Evaluate the implications of the company’s capital budgeting decision for the future.
It can be evaluated that Airtel’s capital investments in various ventures had enabled them to grow its capital assets. In 2010, the company initially decided to invest in the acquisition of 3G service licenses through a capital investment amounting to $2.5 billion. However, it was assessed that, other competitors along with Bharti Airtel were able to acquire the 3G license as well. Which meant that, the competition for 3G services would be high and it would be difficult to secure a sufficient share in the market. Despite this, it was still necessary for Bharti (Airtel) to acquire the 3G service license to stay relevant in the highly diverse and competitive market. This would enable the company to enhance its service’s appeal among the subscribers available in the market. Which could increase the overall revenues generated by the company, as it was forecasted that, India’s 3G users would reach 400 million by 2015.Therefore, it can be determined that, the 3G license investment could have significant impact on the company in the future, as it could allow the company to target the forecasted 400 million potential connections and turn them into its 3G subscribers.
Moreover, Airtel invested 10.7 billion to takeover Zain to support is inorganic growth strategy, which was considered the second biggest overseas acquisition by an Indian company. The company borrowed $9 billion from international markets and an interest amount payable amounting to $200 million. The acquisition exposed the company to additional risks and its debt to equity ratio was increased to 1.4, the highest in telecom industry. However, it was assessed that, Zain’s acquisition would enable the company to become the fifth largest wireless company and attain a strong presence in the African market. It was estimated that, it would gain additional 42 million customers from the African market, resulting in an annual revenue of $3.6 billion. Similarly, it would allow the company to enhance its brand image in the African region and would enhance its global brand position. This, in turn, would enable the company to ensure its long-term survival in the marketplace.
Lastly, Airtel invested $165 million for a 49% stake in Broadband wireless access Indian Branch of Qualcomm. This would allow the company to position itself strategically in the 4G LTE market segment. It was assessed that, the trend for fast internet service would shift towards 4G LTE. Therefore, Airtel ensured that, it would stay relevant in the market for long-periods of time and would be able to maintain its appeal among the subscribers available in the market.However, it can be determined that, although the capital assets of the company had increased from INR 296,191 in 2010 to INR 442,121 in 2013 but its asset turnover ratio had decreased from 1.20 in 2010 to 1.03 in 2013.It could be a result of management’s inefficiency in using the assets to generate higher returns from their investments. Therefore, the capital assets budgeting and investment decisions could have significant impact on the company’s profitability and growth. Hence, the capital assets acquired should be efficiently allocated to generate higher returns.
Critique Airtel’s capital investment financing policy for long-term soundness.
It can be assessed, after evaluating the case that, Airtel made significant investments towards new technologies to stay relevant and competitive in the market. The company borrowed significant capital from international market to finance their investments, exposing them to significant risk of debt and market volatility and increased its dependency on its investments to turn a profit. This could be evaluated from its investment of $10.7 billion, to takeover Zain with $9 billion borrowed from International markets. However, this investment compelled Airtel to depend on its investments churning profits, if the investments does not churn profits, then the company would not be able to pay off its debt and the increased incurred expenses. Therefore, it can be determined that, Airtel’s investments financing policy, although enable it to stay relevant and competitive in the market, increases its dependency on these investment to turn higher profits. This step could compromise its ability to pay-off its debts and interest, if these investments didn’t turn higher profits. This, in turn, could expose Airtel to the systematic risks caused by the market volatility.
What would be the impact of these capital investments on the profitability and financial viability post investment?
It can be assessed, after analyzing the market conditions of Airtel that, its investments to acquire 3G license, Zain and Qualcomm 4G LTE could enable the company to enhance its profitability in the market. The increase in the numbers of customers should be attributed to the investment in Zain, which would allow them to gain a strong presence in the African market and result in an addition 42 million customers, while gaining $3.6 billion in annual revenues.Furthermore, the Acquisition of 3G license and strategic position in the 4G LTE market segment would allow the company to stay relevant and competitive in the market. This would enable them to enhance their appeal among the customer, resulting in increasing their revenues, further enhancing its profitability in the market and allowing the company to make additional capital investments in the future…………..
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