SYNOPSIS ON

A COMPERATIVE STUDY OF EFFECT OF FINANCIAL

LEVERAGE ON PROFITABILITY OF BHARTI AIRTEL AND
IDEA CELLULAR.

For partial fulfillment of the requirement for the Degree of master of business
Administration (full time)

BATCH 2015-17

Submitted to: Submitted by:

Prof. NEHA CHOUHAN VARSHA PARMAR

MBA 3rd
Sem.

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 Roll No.:52770051

CONTENT

[Link] TOPIC PAGE NO.

1. Introduction 3

2. Company Details 4
3. Review of literature 5-6
4. Rationale 7

5. Objectives 7

6. Methodology 8
Tool for Data Collection
7. Bibliography 8

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 INTRODUCTION

Financial leverage is the degree to which a company uses fixed income security such as
debt and preferred equity. The more debt financing a company uses, the high degree of
financial leverage means high interest payments, which negatively affect the companys
bottom line earning per share.

.Financial risk is the risk to the stockholders that is caused by an increase in debt and
preferred equities in a company's capital structure. As a company increases debt and
preferred equities, interest payments increase, reducing EPS. As a result, risk to
stockholder return is increased. A company should keep its optimal capital structure in
mind when making financing decisions to ensure any increases in debt and preferred
equity increase the value of the company.

Degree of Financial Leverage:

The formula for calculating a company's degree of financial leverage (DFL) measures the
percentage change in earnings per share over the percentage change in EBIT. DFL is the
measure of the sensitivity of EPS to changes in EBIT as a result of changes in debt.

Formula:

percentage change EPS

DFL= =
percentage change EBIT

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Company Details (Idea Cellular & Bharti Airtel)

Idea Cellular (commonly referred to as simply Idea) is an Indian mobile network

operator based in Mumbai. Idea is a pan-India integrated GSM operator offering 2G, 3G
and 4G mobile services. Idea is Indias third largest mobile operator by subscriber base
Idea has 182 million subscribers as of 31 December 2015.

History

Held one-third equity in the company. Following AT&T Wireless' merger with Cingular
Wireless in 2004, Cingular decided to sell its 32.9% stake in Idea. This stake was bought
by the remaining two stakeholders equally. Tata forayed into the cellular market with its
own subsidiary, Tata During its inception in 1995, Aditya Birla Group, Tata Group and
AT and T Wirelesses each Indicom .a CDMA -based mobile provider and in April
2006, Aditya Birla Group announced the acquisition of the 48.18% stake held by Tata
Group at INR 40.51 a share amounting to INR 44.06 billion with 15% of the stake
acquired by Aditya Birla and the remaining by Birla TMT holdings Private Ltd. both AV
Birla family owned companies. Malaysia based Axiata bought a 19.96% stake in the
company in 2009

Bharti Airtel is an Indian global telecommunications services company based in Delhi,

India. It operates in 18 countries across South Asia and Africa. Airtel
provides GSM, 3G and 4G LTE mobile services, fixed line broadband and voice services
depending upon the country of operation. It is the largest mobile network operator in
India and the third largest in the world with 365 million subscribers. Airtel was named
India's second most valuable brand in the first ever Brand ranking by Mill ward
Brown and WPP plc.

Airtel is credited with pioneering the business strategy of outsourcing all of its business
operations except marketing, sales and finance and building the 'minutes factory' model
of low cost and high volumes. The strategy has since been adopted by several operators.

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Airtel equipment is provided and maintained by Ericsson and Nokia. Solutions and
Networks whereas IT support is provided by IBM. The transmission towers are
maintained by subsidiaries and joint venture companies of Bharti including Bharti
Ingrates and Indus Towers in India. Ericsson agreed for the first time to be paid by the
minute for installation and maintenance of their equipment rather than being paid up
front, which allowed Airtel to provide low call rates of 1 (1.5 US)/minute.

Literature Review

Sanjay Bose, Robert W. McGee (2008) did a extent research on financial leverage and
capital structure policy has ignored emerging markets as research contexts. This study
attempts to investigate the effect of debt and equity mix, as measured by financial
leverage on a firm financial performance in an emerging market like Saudi Arabia. This
study was developed to extend understandings in the literature of how financial leverage
operates in a zero interest financial system, and how it may affect financial performance.
this research examined 57 publicly trading company listed in Saudi Arabian Stock Market
between 2002 and [Link] also extends the understandings previously reported in the
literature of how financial performance is linked to financial structure ,Zakat and the ages
and sizes of Saudi Arabian firms in a zero interest financial system. The overall result of
this study were that, in the long term, in the absence of acute economic downturns, lower
leverage level tend to higher profit margins and returns on both assets and equity. It also
provides evidence to recommend that under normal economic condition, Saudi Arabian
firms could attempt to improve their financial performance by balancing their zakat
liabilities with their leverage borrowing levels. Another recommendation made by this
study is that more studies are needed to examine zakat calculation standards and zakats
effect on firms capital structure and society.

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Stephen H. Penman (2001) did a research and the paper presents a financial statement
analysis that distinguishes leverage that arises in financing activity from leverage that
arises in operations. The analysis yields two leveraging equations, one for borrowing to
finance operations and one for borrowing in the course of operations. This leveraging
equation describes how the two type of leverage affect bank rates of return on equity. An
empirical analysis shows that the financial statement analysis explains cross sectional
differences in current and future rates of return as well as in price to book ratios,
which are based on expected rates of return on equity the paper therefore concludes that
balance sheet line items for operating liabilities are priced differently than those dealing
with financial liabilities. Accordingly financial statement analysis that distinguishes the
two types of liabilities aids in the forecasting of future profitability and the evaluation of
appropriate price-to-price book ratio.

Harry DeAngelo and Linda DeAngelo (2007) combine elements of the pecking order and
trade off theories of capital structure to develop a more powerful and empirically
descriptive theory in which firms have low long run leverage targets, debt issuances are
temporary deviations from target to meet unanticipated capital needs, firms rebalance to
target with a lag deposit zero adjustment costs and mature firms pay substantial dividends
to foster access to external equity while limiting internal funds to control agency costs
and reduce corporate taxes. The theory generates new testable hypotheses and resolves
the main capital structure puzzles including (i) Why equity is not last resort financing,
(ii) Why profitable firms pay dividends and maintain low leverage despite the corporate
tax benefits of debt, (iii) why firms fail to level up after stock price increases, and (iv)
Why leverage rebalancing occurs with a lag despite trivial adjustment cost.

Costas explore the effect of financial development on corporate capital structure and the
tightness of financial constraints that firms face .we employ an econometric technique
which allows us to explicitly test for convergence in capital structure. This technique

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increases the power of our statistical tests. In doing so, we identify a group of convergent
firms. The driving force of convergence is financial development, which positively
affects the firms leverage ratio. We also identify a group of firms, whose leverage is not
affected by financial development, because they are financially constrained.

Rationale of Study

The purpose of this project is to find out the effect of financial leverage on the
profitability of companies. What difference can make the amount of interest on the
profitability of the company and for how long it can affect the financial position of the
company .

Objective

1. To analyze the impact of debt on profitability on company.

2. To analyze the impact of interest on EPS.
3. To identify the risk taking ability of companies.

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 METHODOLOGY:

DATA COLLECTION: secondary data will be collected through published records and

web portals.

DATA COLLECTION TOOL: Appropriate tool will be used.

Research method: - descriptive research

Data collection:-

A) Secondary: -

Browser
journals
Newspaper
Websites
Books

Bibliography

1. [Link]
2. [Link]
3. [Link]

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4. [Link]
5. [Link]