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EXECUTIVE SUMMARY
The assignment given was to calculate the credit worthiness of the bank. Hence a detailed analysis was done on the various ratios which would be needed to ensure that all the facets of a bank are considered to make a holistic appraisal of the bank. An analysis of the operating environment of the bank includes both macro and micro factors, market factors, market position, and financial flexibility. The methodology mainly focuses on evaluating the financial strength of the entity based on the entitys cash generation and debt servicing abilities. The analysis is carried out based on the past audited financials. Not only financial rations, but non-financial dimensions were also considered for the appraisal The following broad risk parameters were considered for the rating Business and Industry risk analysis Inevitably any industry comprises a number of market segments that will exhibit somewhat better or worse characteristics than the industry as a whole. Consequently, the analysis takes into consideration the particular segments of the market or industry in which that firm operates and the extent to which the firms operating environment diverges from the industry as a whole. The evaluation of the industry environment requires consideration of the following aspects: Intensity of competition The relative profitability of the industry The outlook for Industry Profitability Concentration of the market Size of market Barriers to entry and ease of exit Regulatory, accounting & fiscal regimes Market growth potential Threat of substitute products / services
Operating Risk The companies that operate with high fixed cost in terms of investment in plant and machinery are subject to higher operating risk. Also the companies which are spread out and have large number of divisions and impact, any are considered. The other element of the operational risk is the management of inventory, the process of procurement of raw materials, quality control, production planning and control, capacity utilization of huge machinery etc. The companies that have sustainable raw material advantage in terms of location as well as who have higher productivity due to state of art machinery will score over others.
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People People factor plays a very critical factor in todays world, where talent is scarce. While the country may be producing large number of graduates, the employability and finding the right kind of resource has always been a problem for a number of employers. Effective HR process management can result in a high competitive advantage. Companies with excellent recruitment, interview process, training, performance appraisal and motivation plans can build a successful talent team that cannot be easily replicated by a new company entering the industry. Financial Risk Analysis We looked at a number of financial ratios that give clue for further study of some aspects of the corporation. The financial ratios that we studied are liquidity ratios, inventory turnover & asset turnover ratios, asset quality, earnings quality and profitability ratios, leverage and interest coverage ratio. We discounted the earnings quality as reported by the company, based on auditor qualifications. We also checked if the accounting numbers show a major deviation year to year or show a wide departure from the industry averages. We looked at the cash flow projections as well as the past cash flows Management Quality Important considerations include strengths and weakness of key members of management, depth and stability of top management, and recent and prospective management changes. The assessment of management is based on such factors as tenure, industry experience, a grasp of industry issues, and knowledge of customers and their needs. Management's ability and willingness to develop workable strategies to address its system's needs, to execute reasonable and effective long-term plans, and to be proactive in leading its company into the future are assessed. Final Rating The final rating obtained was a weighted score of the weighted scores obtained for financial risk and non-financial risk. The final score obtained was 5.72/6 (or a 95.33%) which correspond to a AAA rating which implies a minimum risk rating grade. This is owing to the strong financial management and corporate governance by Airtel which has constantly fared well in all the aspects since last few years. The industrial processes are also robust which is evident from the good operating ratios.
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and other emerging businesses (like M-commerce, M-health, M-advertising etc.). The B2C organization will consist of Consumer Business and Market Operations. Airtel is the market leader in India with about 152,495,219 out of the total 745,000,000 subscribers in India or about 20.46% market share as of December 2010. Company has gone through many mergers and acquisitions in the last few years. In March 2010, Bharti struck a deal to buy the Kuwait firm's mobile operations in 15 African countries, in India's second biggest overseas acquisition after Tata Steel's $13 billion buy of Corus in 2007. Bharti Airtel completed its $9 billion acquisition of African operations from Kuwait's Zain, making the firm the world's No. 5 wireless carrier by subscribers.Airtel has reported that its revenues for the fourth quarter of 2010 grew by 53% to US$3.2 billion compared to the previous year, newly acquired Zain Africa division contributed US$911 million to the total. However, net profits dropped by 41% from US$470 million last year to US$291 million this year due to a US$188 million increase in radio spectrum charges in India and an increase of US$106 million in debt interest. On August 11, 2010, Bharti Airtel announced that it would acquire 100% stake in Telecom Seychelles for US$62 million taking its global presence to 19 countries.
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Rating Model
The weight distribution of the various categories and the scores for Airtel is as follows.
Category C1 C2 C3 C4 C5 Industry Risk Business risk Management Risk Financial Risk Category Facility risk
Max Score
6 6 6 6 6
Weight
3 2 5 5 5
Scored
6.00 4.4 5.46 5.05 6.00
Weighted Score
18.00 8.80 27.30 30.30 30.00
5.72
The Management, financial and facility risk category risk has been given the highest rate as this are the risk category directly linked to and under the control of the firm and depends on the past performance and capability of the firm to perform in coming years. The Industry risk and Business risk have been given low scores owing to uncontrollable factors in hands of the firm. The score of 5.72/6 corresponds to 95.33% marks and corresponds to rating of AAA- An exceptionally high position of strength. Very High degree of sustainability (Minimum Risk). Weighted Score 6.00- 5.40 5.39 5.10 5.09 - 4.20 4.19 3.30 3.29 -2.40 2.39-1.00 0.9 0.00 <0.00 Rating AAA AA A BBB BB B C D Description An exceptionally high position of strength. Very High degree of sustainability..Minimum Risk A high degree of strength on a factor among the peer group. High degree of sustainability..Marginal Risk A moderate degree of strength with positive outlookModerate Risk A moderate degree of strength with stable or marginally negative outlook.Average Risk Weakness on a parameter in comparison to peers. Unstable outlookAcceptable Risk A fundamental weakness with regard to the factor. Unlikely to improve under normal circumstances..High Risk Caution & Not Acceptable Default
The detailed scoring for the corporation has been given below: 6|Page
INDUSTRY RISK
1.1
Risk Score
Weight
Weighted Score
Creates huge opportunity for direct and indirect employment Yes Not very important 6 0 6 6 30
1.2
Independence in setting up call tariff Contrary to the apprehensions about MNP, it has not dented the business of any telecom operator significantly Recent corruption in spectrum
Risk Score
Weight
Weighted Score
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allocation indicates tightening of noose around the neck in the future New guidelines issued by TRAI in 2010 about spectrum charges and M&A will be detrimental, especially to GSM operatorers No Yes 6 0 6 6 36
Mobile subscriber base expected to gro to 1 bn till 2014 Saturation in mobile subscriber base expected after 2015 Reduced tariff hurting the bottom-line for all operators Users for the broadband base are going to reach 100 million mark by 2014, particularly after the telecom companies roll out their 3G services Positive Outlook Moderate / negative
Risk Score
Weight
Weighted Score
6 0
6 6
36
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Competitive forces(RP)
High competition with increasing number of players Focus of competition shifting to tower sharing and value added services MNP has not been able to increase competition
Risk Score
Weight
Weighted Score
High demand with greater bargaining power of customers implies consolidation in future Least Competition High Competition 00 06 6 6 36
Nation-wide network and aggressive sales force required High License fee
Risk Score
Weight
Weighte d Score
Continuously expanding technology implies a dedicated R&D center High Barriers No/ Medium Barriers 06 0 6 6 36
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a) Risk Factor :- Presence of substitutes/ Threat of Imports Products and services from non-traditional telecom industries pose serious substitution threats Cable TV and satellite operators, with their own direct lines into homes, offer broadband internet services, and satellite links can substitute for high-speed business networking needs. Delivered by ISPs - not telecom operators "internet telephony" could take a big bite out of telecom companies' core voice revenues. No Sustitutes Few / many substitutes available to the borrowers product 00 06 6 6 00 36 Risk Score Weight Weighte d Score
3. Industry Financial. (RP) a) Risk Factor :- ROCE (average for last Three years)
The Return on Capital Employed would be calculated for the Industry as an average for three years ROCE = 9.3%
Risk Score
Weig ht
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6 3 0
6 6 6
36
The actual profit Margin of the Industry for last 3 years is to t be taken into consideration
Risk Score
Weig ht
Increasing competition means lower revenue Increasing cost of capital due to volatile markets Substitutes pose a strong threat for the company Hence No
Risk Score
Weight
Weighted Score
Stable Business No
6 0
5 5
30
S. No . 1
Risk Parameter
Risk Score
Weight
Weighted Score
Industry Characteristics 6 6
36
2 3 1.
6 6
6 6 18
36 36 108
S. No.
Risk Parameter
Maximum Marks
Business Growth
Growth in sales or Growth in income
02 08 02
Percentage increase in Operating Profit Margin (Before Tax) Over the Previous years margin Total Customers Base
02
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02
Operating Efficiency
Population Coverage Management of Operating Costs
02 02 01 08 01 01 01
Average Minutes of Use Per User Prepaid Customers as a % of total customers Average Revenue Per User (ARPU) Technology Adoption & Location Advantage
Risk Factors
Growth in sales or income : If the Growth rate in sales/ income of the borrowing firm during last completed year as compared to the earlier year was Percentage increase in Operating Profit Margin (Before Tax) Over the Previous years margin: If the Percentage increase shows Total Customers Base ( in cr)
Score
1.5
1 0.5 0
Risk Factor
Population Coverage
80% 60% and 80% 40% and 60% (14.6%) 20% and 40% 20%
Management of Operating Costs: (Operative costs like Energy/Technology/Employee). Greater degree of automation normally leads to optimization of employee costs. Cost of acquiring technology in technology oriented industries, engineering, automobiles etc.: this factor plays an important role. Impact of IT related problems and cost of mitigating measures also needs to be taken into consideration. Prepaid Customers as a % of total customers
Yes
2
No 1
95% (96.3%) 90% and 95% 85% and 90% 80% and 85% 80% 250 150 and 200 (190) 100 and 150 50 and 100 50 600 450 and 600 300 and 450 (445) 150 and 300 150
0.75
0.5
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Technology Adoption: Adoption of cost effective technology is very vital in the present day scenario. Location Advantage: Location Advantage could help reducing manufacturing cost as well as selling cost on account of proximity to key utilities, etc.
Yes
1
No 0
S. No.
Risk Scores 5
Risk weight 4
1.
2.
3.
Capability of the Principal Promoters/Management run the business No. of years of experience of the Principal Promoters in the line of business Financial support to the borrowing firm from the Promoters/Group Frequency of change in the Board of Directors Qualification of the Board of Directors Retention of funds generated from the borrower's business profits
4.
5. 6. 7. 8.
3 3 3 3
3 3 3 2
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9.
1. Achievement during last completed year of targeted Net Sales/Income/Receipts Risk Score Weight Weighted Score
Achievement (during last completed year) of targeted Net Sales/Income/Receipts was to be extent of 100% of the target 5
90% but 100% of target 80% but 90% of target 70% but 80% of target 70% of target
4 (95%) 3 2 1
16
2. Achievement by Borrower (during last completed year) of targeted Net Profit (after tax)
Weight
Weighted Score
75% and 90% of the target 60% and 75% of the target 45% and 60% of the target 30% and 45% of the target 15% and 30% of the target
14
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3. Capability of the Promoters/Management to run the business i.e. either they have the business skills to run the business and/or have employed professionals
Weight 4
Weighted Score 16
4.
No. of years of experience of the Promoter(s)/Management in the line of business. Risk Score 10 years 5 years and 10 years 5 years Weight 4 Weighted Score 12
3 2 1
5.
Risk Score Whether the promoters or their Group Concerns are willing to extend financial support in case of need Yes No Whether the promoters or their group concerns have adequate financial resources to 17 | P a g e 03 00
Weight
Weighted Score
assist the borrower in case of need. Adequate financial resources Less than adequate financial resources No financial resources 03 02 01 3 9
18/6 = 3
Risk Score >5 yrs >4 yrs and <5 yrs >3yrs and <4yrs <3 yrs 3 2 1 0
Weight
Weighted Score
Risk Score Highly Qualified with rich experience Highly Qualified with less experience Medium Qualified with higher experience Medium Qualified with no experience Low Qualification with no experience 3 2.5 2
Weight 3
Weighted Score 9
1.5 1
8. Retention of funds (in the borrowing firm) generated from the borrower's business profits last year 18 | P a g e
Weight 2
3 (95%)
Weighted Score 6
2 1
Risk Score
Weight 1
High Transparency Medium Transparency Transparency only in Financial Statements Low Transparency
3 2 1
Weighted Score 3
S. No.
Risk Scores 4
Risk weight 4
Weighted Score 16
1.
2. 3.
3.5 4
4 4
14 16
4.
12
5.
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Promoters/Group 6. 7. Frequency of change in the Board of Directors Qualification of the Board of Directors 2 3 3 3 6 9
Sl. No 1 2 8. 40%
Range
Weight 5 5
Weighted Score
20 3 2 6
Retention of funds generated from the borrower's business profits Transparency in communicating to the Shareholders in the Annual Report TOTAL
9.
3.25
28
91
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Financial Risk
Profitability (RP) Operating Profit Margin: Sl. No 1 2 3 4 40% 30% and <40% 20% and <30% <20%
Range
Weight 5 5 5 5
Weighted Score
20
Sl. No 1 2 3 4 20%
Range
Weight 6 6 6 6
Weighted Score 36
Sl. No 1 2 3 4 20%
Range
Weight 6 6 6 6
Weighted Score 36
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Sl. No 1 2 3 4 15%
Range
Weight 6 6 6 6
Weighted Score 36
Total Weighted Score for Risk Parameter (Profitability) = 128/23 = 5.56 Leverage Ratio Long Term Debt to Equity Ratio
Range
Weight 5 5 5 5
Weighted Score
24
Sl. No 1 2 3 4 <1
TOL/TNW
Range
Weight 6 6 6 6
Weighted Score 36
Liquidity Ratio Current Ratio Sl.No 1 2 3 4 1 0.75 and <1 0.5 and<0.75 <0.5 Range Score to be allotted 6 4 2(0.52) 0 Weight 4 4 4 4 8 Weighted Score
Sl.No 1 2 3 4 1
Total Weighted Score for Risk Parameter (Liquidity) = 16/8 = 2 Efficiency of Working Capital Management (RP) Sl. No 1 2 3 1.00 >1.00 and 4.00 > 4.00 Fixed Assets Turnover Ratio Range
Weight 6 6 6
Weighted Score 36
Total Weighted Score for Risk Parameter (Efficiency of Working Capital Management) = 36/6 =6
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Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Sl.No. 1 2 3 4 5 4 and <5 3 and <4 <3 Range Score to be allotted 6(5.38) 4 2 0
Weight 6 6 6 6
Weighted Score 36
Sl.No. 1 2 3 4
Weight 5 5 5 5
Weighted Score
10
Sl.No. 1 2 3 4 30
Weight 4 4 4 4
Weighted Score 24
Total Weighted Score for Risk Parameter (Estimated Cash Flows) = 70/15 = 4.67
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Auditors Qualifications in the Balance Sheet (RP) Sl. No Risk Factor :- Qualification by Statutory Auditors (of the Borrower) in the latest audited Balance Sheet of the Borrower Major qualifications: such as change in accounting policy affecting profits adversely, Major deviations in valuation of Stocks/Other assets, Non-providing or non-availability of critical information/data for verification by auditors etc. Minor qualifications: such as Debtors and Creditors balances not confirmed, stocks not checked physically, etc. Maximum Marks 02 1. 2. 3. No qualification of auditor Minor qualification of auditor Major qualification of auditor Total Weight 06 03 00 3 3 3 3 18 9 Score to be allotte d
Weigh t
Audit/Inspection observations in the borrowers account Risk Factor: Observations of the Bank's internal inspectors, concurrent auditors, Banks Statutory auditors, or any other inspecting official with regard to the borrowers account. Maximum Marks 02 1 2 3 4 No observation Minor observation Major observation Total Weight 6 3 0 3 3 3 3 18
Score
Weight
Weighted Score
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Weighted Average Score Financial Risk Category S. No. Risk Parameter 1 2 3 4 5 6 7 Profitability Leverage Liquidity Efficiency of Working Capital Management Cash Flow Indicators Auditors Qualifications in the Balance Sheet Audit/Inspection observations in the borrowers account Total
Weight 6 5 4 4 6 3 3
31
156.61
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Facility Risk
Facility Risk shows the Airtel's response to any bank after availing loan. If it is a new borrower, then facility risk is not applicable. Risk Factor: - Conduct and Operations of accounts Airtel Group and its joint ventures have taken borrowings in various countries towards funding of its acquisition and working capital requirements. The borrowings comprise of funding arrangements with various banks and FIIs taken by parent, subsidiaries and joint ventures. Total borrowings disclosed include o Unsecured borrowings represented by Rs. 5,468 as of March 31, 2011 (Rs. 3,248 and Rs. 8,753 as of March 31, 2010 and March 31, 2009, respectively) and Secured borrowings represented by Rs. 36,816 as of March 31, 2011 (Rs. 34,541 and Rs. 7,770 as of March 31, 2010 and March 31, 2009, respectively) pertaining to joint ventures; and Unsecured borrowings represented by Rs. 497,080 as of March 31, 2011 (Rs. 49,406 and Rs. 110,009 as of March 31, 2010 and March 31, 2009, respectively) and secured borrowings represented by Rs. 77,344 as of March 31, 2011 (Rs. 14,703 and Rs. 6,489 as of March 31, 2010 and March 31, 2009, respectively) pertaining to Group excluding joint ventures.
The details of security provided by the Group and its joint venture in various countries, to various banks on the assets of parent, subsidiaries or JVs are clearly mentioned in the annual report and to a satisfactory detail. The corporate doesnt have any overdrawing beyond drawing power/limit but rather has some unused lines of credit. Airtel seems to be complying with timely submission of stock statements and renewal papers etc. The details on availability of Personal / Corporate Guarantees to secure proposed exposure, realisable value of Tangible Collateral Security excluding personal guarantee, frequency of servicing of existing borrowings etc. arent available in public domain. However, there have been no irregularities found or report ed in public domain with regard to Airtels conduct of accounts. Hence, it has been given a facility rating score of 20 out of 20.
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