Bharti Airtel’s (Bharti) FY12 annual report highlights an improvement in operating cash flows for the African CGU but negative FCF has increased. Goodwill impairment testing did not result in impairment though with low margin of safety. Currency translation impact on USD loans lying with Netherland subsidiary amounted to INR65bn, primarily arising due to INR depreciation. Refinancing of INR193bn of loans during FY13 may hike financing cost but the recognition of translation losses will be deferred.
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African operating cash flow improves, but negative FCF increases
FCF (post interest) for Africa dipped to INR(44.8)bn in FY12 from INR(24.1)bn in FY11 despite improvement in operating cash flows, primarily on account of higher capex.
Margin of safety for goodwill impairment at 4.5%
Goodwill impairment testing for Africa CGU did not result in any impairment; however, fair value of assets exceeds the carrying amount of goodwill by meager ~4.5%. An increase in discount rate beyond 52bps or reduction in growth rate over 87bps for Africa CGU will result in impairment.
Non-recognition of deferred tax assets on c/fd loss
Bharti stated that deferred tax assets (DTA) of INR9.5bn (FY11: INR9.1bn) arising on deductible temporary differences/unused tax losses of ~INR91.0bn (FY11: INR77.8bn) have not been recognised as there is no probability of taxable profits in the future. The turnaround in African operations may lead to the recognition of DTA in future.
Loans rise on currency translation impact of INR65bn
The company’s loan book has increased to INR690.2bn in FY12 from INR616.7bn in FY11 due to currency translation impact of INR64.6bn on unhedged USD loans lying with the Netherland arm (NDL; since NDL’s functional currency is USD, translation fluctuations are routed through the balance sheet; refer our report dated November 24, 2011).
INR193bn of loan repayable in FY13
INR193bn (28% of loan book) of loan is repayable in FY13, which we believe will get refinanced considering negative FCF of Africa’s CGU. Refinancing will lead to deferment of MTM losses, though the interest cost is likely to be higher.
Contingent tax liabilities on the rise
Bharti’s contingent liabilities have jumped from INR30.7bn in FY11 to INR55.5bn, 11% of FY12 networth (FY11: 6.3%), due to higher tax liabilities. However, based on the company’s evaluation, these claims are not likely to materialise.
Regards,
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