Debtors surged from INR35.7bn (8.5% of sales) in FY10 to INR54.9bn (9.2% of sales) in FY11. Creditors increased from INR21.1bn in FY10 to INR55.9bn in FY11; 22.0% of raw material consumed (FY10: 12.1%). Inventories also increased from INR0.5bn in FY10 to INR2.1bn in FY11, primarily on account of inventory for handsets of INR1.4bn (FY10: Nil).

IFRS migration leads to higher EBITDA and debt

IFRS migration will lead to proportionate consolidation of JVs vis-à-vis earlier practice (under US GAAP) of single line adjustment to PAT and hence higher recognition of proportionate debt and EBITDA pertaining to JVs. Accordingly, analysts have to build higher EBITDA on JV consolidation.