Introduction:
Topic- Get the annual report of a company and from the information given in the financial statements and various annexures, identify the company’s fixed and variable costs, make reasonable assumptions (if necessary) in doing so. Collect information about the company’s capital structure and interest
paid. Calculate the company’s operating and financial leverage . Analysis process:
Initially we choose and download the annual report of a specific company and study it carefully. A brief analysis is done on the financial statements of that company. The concepts what we learned as a part of our course, we try to apply them to study and understand the concepts more clearly. On the observations made we draw conclusions and check their relevance towards the concepts we learned and applied.
Theoretical Aspects of the topic DETALS OF FIXED COST AND VARIABLE COST
Fixed costs: Fixed costs are those that will remain constant even when production volume changes. Rent, utilities, and administrative salaries are examples of fixed costs. Whether you produce 1 unit or 10,000, these costs will be about the same each month. It can be explained that cost it can’t proportionate with the level of production or activity. It is also called indirect cost / overhead cost Here the unit fixed cost is changing as the quantity increase but, the total fixed cost remain constant
Variable costs: Variable costs vary with production volume. For example, raw materials, packaging and shipping, and workers' wages are all variable costs. The more units you produce, the higher these costs will be.
It is also called direct cost / cost of sales It can be explained that cost that can proportionate with the level of production or activity Here the unit variable cost is constant as the quantity increase but, the total variable cost changing.
Total cost = variable cost +
fixed cost
CAPITAL STRUCTURE
The capital structure contains owner’s funds and the borrowed fund. Owner’s fund contains equity share capital, preference share capital, reserves and surplus, retained earnings.
Borrowed funds contain loans, debaucher’s, public deposi ts.
Importance of capital structure
Capital Structure shows how a company's assets are built out of debt and equity Capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is the composition or 'structure' of its liabilities. The objective of a firm should be directed towards the maximization of the firm’s value.
The capital structure or financial leverage decision should be examined from the point of its impact on the value of the firm. Choosing the best optimum structure. The change s in the capital structure benefits the stockholders if and only if the value of the firm increases. Thus we will be focus on how to determines the optimal that maximizes firm value capital structure
Leverage
There are two types of leverage they are operating leverage and financial leverage
Operating leverage: Operating leverage refers to the percentage of fixed costs that a company has. It means that if a firm has high operating leverage, a small change in sales volume results in a large change in EBIT and ROIC, return on invested capital.
In other words, firms with high operating leverage are very sensitive to changes in sales and it affects their bottom line quickly.
Operating leverage refers to the left-hand side of the balance sheet - the plant and equipment side. Operating leverage determines the mix of fixed assets or plant and equipment used by the business firm.
Financial leverage: financial leverage refers to the amount of debt in the capital structure of the business firm. Small change in the EBIT which result in the magnification of EPS this is due to fixed financial expenses.
If you can envision a balance sheet, financial leverage refers to the right-hand side of the balance sheet. In financing a firm's operations, can really improve the firm's return on equity and earnings per share. This is because the firm is not diluting the owner's earnings by using equity financing. Too much financial leverage, however, can lead to the risk of default and bankruptcy.
FORMULE DEGREE OF OPERATING LEVERAGE
(Contribution)
FINANCIAL LEVERAGE
.
Bharti Airtel Company Overview Bharti Airtel Limited is a leading global telecommunications company with operations in 20 countries across Asia and Africa. Headquartered in New Delhi, India, the company ranks amongst the top 4 mobile service providers globally in terms of subscribers. In India, the company's product offerings include 2G, 3G and 4G wireless services, mobile commerce, fixed line services, high speed DSL broadband, IPTV, DTH, enterprise services including national & international long distance services to carriers. In the rest of the geographies, it offers 2G, 3G wireless services and mobile commerce. Bharti Airtel had nearly 287 million customers across its operations at the end of Dec 2013.
Facts About The Company
Mr. Sunil Mittal (Chairman) has launched the India’s first fax machines and its first cordless telephones in 1992. Airtel is the largest GSM mobile service provider in India, with over 175.65 million subscribers at the end of December 2011. Number of Employes in airtel – 21,299 (as per 2012 data) www.airtel.in is the most visited telecom website in India. Bharti Airtel's product and services portfolio includes mobile se rvices, home phones, broadband, calling cards, DTH, IPTV, MPLS Services, satellite services, data transport solutions and conferencing services. Bharti Airtel has more than 287 million customers (as on of 31 st Dec. 2013). A new chapter in India's telecom revolution begins as airtel has launched India's first 4G service in last September. Mr.Sunil Mittal, ranked 244th in wor ld’s 500 richest people list with $5.7 billion th Net Worth. And ranked 7 in telecom sector in the world.
Vision & Promise By 2015 airtel will be the most loved brand, enriching the lives of millions. " Enriching lives means putting the customer at the heart of everything we do. We will meet their needs based on our deep understanding of their ambitions, wherever they are. By having this focus we will enrich our own lives and those of our other key stakeholders. Only then will we be thought of as exciting, innovation, on their side and a truly world class company. "
In The Past Years 1995-96- Bharti Cellular launched cellular services 'AirTel’ in Delhi and Himachal Pradesh 1997- Bharti Telenet obtained a license for providing fixed-line in Madhay Pradesh circle. 1998- Bharti Telecom and British Telecom formed a 51% : 49% joint venture, Bharti BT Internet for providing Internet services. 1999- Bharti Enterprises acquired control of JT Holdings, and extended cellular operations to Karnataka and Andhra Pradesh. 2002- Bharti Enterprises went public, and the company was listed on Bombay Stock Exchange and National Stock Exchange of India. 2003- The cellular phone operations were rebranded under the single Airtel brand. 2004- Airtel launched a family pack for its post-paid customers in Chennai on January29. Airtel, a private telecom services provider, has commissioned its first 24x7 customer service centre in Andhra Pradesh. Airtel rolls out wi-fi services in Mumbai. 2005- Airtel introduces BlackBerry Connect in India and launches video services for its GPRS customers. 2006- Joined hands with Microsoft. 2007-2008- Signs agreement with HTC for touch screen mobile. Tied up with US-based Apple Inc to bring the popular GSM- based iPhone in the country. 2009- Launched its first international mobile network in Sri Lanka. 2011- Launches 3G services in Mumbai. 2012- Deal with Axis-Bank to provide mobile banking services in un-banked areas. Bharti and Qualcomm announce partnership for 4G. Started a new mCommerce platform called Airtel Money in collaboration with Infosys and SmartTrust. 2013- Airtel has launched India's first 4G service in the month of September. Walmart likely to stay with Bharti for new Indian multi-brand retail Joint Venture. Bharti Airtel launches an Emergency Alert Service for its customers to alert message with location details to 10 different mobile numbers.
General Reserve An amount of Rs.3,830 Mn has been transferred to the General Reserve out of Bharti Airtel’s total standalone profit of Rs.50,963 Mn for the financial year ended March 31, 2013
Share Capital During the year, there was no change in the Company’s issued, subscribed and paid -up equity share capital. On March 31, 2013, it stood at Rs.18,987,650,480, divided into 3,797,530,096 equity shares of Rs.5 each.
Dividend Summary For the year ending March 2013, Bharti Airtel has declared an equity dividend of 20.00% amounting to Rs.1 per share. At the current share price of Rs 287.10 this results in a dividend yield of 0.35%. And the face value is Rs.5. The company has a good dividend track report and has consistently declared dividends for the last 5 years. Earnings per share (EPS) Rs.14.07 Book Value Rs.135.70 Current Market Value Rs.287.10 (national stock exchange as on 19-03-2014 )
Share Holding Pattern:Indian Promoters - 43.57 % Foreign Promoters - 21.66 % Public Shareholders from Institutional Sector - 24.53 % Public Shareholders from Non-Institutional Sector – 10.24 %
Fixed and variable costs of Bharti Airtel Fixed Costs: in millions Particulars Rent Insurance Installation Plant and machinery Building Advertising & Marketing Leased Line and Gateway Charges Depreciation and Amortization Expenses Repayment of borrowings License fee and spectrum charges Finance costs Charity and donation Taxes Employee cost Employee stock option plan
Expenses in 2013 52,225 537 35 20,507 194 5,993
Expenses in 2012 47,174 354 34 16,630 142 5,586
1,323
1357
68,267
59,160
68,434
69,875
48,815
46942
16,523 295 1358.50 1,511.30 242
13,962 332 1226.20 1,391.50 536
We have considered these particulars as fixed costs because these costs do not vary with the no of telecom operations the company performs.
Variable Costs: in millions Particulars Expenses in 2013 Power & Fuel 35,699 Interconnect and Port 1,074 charges Sales commissions 21,108 Travelling & 1,243 conveyance Sim card Utilization 1,920 Printing and 728 Stationery Access Charges 74,212
Expenses in 2012 35,699 1,359 20,643 997 1,915 638 58,086
We have considered printing and stationery; access charges & sim card utilization as variable costs because as Airtel is an Telecom company its earnings are through telecom services but not by any production as in the case of manufacturing companies. These things are directly linked with the amount of telecom opera tions it does so we consider that they are variable costs.
Capital Structure of Bharti Airtel Bharti Airtel’s capital structure consists of both equity and debt in its capital structure. It has issued 3,797,530,096 no. of shares at a face value of Rs.5 per share and raised a share capital of Rs.18,988 million.
Debt and shareholders’ equity mix in Bharti Airtel Based on Consolidated Statement of Financial Position: in Rs. million Years Shareholders’ equity Net debt Capital Employed
2009 291,279
2010 421,940
2011 487,668
2012 506,113
2013 503,217
84,022 375,301
23,920 445,860
599,512 1,087,180
650,394 638,395 1,156,507 1,141,612
Analysis of capital structure through debt – equity ratio: Debt-equity ratio is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.
Debt equity ratios of Bharti Airtel Years Shareholders’ equity Net debt Debt-Equity ratio
2009 291,279
2010 421,940
2011 487,668
2012 506,113
2013 503,217
84,022 0.29
23,920 0.06
599,512 1.23
650,394 1.29
638,395 1.27
Debt-Equity ratio 1.4 1.2 1 e l t i T s i x A
0.8 0.6 0.4 0.2 0 Debt-Equity ratio
2009
2010
2011
2012
2013
0.29
0.06
1.23
1.29
1.27
If the debt-equity ratio is less than 1, it shows that creditors have less money in the company than its equity shareholder’ s. From the calculations we can observe that the company in the year 2009 has least debt-equity ratio, it is because the company has generated enough profits and retained its earnings into business again without going for external debt source. But in the year 2012 it has the maximum debtequity ratio because the profit margins have decreased as the cash inflows from the operating activities has decreased there by it has very less retained earnings so it has gone for debt to meet it requirements.
Interest payment details of Bharti Airtel Based on Consolidated Statement of Financial Position: in Rs. million
years 2013 EBIT 9,930 Interest 4947
2012 8,614 4,082
2011 2010 2009 12,995 11,927 9,456 2,534 769.7 631.4
Analysis of Interest payments through Coverage ratio: A ratio 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) of one period by the company's interest expenses of the same period:
Coverage ratios of Bharti Airtel years 2013 Coverage 2.01 ratio
2012 2.11
2011 5.13
2010 15.5
2009 14.9
Coverage ratio 18 16 14 e l t i T s i x A
12 10 8 6 4 2 0 Coverage ratio
2009
2010
2011
2012
2013
14.9
15.5
5.13
2.11
2.01
Comparing Debt-equity ratio and coverage ratio: Chart Title 18 16 14 12 10 8 6 4 2 0
2009
2010
2011
2012
2013
Coverage ratio
14.9
15.5
5.13
2.11
2.01
Debt-Equity ratio
0.29
0.06
1.23
1.29
1.27
We can observe from the graph, the less debt-equity ratio the more is the coverage ratio and less coverage ratio for more debt-equity ratio. Though the EBIT has not fluctuated much, because of the increase in the debt amount, the repayment capacity of the firm has decreased from year 2009 to 2012.
Calculating the company’s Operating & Financial leverage: Earnings per share (EPS), EBIT and Sales details of the company
years EBIT EPS Sales
2013 2012 2011 2010 9,930 8,614 12,995 11,927 6.00 11.22 15.93 23.67 80,359 71,505 59,467 41,829
2009 9,456 20.70 37,352
Degree Of Financial Leverage - DFL'
It is the ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT), and can be mathematically represented as follows:
Degree Of Operating Leverage - DOL'
A type of leverage ratio summarizing the effect a particular amount of operating leverage has on a company's earnings before interest and taxes (EBIT). Operating leverage involves using a large proportion of fixed costs to variable costs in the operations of the firm. The higher the degree of operating leverage, the more volatile the EBIT figure will be relative to a given change in sales, all other things remaining the same. The formula is as follows:
Degree Of Combined Leverage - DCL' A leverage ratio that summarizes the combined effect the degree of operating leverage (DOL), and the degree of financial leverage has on earnings per share (EPS), given a particular change in sales. This ratio can be used to help determine the most optimal level of financial and operating leverage to use in any firm. For illustration, the formula is:
Calculations
years % change in EBIT % change in EPS % change in Sales DFL DOL DCL
2013 0.152
2012 -0.33
2011 0.089
2010 0.26
-0.465
-0.29
-0.326
0.143
0.119
0.421
0.202
0.123
-3.059 1.277 -3.906
0.87 -0.783 -0.681
-3.66 0.44 -1.61
0.55 2.113 1.16
DFL 1.5 1
0.87 0.55
0.5 0 -0.5
2013
2012
2011
2010
-1
DFL
-1.5 -2 -2.5 -3
-3.059
-3.5
-3.66
-4
From the graph we can observe that DFL has reached its maximum point in the year 2012 because of the rate of change in the EPS and EBIT was linear where as it has reached the lowest mark in the year 2011 because of the non-linearity of change in EPS and EBIT with high rate of change.
DOL 2.5 2.113
2 1.5 1.277 1
DOL 0.5
0.44
0 2013
2012
2011
2010
-0.5 -0.783 -1
The DOL has reached its maximum level in the year 2010 because of the high rate of change in the EBIT and it reached least point in year 2012 as the EPS value has decreased and finally in 2013 it has raise as the EPS and sales are increased.
DCL 2 1 0 e l t i T s i x A
-1 -2 -3 -4 -5 DCL
2013
2012
2011
2010
-3.906
-0.681
-1.61
1.16
The graph shows that there is a steady decrease in the DCL though there is an increase in the sales is because of the decrease in the EPS value.
Conclusion: We have studied the annual report and applied the concepts learned to analyze the financial statements of the company Bharti Airtel. We have studied various aspects of the company like its Capital Structure, Identified its Fixed and Variable Costs and calculated different types of leverages of that company. We have observed that Bharti Airtel is using both equity funds and debt funds in its capital structure. Its debt-equity ratio is increasing as the company is going for more debts each year as the retained earnings could not be entertained as per requirement of the company. The company’s overall performance was very well in the year 2011 with high EPS and EBIT.
We suggest the company to focus on decreasing their debt amounts as its interest coverage ratio is decreasing every year. The company’s fixed costs are more than the variable costs so it should identify alternatives so as to improve its operational leverage. It should focus on enhancing the profits so that they can pay good amount of dividends as the company’s goal should be maximizing the value of shareholders wealth.
