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CAPITAL BUDGETING MANAGEMENT OF BHARTI AIRTEL — THE
PROFITABILITY IMPACT1

Sandeep Goel wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective
or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to
protect confidentiality.

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This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.

Copyright © 2014, Management Development Institute Gurgaon and Richard Ivey School of Business Foundation Version: 2014-04-07

Since March 2010, the Indian telecommunication giant Bharti Airtel Limited (Airtel) had been
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experiencing a decline in profits in spite of recent capital acquisitions.2 By August 2013, it had lost its
place at the top of every telecom stock chart to new entrants in the Indian market such as Virgin and
Aircel.3 In the face of this competitive threat and to address the company’s sluggish growth, Airtel’s
management was challenged to find a way to consolidate profits and to return the company to its position
of leader in the global telecom industry.
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BHARTI AIRTEL

Headquartered in New Delhi, India, Airtel provided not only international connectivity to its customers
but also offered them a bouquet of telecom solutions. The company

…operated in 20 countries across Asia and Africa and ranked among the top four mobile service
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providers globally by subscribers. In India, the company’s product offerings included 2G, 3G and
4G wireless services, mobile commerce, fixed line services, high-speed DSL broadband, IPTV,
DTH [and] enterprise services including national and international long distance services to
carriers. In the rest of the geographies, it offered 2G [and] 3G wireless services and mobile
commerce. Bharti Airtel had more than 269 million customers at the end of March 2013.4

The company had four key strategic business segments: mobile, telemedia, enterprise and digital TV.

Airtel was set up as public limited company on July 7, 1995 by Sunil Bharti Mittal, who became its first
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chairman. The company was listed on both the Bombay Stock Exchange Limited (BSE) and the National

1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Bharti Airtel Limited or any of its employees.
2
www.voicendata.com/voice-data/news/167843/bharti-airtel-strategy-gone-sour, accessed May 5, 2013.
3
http://telecomtalk.info/aircel-adds-highest-number-of-gsm-subscribers-in-august-followed-by-airtel-vodafone-loses-
coai/108943/,accessed December 18, 2013.
4
www.airtel.in/wps/wcm/connect/about+bharti+airtel, accessed May 20, 2013.

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Stock Exchange of India Limited (NSE). Within a very short span of time, it rose to great heights with its

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worldwide network of services. Buoyed by this success, the management decided to invest in a 3G licence
and to acquire Zain, an African telecom company, and the Indian branch of Qualcomm Inc., a major U.S.
telecom company. Airtel reported net revenue of INR468,131 million in 2013 compared to INR422,272
million in 2012, but its net profit decreased by 46 per cent during the same period.

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CAPITAL BUDGETING MANAGEMENT

Airtel had undertaken several major capital investments in the recent past as part of its business growth
strategy.

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Investment in 3G Services

In 2010, the Indian government received around US$15 billion from the auction of 3G spectrums. As one
analyst explained,

Aircel, Bharti Airtel, Vodafone Essar, Idea Cellular, Reliance Communications, Tata Teleservices
and S Tel all won 3G licenses. They would invest US$2.5 billion in network rollouts between Q4
2010 and Q4 2011. Wireless Intelligence forecasted that India would reach around 400 million
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3G connections (including CDMA2000) by the end of 2015, which would represent almost 30 per
cent of total connections.5

The prospect of such a big investment in new high-speed networks and services raised concerns about the
profitability of these players, including Airtel, especially in a price sensitive market dominated by prepay
users.
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The Zain and Qualcomm Deals

Airtel had adopted an inorganic growth strategy to expand through takeovers. External or inorganic
growth strategy provides instantaneous results but can be risky. It is preferable, therefore, that such
investments be financed entirely by the acquiring company. Although borrowed funds can be used, short-
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term loans should be avoided. Airtel used external long-term loans for these deals.

Airtel first acquired Zain. Its “Zain acquisition in June 2010 was the second biggest overseas acquisition
by an Indian company after Tata Steel’s $13 billion acquisition of Corus in 2007.”6 This deal not only
gave Airtel a strong presence in African markets but also made it the world’s fifth largest wireless
company. This “would increase its profitability as with Zain’s takeover, Airtel will gain Africa’s 42
million customers and annual revenue of $3.6 billion.”7

“Airtel invested 10.7 billion in Zain deal,” read one newspaper headline.8 The company had borrowed
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nearly $9 billion from international markets to finance the deal, resulting in an interest payment of more
than US$200 million, around INR9,400 million. Combined with its commitment of more than

5
https://wirelessintelligence.com/analysis/2011/03/india-3g-rollout-forecasts-and-market-share-2011-2015, accessed May
29, 2013.
6
www.zain.com/about-zain/overview/, accessed July 25, 2013.
7
www.reuters.com/article/2010/06/08/us-zain-bharti, accessed May 21, 2013.
8
www.hindu.com/2010/06/09/stories, accessed May 21, 2013.

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 Page 3 9B14N006

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INR123,000 million towards 3G licences in India, its debt exposure was raised even further.9 Its debt-

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equity ratio at 1.4 was the highest in the telecom industry. Thus, the company’s success was linked to
making profits from Zain, whose previous losses had made it a prime candidate for takeover.

On May 24, 2012, Airtel announced the acquisition of a 49 per cent stake in the broadband wireless
access (BWA) Indian branch of Qualcomm, for an initial investment of $165 million (INR9,070 million).

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This moved Airtel into a key position in the 4G LTE market in Delhi, Mumbai Haryana and Kerala. As a
Reuters report declared, “Shares in [Airtel], valued about $20 billion, ended 5.6 per cent to post their
biggest single day gain in more than three months.”10

Overall, Airtel’s capital assets increased from INR296,191 in 2010 to INR442,121 in 2013. But, at the
same time, the share of investment in these capital assets declined from 49.85 per cent in 2010 to 45.58
per cent in 2013, largely because Airtel’s management had not been able to adjust them according to its

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needs. Its business model needed good capital assets, but they formed less than 50 per cent of the
company’s total assets.

Capital assets are the most important resource of any business undertaking. Therefore, they should be
used efficiently so they will yield the required rate of return. But Airtel’s assets turnover ratio, a sign of
efficiency, had decreased from 1.20 in 2010 to 1.03 in 2013, showing inefficient use. (See Exhibit 1.)
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PROFITABILITY AND LONG-TERM VIABILITY

Airtel had made these capital investments to increase long-term profits and its market share. But the
results were not satisfactory. The high up-front cost of the inorganic growth approach, although it
achieved rapid traction in the new market in Africa and in the global telecom industry, cost the company
more than it gained.
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Airtel remained India’s largest mobile services operator by revenue and subscriber base, registering an
operating revenue growth of 27.35 per cent in 2012. But its net profit declined (see Exhibit 2). Data
released by TRAI (Telecom Regulatory Authority of India), the telecom industry regulator, suggested that
Airtel had lost its market leadership place to Vodafone India, Unitech Wireless (Uninor) and Idea
Cellular, which all had increased their share of the market.
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By 2013, Airtel was experiencing a lower than expected (or hoped for) performance in both its domestic
and international business areas. It had posted a dip in its consolidated net profits for four quarters in a
row (see Exhibit 3), and that raised some eyebrows in the industry. Analysts suggested that Airtel was
struggling on all fronts. Its monthly average revenue per user (ARPU), a key gauge for telecom carriers,
had fallen significantly. Its huge investment in Zain had yet to produce a good profit, and its acquisition
of Qualcomm’s 4G broadband venture came with a debt of around $1 billion to $1.2 billion.11

Moreover, leadership issues had resulted in changes in the top management. Sanjay Kapoor, deputy chief
executive officer (CEO) of the company, was promoted on April 1, 2010 to CEO. Manoj Kohli, CEO and
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joint managing director (MD) of the Indian segment of the company became MD and CEO of Airtel’s
newly created international business division.

9
Ibid.
10
www.reuters.com/article/2012/05/24/us-qualcomm-bharti, accessed May 21, 2013.
11
Ibid.

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To make the situation even more complicated, the Indian telecommunication industry as a whole was also

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at its lowest point with a continuous declining trend of operating profit and net profit (see Exhibit 2).

FUTURE OUTLOOK

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With its takeover of Zain and Qualcomm, Airtel had aimed to become one of the world’s leading telecom
players.12 The company appeared to be on a high and looking forward to future challenges. However, it
was concerned about the declining profits that were engendering a deep sense of tension and frustration in
its management staff.13 Was Airtel growing or stagnating? Would the recent capital investment decisions
be profitable in the long-term or would they lead to a short-term disaster? What were the future prospects
for the company?

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Professor Sandeep Goel is from MDI, Gurgaon, India.

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No
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12
www.airtel.in/wps/wcm/connect/e7a29a2d-a200-4b4f-9367-518aada73bd9/Bharti-Management-Presentation_vfc-
BCompatibility-Mode.pdf?MOD=AJPERES&CONVERT_TO=url&CACHEID=e7a29a2d-a200-4b4f-9367-518aada73bd9,
accessed December 5, 2013.
13
www.voicendata.com, op. cit.

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EXHIBIT 1: BHARTI’S FUNDS AND ASSETS POSITION (2010 TO 2013), INR MILLION

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March 2010 March 2011 March 2012 March 2013
Shareholders’ funds 367,370 441,111 494,291 541,460
Total Debt 50,381 100,820 108,921 131,610
Capital Assets (Net) 296,191 471,791 449,061 442,121
Investments 157,730 192,000 219,111 385,460

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Current Assets 140,240 115,360 212,341 142,450
Total Assets 594,161 779,151 880,513 970,031

Capital assets are net of depreciation and include capital work in progress.
Source: www.aceanalyser.com, accessed May 21, 2013.

EXHIBIT 2: BHARTI AIRTEL & INDIAN TELECOMMUNICATION SERVICE INDUSTRY

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REVENUE AND NET PROFIT POSITION (2010 TO 2013) IN INR MILLION

March2010 March 2011 March 2012 March 2013

A. AIRTEL
Net Sales & Other Operating Income 356,091 380,151 416,031 453,501
Other Income 891 1,121 6,241 14,630
Total Expenditure 219,651 250,780 279,600 318,800
Interest -8,551 1,301 13,960 16,520
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Depreciation 38,900 41,931 59,160 68,261
PAT 94,260 77,161 57,300 50,960
B. INDIAN TELECOM SERVICE INDUSTRY
PAT 13,523 -188,330 -295,101 -17,800

Source: www.aceanalyser.com, accessed May 21, 2013.

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EXHIBIT 3: BHARTI’S QUARTERLY CONSOLIDATED NET PROFIT POSITION, INR MILLION

March June2012 September December March

2012 2012 2012 2013
10,091 7,821 7,011 2,840 5,060
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Source: www.aceanalyser.com, accessed May 21, 2013.

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or 617.783.7860