CASE STUDIES IN TELECOM BUSINESS

FINANCIAL ANALYSIS OF
IDEA

Submitted by:
KRISHNA KANT NEEKHRA
12020541104
MARKETING & FINANCE
SITM, BATCH 2012-14
 FINANCIAL ANALYSIS OF Idea

ABOUT Idea

Idea Cellular is an Aditya Birla Group Company, India's first truly multinational corporation. Idea is a pan-India
integrated GSM operator offering 2G and 3G services, and has its own NLD and ILD operations, and ISP license.
With revenue in excess of $4 billion; revenue market share of nearly 15%; and subscriber base of over 121
million in FY 2013, Idea is India’s 3rd largest mobile operator. Idea ranks among the Top 10 country operators
in the world with a traffic of over 1.5 billion minutes a day.

FINANCIAL ANALYSIS

It is the selection, evaluation, and interpretation of financial data, along with other pertinent information, to
assist in investment and financial decision-making. Financial analysis may be used internally to evaluate issues
such as employee performance, the efficiency of operations, and credit policies, and externally to evaluate
potential investments and the credit-worthiness of borrowers, among other things.

RATIOS are highly important profit tools in financial analysis that help financial analysts implement plans that
improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios
report mostly on past performances, they can be predictive too, and provide lead indications of potential
problem areas.

Following ratios have been used in financial analysis of Infosys:

 Liquidity
 Profitability
 Coverage

LIQUIDITY RATIOS:

The term liquidity refers to the ability of the company to meet its current liabilities. Liquidity ratios assess
capacity of the firm to repay its short term liabilities. Thus, liquidity ratios measure the firms’ ability to fulfil
short term commitments out of its liquid assets. The liquidity ratios calculated are:

i. Current ratio
ii. Quick ratio
iii. Cash ratio

NAME FORMULA 2013 2012 2011

Calculations Ratios Calculations Ratios Calculation Ratios
s
Current Total Current 30051.03/778 0.39 23883.01/82934. 0.29 29470/808 0.36
Ratio Assets/Total 07.01 49 07.23
Current
Liabilities
Quick (Total 29506/77807. 0.38 23354/82934.50 0.28 28948/808 0.36
Ratio Current 02 07.24
Assets-
Inventory)/To
tal Current
Liabilities
Cash Ratio Cash & Cash 10867/77807. 0.14 9964/82934.51 0.12 10393/808 0.13
Equivalents/T 03 07.25
otal Current
Liabilities
 A) Current ratio

Current ratio is a ratio between current assets and current liabilities of a firm for a particular period. The
objective of computing this ratio is to measure the ability of the firm to meet its short term liability. It
compares the current assets and current liabilities of the firm. This ratio is calculated as under:

Significance
It indicates the amount of current assets available for repayment of current liabilities. Higher the ratio, the
greater is the short term solvency of a firm and vice a versa. However, a very high ratio or very low ratio is a
matter of concern. If the ratio is very high it means the current assets are lying idle. Very low ratio means the
short term solvency of the firm is not good.
Thus, the ideal current ratio of a company is 2:1 i.e. to repay current liabilities, there should be twice current
assets.

Observation
The current ratio has consistently remained less than 1 which means that the company is not in a very good
position to repay its current liabilities. However this also indicates that there is low liquidity with the company.
The ratio is inconsistent, It is due company is reducing short term borrowing and increasing other liabilities.

B) Quick ratio

Quick ratio is also known as Acid test or Liquid ratio. It is another ratio to test the liability of the concern. This
ratio establishes a relationship between quick assets and current liabilities. This ratio measures the ability of
the firm to pay its current liabilities. The main purpose of this ratio is to measure the ability of the firm to pay
its current liabilities. For the purpose of calculating this ratio, stock and prepaid expenses are not taken into
account as these may not be converted into cash in a very short period. This ratio is calculated as under:

Quick Ratio = (A+B+C)

--------------------------------------
Current Liabilities
Where
A = Cash and Equivalents,
B= Trade Receivables
C = Marketable Securities

Significance
Quick ratio is a measure of the instant debt paying capacity of the business enterprise. It is a measure of the
extent to which liquid resources are immediately available to meet current obligations. A quick ratio of 1:1 is
considered good/favourable for a company.

Observation
The quick ratio has been below one which indicates a not very good position for the company. This indicates
that company is in the transition phase and not in position to pay dividend.

C) Cash Ratio

The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick
ratio by measuring the amount of cash, cash equivalents or invested funds there are in current assets to cover
current liabilities.

Cash Ratio = (Cash + Cash Equivalents+ Marketable securities)

-------------------------------------------------------------------
Current Liabilities
Significance

The cash ratio is the most stringent and conservative of the three short-term liquidity ratios (current, quick and
cash). It only looks at the most liquid short-term assets of the company, which are those that can be most
easily used to pay off current obligations. It also ignores inventory and receivables, as there are no assurances
that these two accounts can be converted to cash in a timely matter to meet current liabilities.

Observation
The ratio has been below for the observed years meaning that the company is not a cash rich one. It is
increasing but not significantly, though trade receivables are increasing but significantly.

PROFITABILITY RATIOS

Profitability ratios (also referred to as profit margin ratios) compare components of income with sales. They
give us an idea of what makes up a company's income and are usually expressed as a portion of each dollar of
sales. The profit margin ratios we discuss here differ only by the numerator. It's in the numerator that we
reflect and thus evaluate performance for different aspects of the business.
• The profitability ratios calculated are:
i. Operating Profit Ratio
ii. Operating Cost Ratio
iii. Return on shareholders’ fund
iv. Return on Capital Employed
v. Return on Assets
NAME FORMULA 2013 2012 2011
Calculations Ratios Calculatio Ratios Calculations Ratios
ns
Operating OPBIT/Sales 51564.50/22 0.23 43128.37/ 0.22 31280.66/153 0.20
Profit Ratios 0868.74 193223.33 889.97
Operating Cost Operating 169304.24/2 0.77 150094.96 0.78 122609.31/15 0.80
Ratios Cost /Sales 20868.74 /193223.3 3889.94
3
ROA PAT/Total Asset 8182.34/344 2.30% 5765.38/3 1.86% 8445.97/2862 2.95%
266.49 09840.53 80.66
ROSF PAT/Shareholder 8182.34/140 5.80% 5765.38/1 4.45% 8445.97/1233 6.84%
’s fund 199.01 29345 07
ROCE OPBIT/Capital 51564.4/266 19.35% 43128.37/ 19.00% 31280/205473 15.22%
Employed 459.48 226902.99 .41

A) Operating Profit Ratio

By subtracting selling, general and administrative (SG&A), or operating, expenses from a company's gross
profit number, we get operating income (EBIT). Management has much more control over operating expenses
than its cost of sales outlays. Thus, investors need to scrutinize the operating profit margin carefully. Positive
and negative trends in this ratio are, for the most part, directly attributable to management decisions.

Significance
A company's operating income figure is often the preferred metric (deemed to be more reliable) of investment
analysts, versus its net income figure, for making inter-company comparisons and financial projections.

Observation
Operating profit margin is increasing, but not significantly. Operating expenses are also increasing. Operating
margin is moderate range of 20-23% in recent years.
 B) Operating Cost Ratio

A ratio that shows the efficiency of a company's management by comparing operating expense to net sales.

Operating Cost ratio = 100-Operating Profit ratio

Significance
The importance of operating expense ratio lies in the fact of it being an indicator of the efficiency level of
managing a property. A lower operating expense ratio indicates a greater profit for the investors. In simple
words, the operating expense ratio reflects the percentage of a property’s income which is being utilized to
pay operational and maintenance expenses. 

Observation
Operating cost ratio has decreased this year which means that the efficiency has gone up.

C) Return On Assets

This ratio indicates how profitable a company is relative to its total assets. In the case of capital-intensive
businesses, which have to carry a relatively large asset base, will calculate their ROA based on a large number
in the denominator of this ratio. Conversely, non-capital-intensive businesses (with a small investment in fixed
assets) will be generally favored with a relatively high ROA because of a low denominator number. The ROA
ratio is calculated by comparing net income to average total assets, and is expressed as a percentage.

Significance
The return on assets (ROA) ratio illustrates how well management is employing the company's total assets to
make a profit. The higher the return, the more efficient management is in utilizing its asset base.
Observation
The Return on Assets has gone up for FY13 which means that company has been able to utilize its financial
assets that well. It is low in a range of 2-4%, this is basically the inability to increase profits in proportion to
assets.
D) Return On Equity

This ratio indicates how profitable a company is by comparing its net income to its average shareholders'
equity. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the
better return is to investors. The return on equity ratio (ROE) measures how much the shareholders earned for
their investment in the company.

Significance
ROE ratio is an important measure of a company's earnings performance. The ROE tells common shareholders
how effectively their money is being employed. Peer company, industry and overall market comparisons are
appropriate; however, it should be recognized that there are variations in ROEs among some types of
businesses. In general, financial analysts consider return on equity ratios in the 15-20% range as representing
attractive levels of investment quality.

Observation
The ROE has remained in the range of 5.8 % which is considered good for company in telecom domain. But
compared to industry leader Airtel, which has the ROE of 9% for FY13, the ROE can be improved.
E) Return on Capital Employed

It complements the return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to
equity to reflect a company's total "capital employed". This measure narrows the focus to gain a better
understanding of a company's ability to generate returns from its available capital base.
Return on Capital Employed = Operating Profit
-------------------------
Capital Employed

Significance
The return on capital employed is an important measure of a company's profitability. An ROCE ratio, as a very
general rule of thumb, should be at or above a company's average borrowing rate.

Observation
The RoCE has increased consistently, but not significantly,means that the ability of the company to generate
returns has increased.
CAPITAL GEARING RATIOS

NAME FORMULA 2013 2012 2011

Calculations Ratios Calculations Ratios Calculations Ratios
Debt (Non current 204067/14019 1.46 180495/12934 1.40 162973/123307 1.32
Equity liabilities+Current 9 5
ratio liabilities) /
(Share
capital+reserve &
surplus)
Fixed Fixed assets/Non 267819/10776 2.49 243765/87511 2.79 226808/77018. 2.94
Asset current 2 53
Ratio Liabilities(long
term borrowings
& provisions
Total Total Debt / Total 204067/34426 0.59 180495/30984 0.58 162973/286280 0.57
Debt Asset 6 0
Ratios

Debt-to-Equity Ratio
The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative proportion of entity's
equity and debt used to finance an entity's assets. This ratio is also known as financial leverage.
Debt-to-equity ratio is the key financial ratio and is used as a standard for judging a company's financial
standing. It is also a measure of a company's ability to repay its obligations. When examining the health of a
company, it is critical to pay attention to the debt/equity ratio. If the ratio is increasing, the company is being
financed by creditors rather than from its own financial sources which may be a dangerous trend. Lenders and
investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a
business decline. Thus, companies with high debt-to-equity ratios may not be able to attract additional lending
capital.

Debt-to-equity ratio = Liabilities / Equity

Significance

Indicates what proportion of equity and debt the company is using to finance its assets. A high DER means that
company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of
the additional interest expense .Standard ratios is 2:1.

Observations

This ratio is increasing, which means that debt is increasing. It can be increase further too standard ratio as 2:1
as financial leverage.
Fixed Asset ratios

It indicates the portion of a company's debt to its total assets. It shows how much the company relies on debt
to finance assets. The debt ratio gives users a quick measure of the amount of debt that the company has on
its balance sheets compared to its assets. The higher the ratio, the greater the risk associated with the firm's
operation. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no
significant risk. 
Debt ratio = Liabilities / Assets

Significance

This ratio establishes the relationship between long term funds (equity plus long-term loans) and fixed assets.
It is advised that fixed assets should be purchased out of long term funds only

Observations
Company is increasing its fixed asset by long term loans. Although, this ratio is decreasing because fixed asset
are not increasing as proportionate to long terms loan.

COVERAGE RATIOS

A coverage ratio is a measure of a company's ability to satisfy (meet) financial obligations. In broad terms, the
higher the coverage ratio, the better the ability of the enterprise to fulfil its obligations to its
lenders. Comparison of coverage ratios of companies in the same industry or sector will provide valuable
insights into their relative financial positions. Coverage ratios calculated include:

i. Interest Service Coverage Ratio

ii. Cash flow Coverage Ratio

NAME FORMULA 2013 2012 2011

Calculations Ratios Calculations Rati Calculation Ratios
os s
Interest Service (EBIT) / (Interest 43429.95/864 5.02 34050.33/893 3.81 28793.31/3 7.85
Coverage Ratio Expense) 9 5.81 664.54

Total Cash Flow (net 43428.95/266 0.16 34050.33/226 0.15 28793.31/2 0.14
Coverage Ratio earnings+depreci 459.48 902.99 05473.40
ation+amortizati
on) / (total debt)

A) Interest Service Coverage Ratio

The interest coverage ratio is used to determine how easily a company can pay interest expenses on
outstanding debt. The ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by
the company's interest expenses for the same period. The lower the ratio, the more the company is burdened
by debt expense. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest
expenses may be questionable.

Significance
The ability to stay current with interest payment obligations is absolutely critical for a company as a going
concern. While the non-payment of debt principal is a seriously negative condition, a company finding itself in
financial/operational difficulties can stay alive for quite some time as long as it is able to service its interest
expenses.

Observation
Interest coverage is greater than one. But, it should be high as possible. It is inconsistent in range of 5-8%.
Therefore, company is in position pay its interest charges.

B) Total Cash Flow Coverage Ratio

The cash flow coverage ratio is an indicator of the ability of a company to pay interest and principal amounts
when they become due. This ratio tells the number of times the financial obligations of a company are covered
by its earnings. A ratio equal to one or more than one means that the company is in good financial health and
it can meet its financial obligations through the cash generated by operating activities. A ratio of less than one
is an indicator of bankruptcy of the company within two years if it fails to improve its financial position.

Significance
It is an indicator of the ability of a company to pay interest and principal amounts when they become due. This
ratio tells the number of times the financial obligations of a company are covered by its earning

Cash flow coverage ratio = (Net Earnings + Depreciation + Amortization) / Total Debt

Observations
This ratio is low. It indicates the high debt contains and poor cash generation in proportion to debt.