Firms with high levels of US dollar-denominated debt are evidently in trouble, what with the domestic currency having depreciated about 19% since September. By extension, their shares should be suffering too. But for some reason, the Bharti Airtel Ltd stock has been spared.
According to a recent report by Edelweiss Securities Ltd, Bharti’s annual report for the year ended March shows significant exposure to dollar-denominated loans due to the Zain acquisition. The firm’s outstanding debt stood at Rs 61,671 crore at the end of March and 73% of this was dollar-denominated. At the end of September, the debt increased to Rs 67,491 crore, largely owing to third-generation, or 3G, spectrum licence fees and capital expenditure.
The report points out that a large part of the dollar debt is lying with the firm’s arm in the Netherlands, Bharti Airtel International (Netherlands) B.V., and that since the functional currency for this subsidiary is the dollar, it would immunize the firm’s profit and loss statement from the volatility in rupee-dollar rates. Even so, the fact remains that the Netherlands subsidiary doesn’t generate any cash and the repayment of debt will happen from cash flows that accrue in the parent company in India. It doesn’t appear that the incremental dollar loan taken for the Zain acquisition is hedged, which means that the repayment burden could eventually turn out to be substantially higher than what the company had envisaged.
According to Edelweiss’ calculations, there could be a total cash flow impact of Rs 4,200 crore on the incremental dollar denominated debt taken in 2010-11, if currency rates remain at current levels. This difference is in comparison with the prevailing currency rates at the time of the Zain acquisition. The firm is due to repay borrowings of approximately Rs 4,000 crore in 2013, Rs 8,000 crore in 2014, Rs 12,000 crore in 2015, and Rs 16,000 crore in 2016.
The other highlight in the firm’s balance sheet is that the amount of intangible assets (goodwill, in particular) has surged. So much so that Bharti ended 2010-11 with a negative tangible net worth. Even at the end of September, its intangible assets, at Rs 64,894 crore, far outstripped its net worth of Rs 51,258 crore. In other words, the balance sheet doesn’t look pretty.
But on the positive side, its core Indian mobile operations are now generating considerable cash, which is more than making up for the cash burn at new ventures such as the digital TV operations and the Zain buy. In the past four quarters, Bharti generated a free cash flow of Rs 4,670 crore, after accounting for capex, cost of acquisitions and investments in subsidiaries.
Needless to say, this will provide comfort to investors. Besides, investors also seem to be enthused that mobile operators have started taking price increases because of a decrease in competitive intensity. Yet, while all this bodes well for the firm, the impact of the falling rupee does not seem to be factored in the current share price.