PROJECT REPORT

ON

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

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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
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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 Cost of Cost of Cost of

e D/E Beta Equity Debt 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%

Optimal Capital Structure
0.7 2.33 0.36 10.96% 8.87% 7.38%

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 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

Levered Tax Rate Unlevered Relevered Beta Cost of Cost of

Company Beta (Tc) D/E Beta (βe) Equity Debt D/V WACC
Bharti Airtel 0.81 33.99% 0.20 0.72 0.802 14.17% 4.55% 0.17 12.31%
Mahanagar Telephone
Nigam Ltd* 0.93 33.99% 0.00 0.93 0.709 13.49% 0 0.00 13.49%
Idea Cellular Ltd 1.06 33.99% 0.62 0.75 0.999 15.59% 8.64% 0.38 11.81%
Reliance
Communications Ltd 0.07 33.99% 0.54 0.05 0.961 15.32% 4.55% 0.35 11.00%
Tata Tele Services
(Maharashtra) Ltd** 0.95 33.99% 0.00 0.95 0.709 13.49% 8.80% 0.00 13.49%
Tata Communications 1.05 33.99% 0.35 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) 15.60%

Corpora
te Tax 33.99
Rate* = %

* = 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

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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 Mar 2010 June Sep 2010 Dec 2010 Yearly

2009 2010

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 3654 3786 4503 4570 4645 5000

(LTM)

Debt/Equit 0.13 0.06 1.38 1.3 1.3 1.36

y

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
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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

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Av Cost of Debt (Kd) 0.0530 0.0492 0.0385 0.040210 0.0156591 1.026487
93 5 94 66

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 1.38

D/V 0.3939 0.3197 0.2481 0.21875 0.122807 0.579832

39 28 2

E/V 0.6060 0.6802 0.7518 0.78125 0.877193 0.420168

61 72 8

βe 1.0132 0.9289 0.8634 0.840043 0.7745215 1.354855

07 65 44 05

Cost of Equity (Ke) 0.1569 0.1508 0.1461 0.144435 0.1396979 0.181656

55 64 27 11

WACC 0.1089 0.1130 0.1161 0.118646 0.1238114 0.469211

3 23 91 23

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)

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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
Mar- -
10 5.39 20997 4636 5.289052891 -6.078904992
-
Jun-10 4.43 16969 6708 17.81076067 -19.18369291
Sep- -
10 4.38 16589 6258 1.128668172 -2.239377689
Dec- -
10 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 1539923954
total number of existing shares 3797530000 ( fv = 5)
new shares 1539923954
Total shares 5337453954

Assuming 1 $ = 45INR and interest charges before Debt will remain same i.e. INR
4636 million.

Earnings before taxation Finance Less

Period and interest income taxation EPS
Dec-09 25070 remain same remain 5.691
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 same
remain
Mar-10 24056 remain same same 5.39
3.50141100
Jun-10 24917 2510 18688.62 2
3.67009817
Sep-10 25586 2939 19588.98 2
2.87520981
Dec-10 22965 386 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 769961977.2
total number of existing shares 3797530000
new shares 769961977.2
Total shares 4567491977

Interest interest charges

Earnings charges ( interest charges
before debt without debt - half
Perio taxation and Finance financing of new interest earnings
d interest income (100%) charges) net EPS
Dec- 4199(same as 5.69
09 25070 4465 before) 22356 1
4636 ( same as
Mar-10 24056 4992 before) 20997 5.39
3.90
Jun-10 24917 2510 6708 5672 17839.1 57
4.14
Sep-10 25586 2939 6258 5447 18923.96 32
Dec- 3.07
10 22965 386 7856 6246 14026.1 09

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 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 Mar
Year Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 05

SOURCES OF FUNDS :
1,897.9 1,895.9 1,856.
Share Capital 1,898.77 1,898.24 1 3 1,893.88 09
27,229.3 19,825. 9,562.4 2,678.
Reserves Total 37,980.15 9 24 5 5,456.38 47

Equity Share Warrants 0 0 0 0 0 0

Equity Application
Money 0 0.29 1.23 0 0 0
Total Shareholders’ 39,878.9 29,127. 21,724 11,458 7,350.2 4,534
Funds 2 92 .38 .38 6 .56
1,014.2
Minority Interest 2,855.53 1,229.75 2 194.82 109.1 92.45
3,961.
Secured Loans 4,958.43 1,428.73 58.26 245.28 2,839.91 98
12,088.4 9,543.4 5,040.6 1,038.
Unsecured Loans 5,329.71 2 9 1 1,932.93 62
10,288.1 13,517. 9,601. 5,285. 4,772.8 5,000
Total Debt 4 15 75 89 4 .60

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 53,022.5 43,874. 32,340 16,939 12,232. 9,627
Total Liabilities 9 82 .35 .09 20 .61

Debt-Equity Ratio 0.2 0.3 0.38 0.54 0.83 0.6

Debt-Equity Ratio
Industry 0.35 0.31 0.32 0.29 0.26 0.27

Ownership Pattern as on 31-12- % Share Share

2010 No of Shares 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 Depository
Receipts) 0 0 0 0

Grand Total 3797530096 100 377232 3792072796

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 2007-
10(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.
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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
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 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.

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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).

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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%.

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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

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 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 debt-
funded; the acquisition can thereby adversely affect Bharti Airtel's gearing [debt-
to-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

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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

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