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Analysis Of Financial Statement Of Telecom Sector


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Our analysis as a part of management accounting course in MDI, aims at financial analysis of two distinct companies of Telecom sector of India. Telecom sector is one of the fastest growing sectors and has shown the growth of 9.1% in Q2 of financial year 2009-2010 whereas GDP growth of India has been 5.8%.

We have done a comparative analysis of the balance sheet, income & cash flow statements of "Bharti Airtel" & "MTNL". Key ratios are generated and analysed for short-term and long-term investing, short-term and long-term lending and suggesting a comprehensive strategy.

Accordingly, we have included balance sheet, income & cash flow statements of "Bharti Airtel" & "MTNL" over a period of 5-years in appendix used for data analysis.

Telecom Sector: An Introduction

Telecommunication is the assisted transmission over a distance for the purpose of communication.

The broad segmentation of Indian Telecom Sector can be done on the following basis:

Telecommunication Services

Basic service

Internet Service Provider (ISP)

Value added services


Telecommunication Equipment

Current Scenario

Indian telecom industry a shinning knight in the armour of Indian industries continued to register a significant growth in 2008-09. Indian telecom network, with subscriber base crossing 479 mn in July 2009, is the third largest in the world, while it is the second largest wireless network

At the current pace, the target of 500 million connections by 2010 is well within reach.

The wire-line segment has been declining gradually but the wireless subscriber base grew at a compound annual growth rate (CAGR) of 75.9 per cent per annum since 2003. The share of wireless phones increased from 24.3 per cent in March 2003 to 90.88 per cent in February 2009. Universal access objective feasibility has improved affordability of wireless phone. Several steps are undertaken by Government for reduction in entry barriers, creation of a level-playing field between incumbents and new entrants and forward looking regulation. Consequently, there has been an increase in share of private sector in total telephone connections to more than 79 per cent in February 2009 against a meagre 5 per cent in 1999.

The market share of top 12 telecommunication operators and their devision based on type of services provided (GSM & CDMA) are shown below:


Market share of top 12 operators

Market share of top GSM operators

Market share of top CDMA operators

Criteria: For Selection of Companies

In the telecom sector, we have chosen Bharti Airtel Ltd and MTNL as two companies for financial analysis and strategical suggestions.

The criteria to choose these two companies are:

MTNL is government owned and Bharti Airtel Ltd. is a private sector company, this would give a clear picture from both directions.

MTNL and Bharti Airtel Ltd. both offer similar kinds of products/services in the market. For e.g. both are in fixed and mobile communication.

They deal extensively in Value added services and also provide broadband facilities to its consumers.

Their respective asset holding is quite near to each other.

Both the companies are holding companies in other companies.

MTNL has launched 3G services and Airtel would do so from 2010.

Financial Ratio Analysis

It is a method of calculating the financial strengths and weaknesses of the firm by converting financial data into ratios. The most important financial ratios of the firm that needs to be analyzed are:



overall performance measures

Asset utilization ratio.

The financial analysis of MTNL and Bharti Airtel Ltd. is done using key ratios not only in context of the firm's history (over a period-trend analysis), but also with respect to each other(inter-firm).

Common size analysis is additionally done to the compare financial data across firms. Common size statements normalize the balance sheets and income statements and thus making the task at hand simple.


Financial analysis is done to assess the viability, stability and profitability of a business. These could be fulfilled by analysing the company on the following scenarios:

Short-term Investment

Long-term investment

Short-term Lending

Long-term Lending

Strategical suggestions


To gain profits by investing in a company for a short term, a person has financial as well as non financial data available with him to calculate the level of risk and returns involved in the stock he is investing for short term.

To measure the volatility of the price of a stock relative to the rest of the market Beta ratio should be applied. Beta ratio provides information on the movement of the price of the stock as compared to the rest of the stock market. Beta of a stock can be used to compare a company with its peers from the same industry or sector to see the relative performance accordingly. If the beta value of a stock is more than 1, then the price of this stock is considered volatile as compared to the overall market. Thus the stock is classified as risky. If the beta value of a stock is equal to 1, then the price of the stock fluctuates at the same level as the market. If the beta value of a stock is less than 1, then the price of the stock is less volatile as compared to the overall market. Thus, the stock is classified as less risky.

Market capitalisation (cap) - Market capitalization/capitalization ( market cap or capitalized/capitalized value) is a measurement of corporate size equal to the share price times the number of shares outstanding of a public company. It is the True Measure of A Company's Value

Another important factor that can be considered for short term investment is the P/E ratio. The P/E ratio provides relationship between the stock price and the company's earnings.

P/E Ratio = Stock Price / EPS (Earnings per share)

The P/E ratio tells you what the market thinks of a stock. It provides information about the investors' confidence in the stock and how much extra he is willing to pay for it.


The estimated returns that can be generated against the risks involved when investing for a long term, can be found out using the following criteria:-

Debt-equity ratio- Company's financial leverage can be measured using this. Debt/equity ratio is equal to long-term debt divided by common shareholders' equity. It is considered risky to invest in a company with a higher debt/equity ratio, especially when interest rates are rising, as the additional interest is generally paid out from debt.

Interest coverage ratio - This ratio is used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by the company's interest expenses of the same period. Interest coverage ratio is given as ebit/ interest expense of the company. If this ratio is low, it means the company is burdened by debt expense. If interest coverage ratio is 1.5 or lower, the companies' ability to meet interest expenses may be questionable. An interest coverage ratio below 1 generally indicates the company is not generating sufficient revenues to satisfy the interest expenses.

Market capitalisation - Market cap helps to determine the true value of the company.

Return on capital employed (ROCE)- This ratio indicates the efficiency and profitability of a company's capital investments and is calculated as:

ROCE= EBIT/ (total assets-current liabilities)

ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce shareholders' earnings. A variation from this ratio is return on average capital employed (ROACE), which takes the average of opening and closing capital employed for the time period.

Operating profit ratio - This ratio measures the money a company is generating from its own operations; it doesn't include income generated from investments in other businesses. Operating income can be used to judge the general health of the core business and the managerial efficiency.

Total asset turnover ratio - This ratio calculates the total sales [revenue] for every asset a company owns. The Asset Turnover ratio is given as:

Total Revenue/ Average assets for period

This ratio is an indicator of the relationship between assets and revenue. Companies with low profit margins tend to have high asset turnover and those with high profit margins have low asset turnover - it indicates pricing strategy. This ratio is useful to check the growth of companies as a fact to see the growing revenue in proportion to sales.


To lend money to a firm for a short term the following things have to be considered before going ahead with actually lending the desired amount-

Current ratio- This ratio is an indication of a company's ability to meet short-term debt obligations; higher the ratio, more liquid the company is. Current ratio is equal to current assets divided by current liabilities

If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations

Quick ratio - This ratio is an indicator of a company's short-term liquidity. The quick ratio is the measures of a company's ability to meet its short-term obligations with its liquid assets. Higher the quick ratio better is the position of the company. The quick ratio is equal to Current assets-inventories/current liabilities. It is also known as Acid test or liquidity ratio.

Quick ratio is usually more conservative than the current ratio, and is a more well-known liquidity measure, because it does not include inventory in current assets. Inventory is excluded because some companies face difficulty in turning their inventory into cash. In case short-term obligations need to be paid off immediately, situations may arise in which the current ratio would overestimate a company's short-term financial strength.

Credit policy of the company has to be calculated to judge the credibility of the company it basically compares the debit period with the credit period for the company i.e. the credit time a company offers to its customers and the credit period it gets from its suppliers. This also gives a general idea about the cash requirements of the company.

Another important aspect to be considered is the cash from the operating activities and comparing it with the total sales. It indicates the efficiency of the management in managing its resources and gives a glimpse of the future aspects of the company. The operating profit ratio of the company also needs to be calculated.


The following things need to be kept in mind before lending money to any firm for a long term.

Turnover ratios-This ratio is a measure of number of times a company's inventory is replaced during a given time period. Turnover ratio is calculated as cost of goods sold divided by average inventory during the time period. A high turnover ratio is a sign that the company's production and sale of goods or services is taking place at a quick pace.

Profitability ratios-A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. A general rule followed for most of these ratios is that having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Various types of profitability ratios are profit margin, return on assets and return on equity etc.

Profit margin is a measures of how much a company earns relative to its sales. A company with a higher profit margin is considered more efficient than its competitor.

Two profit margin ratios are:

operating profit margin

net profit margin.

Operating profit margin measures the earnings before interest and taxes, and is calculated as follows:

Operating Profit Margin = Earnings before Interest and Taxes/sales

Net profit margin measures earnings after taxes and is calculated as follows:

Net Profit Margin = Earnings after Taxes/ sales

Return on assets (ROA) tells how the performance of the management on all the firm's resources is. However, this does not give an idea about how well they are performing for the stockholders. It is calculated as follows:

Return on Assets = Earnings after Taxes/ total assets

Return on equity (ROE) measures how well management is doing for the investor, because it tells how much earnings investors are getting for each rupee invested. It is calculated as follows:

Return on Equity = Earnings after Taxes/ equity

Another important ratio as a part of the analysis will be debt equity ratio which helps in measuring company's financial leverage. If this number is too high it may signify future liquidity problems. If this ratio is too low it can signify inefficient use of the various financing alternatives available to a company.

Apart from these ratios the interest coverage ratio and the debt service coverage ratio has to be calculated and evaluated too. It is the ratio of net operating income to debt payments on a piece of investment in real estate. It is a popular benchmark used in the measurement of an income-producing company's ability to buy a property and its ability to produce enough revenue to cover its monthly mortgage payments. Higher this ratio is, and then it is easier to borrow money for the property.

Strategical suggestions

The company should be suggested a strategy as in restructuring or diversification or expansion. The strategy is decided based on the profitability and the credit policy of the company. The strategy needs to be evaluated very closely for the best possible results of the company and a bright future. The managerial efficiency also plays an important role in determining the right strategy for the company in future endeavours. Thus, strategical suggestions should be made keeping in mind these points and only after detailed analysis of financial and non-financial data is done


Analysis Of Financial Statements


Liquidity ratios in a Balance Sheet refer to the company's ability to meets its current obligations. There are two major liquidity Ratios, Current Ratio & Quick ratio.

Current ratio gives us an idea about how much of a company's current liabilities is covered up by its current assets. A higher figure in this case shows that the companies can more than sufficiently meet its current obligations.

Quick ratio is the same as current ratio except for the fact that the current assets in this case does not include inventories because it is believed that inventories are not realized as easily as other current assets are.

Calculated using:

Current Ratio = Current Assets/ Current Liabilities

Quick Ratio = (Current Assets - Inventories)/Current Liabilities


Solvency Ratio refers to the use of Debt Finance in the organization. It pertains to the company's ability to meet the internal costs & repayment schedules associated with long-term obligations. They help in assessing the risk arising from the use of debt capital. The important Solvency Ratios are the following:

Financial Leverage Ratio = Assets/Shareholders' Equity

Debt-Equity Ratio = Long Term Liabilities/ Shareholders' Equity

Debt-Total Funds = Long Term Liabilities/( Long Term Liabilities + Shareholders' Equity)

Interest Coverage Ratio = EBIT/ Interest


Profitability reflects the final position of business operations. These ratios help us to measure the overall profitability of the company. The major Profitability Ratio are given below:

Gross Profit Margin = Gross Profit / Turnover

Net Profit Margin = Net Profit / Turnover

Earning Per Share = PAT / Number of Shares Outstanding

Cash Earning Ratio = Cash Generated by Operations / PAT

Dividend Payout Ratio = Dividend Per Share / Earning Per Share


Activity Ratios, also referred to as Asset Management Ratio, measures how efficiently the assets are employed by a firm. These ratios are based on the relationship between the level of activity, represented by Sales, Cost of Goods of Sold, and levels of various assets. The major Activity Ratios are the following:

Total Assets Turnover = Sales Revenue/ Total Assets

Equity Turnover = Sales Revenue / Shareholders' Equity

Fixed Assets Turnover = Sales Revenue/ Fixed Assets

Current Assets Turnover = Sales Revenue/ Current Assets

Working Capital Turnover = Sales / Net Current Assets

Inventory Turnover Ratio = Cost of Goods Sold / Inventory

Debtor Turnover = Sales / Debtors

Average Holding Period = 365 / Inventory Turnover Ratio

Average Collection Period = 365 / Debtor Turnover Ratio


Valuation ratios indicate how the equity stock of the company is assessed in the Capital Market. Since the market value of equity reflects the combined influence of risk & return, valuation ratios are the most comprehensive measures of a firm's performance. The major Valuation Ratios are the following:

Book Value Per Share = Shareholders' Equity / Number of Shares Outstanding

Market Value to Book Value Ratio = Market Price / Book Value Per Share

Price Earning Ratio = Current Market Price/ EPS

Market Capitalization = Market Price per share x Number of Shares

Earning per Share = PAT/Number of Shares Outstanding


There are basically three main ratios which are used to analyze the overall performance of any Organizations, these ratio in themselves speaks a lot about how the company has performed in the last year and what are the expectations about the company in the future. The three ratios are:

Return on Assets = PAT + Interest (1-Tax Rate)/ Total Assets

Return on Invested Capital = PAT + Interest (1-Tax Rate)/(Long Term Liabilities + Shareholders' Equity)

Return on Equity = PAT/ Shareholders' Equity


State-run Mahanagar Telephone Nigam Ltd ( MTNL) reported a 53% year-on-year decline in its net profit at Rs976 crore for the third quarter (Q3) ended December as the company continued to lose market share to more aggressive rivals such as Bharti Airtel Ltd and Reliance Communications Ltd, in the markets of Mumbai and Delhi. The firm's total revenues for Q3 also declined to Rs1,326 crore, from around Rs1,428 crore in the year-ago quarter.

"The staff cost alone accounts for almost 35% of our revenues, putting a lot of pressure on our profitability," A.K. Arora, executive director of MTNL, had said in an interview earlier this month.

However, staff costs during the quarter went down from Rs474 crore in the corresponding quarter last fiscal to Rs433 crore in the past quarter. The reduction in costs was brought about by a voluntary retirement scheme that was initiated in fiscal 2006 and fiscal 2007, according to an MTNL statement. During the quarter, the company's cellular phone subscriber base also increased by 182,760 new connections, bringing MTNL's total subscribers to 2,954,880 at end-December.

What may have contributed to the decline in revenues is other income during the quarter, "which came down to Rs137 crore, from almost Rs200 crore a year ago," said Yogesh Kirve, equity analyst at Mumbai-based Anand Rathi Securities Ltd.

MTNL was set up in 1986 by the Union government to enhance telephone connectivity across India. The government currently holds a 56.25% stake in the company.

Shares of MTNL fell 6.62% to close Wednesday trade at Rs123.40 on the Bombay Stock Exchange.











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