Since March 2010, the Indian telecommunication giant Bharti Airtel Limited (Airtel) had been experiencing a decline in profits in spite of recent capital acquisitions. 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. In the face of this competitive threat and to address the companys sluggish growth, Airtels 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. Airtel provides not only international connectivity to its customers but also offered them a bouquet of telecom solutions. The companys 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. 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 chairman. Within a very short span of time, it rose to great heights with its 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. Airtel had undertaken several major capital investments in the recent past as part of its business growth strategy. 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 3G connections (including CDMA2000) by the end of 2015, which would represent almost 30 per cent of total connections. 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. 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-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 Steels $13 billion acquisition of Corus in 2007. This deal not only gave Airtel a strong presence in African markets but also made it the worlds fifth largest wireless company. This would increase its profitability as with Zains takeover, Airtel will gain Africas 42 million customers and annual revenue of $3.6 billion. Airtel invested 10.7 billion in Zain deal, read one newspaper headline. The company had borrowed 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 INR123,000 million towards 3G licences in India, its debt exposure was raised even further. Its debt to equity ratio at 1.4 was the highest in the telecom industry. Thus, the companys 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). 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. Overall, Airtels 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 Airtels management had not been able to adjust them according to its needs. Its business model needed good capital assets, but they formed less than 50 per cent of the companys 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 Airtels 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.) 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. Airtel remained Indias 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. 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 Qualcomms 4G broadband venture came with a debt of around $1 billion to $1.2 billion. 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 joint managing director (MD) of the Indian segment of the company became MD and CEO of Airtels newly created international business division. To make the situation even more complicated, the Indian telecommunication industry as a whole was also at its lowest point with a continuous declining trend of operating profit and net profit (see Exhibit 2). FUTURE OUTLOOK With its takeover of Zain and Qualcomm, Airtel had aimed to become one of the worlds leading telecom players. 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.

EXHIBIT 1: BHARTI'S FUNDS AND ASSETS POSITION (2010 TO 2013), INR MILLION Shareholders' funds Total Debt Capital Assets (Net) Investments Current Assets Total Assets March 2010 March 2011 367,370 441,111 50,381 100,820 296.191 471,791 157,730 192,000 140,240 115,360 594,161 779, 151 March 2012 494,291 108,921 449,061 219,111 212,341 880,513 March 2013 541,460 131,610 442.121 385,460 142,450 970,031 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 REVENUE AND NET PROFIT POSITION (2010 TO 2013) IN INR MILLION March 2011 March 2012 March 2013 March 2010 A. AIRTEL Net Sales & Other Operating Income 356,091 Other Income 891 Total Expenditure 219,651 Interest -8,551 Depreciation 38,900 PAT 94,260 B. INDIAN TELECOM SERVICE INDUSTRY PAT 13,523 380, 151 1,121 250,780 1,301 41,931 416,031 6,241 279,600 13,960 59,160 57,300 453,501 14,630 318,800 16,520 68,261 50,960 77.161 -188,330 -295, 101 -17,800 Source: www.aceanalyser.com, accessed May 21, 2013. EXHIBIT 3: BHARTI'S QUARTERLY CONSOLIDATED NET PROFIT POSITION, INR MILLION June 2012 March 2012 10,091 September December 2012 2012 7,011 March 2013 5,060 7,821 2,840 Source: www.aceanalyser.com, accessed May 21, 2013. Required: 1. 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? 2. Evaluate the future implications of the company's capital budgeting decisions. 3. Appraise the solvency of the capital investment financing policy. 4. Discuss the importance of sound capital investment and measure its impact on the firm's profitability 5. Evaluate the growth prospects of the company and suggest the right strategy to pursuc. 6. Explore effective ways of capital budgeting for future growth EXHIBIT 1: BHARTI'S FUNDS AND ASSETS POSITION (2010 TO 2013), INR MILLION Shareholders' funds Total Debt Capital Assets (Net) Investments Current Assets Total Assets March 2010 March 2011 367,370 441,111 50,381 100,820 296.191 471,791 157,730 192,000 140,240 115,360 594,161 779, 151 March 2012 494,291 108,921 449,061 219,111 212,341 880,513 March 2013 541,460 131,610 442.121 385,460 142,450 970,031 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 REVENUE AND NET PROFIT POSITION (2010 TO 2013) IN INR MILLION March 2011 March 2012 March 2013 March 2010 A. AIRTEL Net Sales & Other Operating Income 356,091 Other Income 891 Total Expenditure 219,651 Interest -8,551 Depreciation 38,900 PAT 94,260 B. INDIAN TELECOM SERVICE INDUSTRY PAT 13,523 380, 151 1,121 250,780 1,301 41,931 416,031 6,241 279,600 13,960 59,160 57,300 453,501 14,630 318,800 16,520 68,261 50,960 77.161 -188,330 -295, 101 -17,800 Source: www.aceanalyser.com, accessed May 21, 2013. EXHIBIT 3: BHARTI'S QUARTERLY CONSOLIDATED NET PROFIT POSITION, INR MILLION June 2012 March 2012 10,091 September December 2012 2012 7,011 March 2013 5,060 7,821 2,840 Source: www.aceanalyser.com, accessed May 21, 2013. Required: 1. 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? 2. Evaluate the future implications of the company's capital budgeting decisions. 3. Appraise the solvency of the capital investment financing policy. 4. Discuss the importance of sound capital investment and measure its impact on the firm's profitability 5. Evaluate the growth prospects of the company and suggest the right strategy to pursuc. 6. Explore effective ways of capital budgeting for future growth