Now as financial year ended, telecom companies in India going to present the financial accounts to external stakeholders soon. But this time it should be with little difference.
After losing net profit straight few quarters, let’s analyse some of the basics of financial return measures for Airtel, India’s biggest mobile telecom operator company with global presence.
Let’s look at free cash flow position. If you look at cash flow statements of Airtel for past three quarters, you will come to notice the unsteady flow of cash for the company. In Q1 2011, Airtel had Rs 6358 million cash pile, which has been increased to Rs 21938 million in Q2 2011. But in Dec 2011, i.e. in last quarter of the year 2011, the cash pile has been eroded to Rs 12359 million. If you analyse basic variance of cash flow on per quarter basis, it has changed from 245{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} (Q2-Q1) to -40{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} (Q3-Q2).
This is quite alarming in the sense that cash flow has dipped & rose too significantly on Q-o-Q basis in last three quarters and this quarter won’t be a surprise again. In fact, in last two quarters ended in Sep 2011 (Q2) & Dec 2011 (Q3), the outflow of cash from investment activities remained same, but operating income has eroded substantially. Will this trend remain same also in this quarter? Investors who are quite keen on free cash flow would mind it if cash pile dips below their expectations in Q4. Fact is that Airtel’s free cash flow is highly fluctuating and that makes it quite vulnerable to market conditions.
Now coming to darling of Indian investors index i.e. EBITDA. I feel we should omit the EBITDA completely from watch list. Reason being; after purchase of intangible assets like spectrum, lots of amortization will play its role and more over when your purchases are backed by debt, interest component will also be very high. So accept it- ITDA (Interest, Tax, Depreciation & Amortization all) will result in huge expenses outgo for the company in current & coming quarters. In fact, Airtel’s net profit ratio has also dipped to mere 6{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} from 9{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} at the start of last financial year. So it’s better to focus on net profitability than just gross profit. Investors or financial analysts must accept that ITDA results in huge cash outgo, which shouldn’t be underestimated.
Can Airtel remain sustainable in growth? For that we must look at ROE. Based on historical data, in June 2010, ROE was strong at 21{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3}, dipping it to 15{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} in just 6 months i.e. in Dec 2010. In Dec 2011, it stood at just 9{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3}. Erosion of return on equity has also affected the company’s perceived value of stock. Since July 2011, Airtel has lost almost 25{af589cdba9d77786c8c861317dbad60bba1e2ebbf56e2ffab874a1b59fde9ce3} of its market capital value owing to its own internal issues added with industry’s negative sentiments. There’s nothing too much in reading these all numbers but Airtel’s position to maintain sustainable growth is eroding fast & if the trend continues, it might lose up the sheen completely.
In the end, will it be in position to sustain Qualcomm’s assets acquisition in India? We can’t say it at present with too certainty. Buying another set of intangible assets will hit EBITDA badly and revenue might not increase substantially in case of 4G and 3G. Company will have to burden its roll-out or network expansions from operating cash flow or another set of leverages with major outflows. This will affect free cash negatively. Being too aggressive might not be the best course at present but Airtel needs to get things tight up to avoid losing its advantages to competitors. Recent hike in tariffs by the operator is welcomed by subscribers by churning subscriptions to rivals. Price elasticity of prepaid business makes it difficult for the company to increase tariffs even slightly . The company needs to reinvent the wheels again. Airtel looks more vulnerable than ever before & started losing its leadership position already.
