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Imperial Journal of Interdisciplinary Research (IJIR) Vol-2, Issue-3 , 2016 ISSN : 2454-1362 , http://www.onlinejournal.in

Working Capital Management and Its Impact on Profitability: A Case Study of Bharti Airtel Telecom Company Mrs. Poonam Gautam Sharma1 & Ms. Risham Preet Kaur2 1&2

Assistant Professor in Commerce, Dev Samaj College for Women, Ferozepur, India.

Abstract : The present paper examines the working capital performance of Bharti Airtel during the period 2007-08 to 2014-15. An attempt has been made to measure the working capital performance with the help of ratio analysis. Statistical as well as econometric techniques are employed in order to assess the behavior of the selected ratios. Quick ratio, inventory turnover ratio, Debtors turnover ratio, gross profit ratio, operating profit ratio showed satisfactory performance and current ratio, of the company were not found to be satisfactory. Except 2012 and 2014, working capital turnover ratio showed negative results. The correlation coefficient between liquidity and profitability of the selected company is observed to be 0.08. Motaals test also indicated significant improvement in liquidity performance during the study period. Finally, there exists significant negative relationship between liquidity and profitability, which indicates that Bharti Airtel has maintained post optimal level of liquidity (i.e., excess liquidity) during the period under study. Keywords: Liquidity, Profitability, Working Capital Management, Current Ratio, Net Working Capital, Risk ,ROCE, Risk-Return Trade Off .

1. Introduction Working Capital Management is an important component of Corporate Financial Management. It is the relationship between current assets and current liabilities. Management of working capital is important to carry the routine activities of a firm. The objective behind working capital management is to ensure continuity in the operations of a firm and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. It mainly involves management of inventories, accounts receivables, accounts payables and cash. The basic theme of working capital management is to provide adequate support for smooth and efficient functioning of day to day business operations by striking a trade between the three

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proportions of working capital. They are liquidity, profitability and risk. In the present environment of cut throat competition, business does not have any other alternative, than cutting the cost of its operations in order to be competitive as well as financially strong. It is in this connection that effective management of working capital plays a vital role. In fact the relationship between working capital and profitability is still a debatable issue. There are not many studies carried out in India on telecom industry in connection with the relationship between working capital and profitability in the recent past. An attempt has been made to evaluate the interrelationship between working capital management and profitability of Bharti Airtel during the period 2007-08 to 2014-15.

2. Bharti Airtel: A brief profile Bharti Airtel Limited was established on July 07,1995 as a Public Limited Company. It is a leading global telecommunications company with operations in 20 countries across Asia and Africa. It’s headquarter is at New Delhi, India. The company ranks amongst the top 4 mobile service providers globally in terms of subscribers. In India, the company's product offerings include 2G, 3G and 4G wireless services, mobile commerce, fixed line services, high speed DSL broadband, IPTV, DTH, enterprise services including national & international long distance services to carriers. In the rest of the geographies, it offers 2G, 3G, 4G wireless services and mobile commerce. Bharti Airtel had nearly 340 million customers across its operations at the end of Sep 2015.

3. Literature review Several studies have been conducted regarding the relationship between the working capital management and corporate profitability. The studies suggested that corporate profitability can be improved through efficient working capital management. The following studies were useful for this research:

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Imperial Journal of Interdisciplinary Research (IJIR) Vol-2, Issue-3 , 2016 ISSN : 2454-1362 , http://www.onlinejournal.in Joshi, Lalit Kumar and Ghosh, Sudipta (2012), attempted to examine the working capital performance of Cipla Ltd. during 2004-05 to 200809. Primary data was collected for the study. Source of primary data for their study was published annual reports of the selected company for the 5 year period. Financial ratio analysis, statistical and econometric techniques were used in the study. Findings of the study revealed significant positive trend growth in most of the selected performance indicators. The selected ratios also showed satisfactory performances during the study period. Motaals test indicated significant improvement in liquidity performance during the study period. There was also significant negative relationship between liquidity and profitability, which indicated excess liquidity of the company. Haresh, Barot (2012), attempted to provide empirical evidence about the effects of working capital management on profitability performance of CNX Pharmaceutical companies listed on National Stock Exchange of India. To analyze profitability and working capital management from the financial reports, data for a period of 2005-06 to 2009-10 was collected. SPSS software package was used to investigate the collected data. Regression analysis showed that accounts receivable and accounts payable were significant in explaining profitability, while inventory turnover and cash conversion cycle were found to be insignificant. A negative relationship between accounts receivables and corporate profitability and a positive relationship between accounts payable and profitability was found xd```through his study. He concluded that working capital should be managed in more efficient ways to increase firm’s profitability. Akoto, Richard Kofi et.al. (2013), collected data from all the 13 listed manufacturing firms in Ghana covering the period from 2005-2009 to examine the relationship between working capital management practices and profitability of the firms. Panel data methodology was used in the study with the help of which it was concluded that accounts receivable days significantly negatively influence profitability of listed manufacturing firms in Ghana. It was recommended in the study that incentives should be created o reduce their accounts receivable to 30 days and local laws that protect indigenous firms and restrict the activities of importers should be enacted to promote increase demand for locally manufactured goods both in the short and long runs in Ghana. Chakraborty, Nirmal (2014), made an effort to examine the working capital performance of Dr Reddy’s Laboratory during the period 2004-05to 2012-13. To measure the working capital

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efficiency, different financial ratios and statistical techniques were applied. Primary data was collected from published annual reports of the company. Studies showed inverse relationship between liquidity and profitability under the study period. Quick ratio, inventory turnover ratio, Debtors turnover ratio, gross profit ratio, and working capital turnover ratio showed satisfactory performance whereas current ratio, absolute liquid ratio, operating profit ratio of the company were not found to be satisfactory. Muhammad, Sabo et.al.(2015) examined the impact of working capital management on corporate profitability of seven firms listed on the floor of the Nigerian Stock for the periods of 2008 to 2012. Secondary data from annual reports and accounts of the sampled companies and the Nigerian Stock Exchange Fact book was collected for the study. Descriptive statistics and GLS regression analysis through STATA 11 were used to analyze the data. Positive relationship among Average Collection Period (ACP), Current Ratio (CR) and the size of the firm (LOGSIZE) with Profitability and a negative relationship with Inventory Turnover Period (ITP), Average Payment Period (APP) were found. It was suggested that cash collected should be re-invested into short-term investment to generate profits. K T, Srinivas undertook a research to study working capital management through ratio analysis at Karnataka Power Corporation limited. The association between traditional and alternative working capital measures and return on investment (ROI), specifically in industrial firms listed on the Johannesburg Stock Exchange (JSE) was evaluated. It was concluded that the financial position of the company was sound as the company made an effort to increase its production and net profit. It was also concluded that though the company’s earnings were increasing every year but the company’s funds were not properly utilized.

4. Objectives of the study The main objective of the study is to examine the working capital management of the selected companies. To attain the main objective, the following objectives are sought to be achieved: I. II. III.

To evaluate the working capital performance of the selected company. To study the liquidity position by applying various ratios. To check the relationship between profitability and liquidity of the selected company.

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Imperial Journal of Interdisciplinary Research (IJIR) Vol-2, Issue-3 , 2016 ISSN : 2454-1362 , http://www.onlinejournal.in

5. Hypothesis In conformity with the objectives of the study, the following hypothesis is taken: i) Working capital performance of the selected company is healthy. ii) There is a significant negative relationship between liquidity and profitability

6.

Research methodology

To carry out the present study, following methodologies have been adopted. Data source: The data required for the study has been collected from the capital line database as well as from the company’s website. Secondary data for the study were drawn from audited accounts (i.e., income statement and balance sheet) and also from the website moneycontrol.com. Study Period: We have chosen the study period ranging from 2007-09 to 2015.

7. Working Capital Performance Of The Selected Sample Company To study the working capital performance of the selected company, various ratios has been taken into consideration. Performance drivers Current asset/ current liability Quick ratio (Current asset-stock ) / (current liability- bank overdraft) Absolute liquid (Cash and bank balance+ ratio marketable securities)/ (current liabilities-bank overdraft) Inventory turnover (sale-gross profit)/ closing ratio(in times) stock Inventory turnover 365/ inventory turnover (in (in days) times) Debtors turnover Net sales/ closing debtors ratio (in times) Debtors turnover 365/debtors turnover (in ratio (in days) times) Working capital Net sales/ working capital turnover(in days) Current asset Sales/ current assets turnover ratio Current ratio

Table: 1 Different Ratio Which Are Taken Into Consideration To Analyze The Working Capital Performance Of The Sample Company

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8. Analysis Of The Liquidity Position By Motaals Comprehensive Test In this test the following ratios (shown in percentage) have been taken into consideration. I. Inventory/ current assets II. Debtors /current assets III. Cash & bank/ current assets IV. Loans & advances& other assets/ current assets For I) the lower the ratio the more favorable is the position and ranking has been done in that order. For ii), iii), and IV) the higher the ratio, the more favorable is the position and thus ranking has been done in that order. Ultimate ranking has been done on the principle that lower the points scored the more favorable are position and vice- versa.

9. Relationship between Liquidity and Profitability Spearman’s Rank Correlation has been applied to evaluate the relationship between liquidity and profitability. For this purpose spearman’s rank correlation coefficient is computed as below. Rxy= 1-[6 ΣD2/ (N3-N)] Rxy= rank correlation co-efficient D= rank difference (R1-R2) N= number of observations To check the significance of the relationship between liquidity and profitability, t test has been applied. If the calculated value of t is less than table value, the null hypothesis will be accepted and vice versa for a given significance level. The t test is calculated as follow: _____ _____ t = R√ (n-2) / √ (1-R2) Where R= Rank Correlation coefficient, n= No. of observations In addition to above, simple statistical measured like mean S.D, coefficient of variation has been used in this study.

10. Analysis of Working Capital Performance of Selected Telecom Company Table 2 shows the different ratios for measuring working capital performance. The current ratios in all the years are below 2: 1 (being the standard norms). Again the average of these ratios is 0.7:1 which is also below the standard norms (2:1). It is to say that current ratios of the companies maintained standard norms neither in individual

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Imperial Journal of Interdisciplinary Research (IJIR) Vol-2, Issue-3 , 2016 ISSN : 2454-1362 , http://www.onlinejournal.in years nor in that of average. Therefore, current ratios are not in a satisfactory level. However, the standard deviation of current ratio is 0.17. It indicated that current ratio of the different years are more or less steady as its standard deviation is very low and its coefficient of variance 24.01%. It is observed that firms are not maintaining the quick ratios above its standard norms (1:1) {except the year 2012}. It is to say that the firm does not have enough capacity to meet the short term obligations. The quick ratios of the firm range from 0.47:1 to 1.37:1. The mean value of quick ratios is 0.77 with a coefficient of variation 0.27%. It is observed from the table that inventory turnover (in times) lies in between 453.06to 45,380.45with a mean of 8,671.36 and standard deviation is 15367.18during the study period. The co-efficient of variation is 177.22%. Again it is observed from the table that inventory velocity lies

in between 0.008 days to 0.80 days with an average of 0.361678 under the study period. It is observed that the company is maintaining a satisfactory level of inventory which helps to avoid the extra cost for maintaining both the high and low level of inventory under the study period.Net working capital turnover period of the company is 2.73 on an average with a standard deviation and coefficient of variation 0.36 and 13.14% respectively. It is to say that the time taken from cash invested in the business to cash recovery from the business is 135.5422 days on an average. If we analyze in depth, it is observed that working capital cycle is a good one. The gross working capital (sum of current assets) cycle period of the company is 15.33on average with standard deviation and coefficient of variation 4.515811and 29.45% respectively.

Table: 2 Distribution of different ratios of working capital in Bharti Airtel, during March 2007 to march 2015 2007

2008

2009

2010

2011

2012

2013

2014

2015

Mean

SD

CR QR ITR(times) ITR(days)

0.47 0.47 453.06 0.8056

0.57 0.55 453.06 0.8056

0.69 0.65 547.83 0.6662

0.7 0.67 1,307.05 0.2792

0.63 0.73 1,105.17 0.3302

1.02 1.37 1,296.07 0.2816

0.65 0.75 21,595.67 0.0169

0.93 0.98 45,380.45 0.008

0.73 0.75 5,903.87 0.0618

DTR(times)

14.31

12.28

12.78

15.3

21.32

23.14

20.7

22.63

20.27

0.71 0.77 8,671.36 18.08

0.17 0.27 15367.18 4.36

DTR(days) WCT(times) WCT(days)

25.5 -2.2 165.9

29.72 -2.8 130.35

28.56 -3.07 118.89

23.85 -3.3 110.6

17.12 -2.5 146

15.77 3.1 117.74

17.63 -2.6 140.4

16.12 2.6 140.4

18 -2.44 149.6

-

-

CAT(time)

10.46

8.49

12.31

16.28

23.33

15.71

17.36

19.1

14.96

Where CR= Current Ratio, QR= Quick Ratio, ITR=Inventory Turnover Ratio, DTR= Debtor Turnover Ratio, WCT=Working Capital Turnover, CAT= Current Asset Turnover. From Table 3, percentage of stock out of total current assets held by the company during the study period is shown. Higher level of inventory holding indicates the lower level of liquidity position. Considering this, the liquidity rank has been done. In case of debtors to current assets, the rank has been scored by keeping in mind that higher amount of debtors out of its total current assets is the indicator of better liquidity position and vice-versa. The rank of debtors to current assets is 1 in 2010 as it is highest and so on.

2.73 15.33

0.36 4.51

CV (%) 24.01 34.69 177.22 24.11 13.14 29.45

and loans & advances to current assets. It is necessary to mention that fixed deposits have been included in cash & bank balance. After getting individual rank all the ranks on particular year has been added to get the total rank and it is found that total rank in 2014, is the lowest and it got ultimate rank 1. It is indicating that the company under the study period recognizes the most sound liquidity position in the year 2014 followed by 2012, 2013, 2015 and 2011 places the 2nd, 3rd, 4th and 5th position respectively. It is observed from the total rank that the trend of liquidity position is more or less steady and it is ranging from 13 to 27.

The same consideration has been applied in case of calculating rank of cash & bank to current assets

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Imperial Journal of Interdisciplinary Research (IJIR) Vol-2, Issue-3 , 2016 ISSN : 2454-1362 , http://www.onlinejournal.in Table 3: Liquidity Ranking Analysis Of Bharti Airtel By Motaal’s Test Inventories to CA (%)

2015 2014 2013 2012 2011 2010 2009 2008 2007

1 0.253 0.042 0.08 1.212 2.111 1.245 2.247 1.873 2.803

Debtors to CA (%)

2 89.27 82.89 86.03 80.61 89.71 96.24 92.20 91.51 83.18

Cash &bank to CA (%) 3 10.48 17.07 13.89 18.17 8.17 2.51 5.548 6.619 14.02

Loans and advances to CA (%) 4 460.66 763.42 492.38 771.61 672.61 323.37 202.59 168.19 185.29

Liquidity Rank

1

2

3

4

3 1 2 4 7 5 8 6 9

5 8 6 9 4 1 2 3 7

5 2 4 1 6 9 8 7 3

5 2 4 1 3 6 7 9 8

Table 4 shows the different profitability ratios with mean, standard deviation and coefficient of variation under the study period. On analyzing operating profit margin it is observed that the operating profit of the company during all the study periods is satisfactory. A higher operating margin means that the company has less financial risk. The average operating profit margin is also satisfactory with standard deviation and coefficient of variation 4.03 and 11.18% respectively. Gross profit margins of the company are lying between 14.65 to 29.33 with mean 19.66 and standard deviation and coefficient of variation of 5.62 and 28.6% respectively. The ratios are within range of standard norms (25% to 30%). Therefore it is to say that the gross profit ratio of the company is

Total Rank

Ultimate Rank

18 13 16 15 20 21 25 25 27

4 1 3 2 5 6 7 7 8

satisfactory under the study period. The net profits of the company during the last four years are stable and lying in between 10% to 26%. It is moderately fluctuating and ranging between 10.88% to 26.36% for the entire study period with standard deviation of 5.46 and coefficient of variation of 24.41%. Returns on capital employed during the last five years of the study period are satisfactory. It lies between 12.07% and 29.06% under the study period with mean of 20.18111, standard deviation of 7.12 and coefficient of variation of 35.27%. It is observed from the study that returns on capital employed of the company reached 29.06% (being the maximum) in the year 2015.

TABLE 4 PROFITABILITY ANALYSIS OF BHARTI AIRTEL TELECOM

Operating Profit Margin (%) Gross Profit Margin (%) Net Profit Margin (%) ROCE (%)

2007

2008

2009

2010

2011

2012

2013

2014

2015

Mean

40.65

41.37

38.74

39.08

35.08

32.79

29.7

32.65

35.01

36.12

21.39

18.16

14.65

18.57

22.95

28.15

29.33

29.08

27.47

23.78

13.22

10.88

13.56

20.12

26.36

22.58

23.99

22.46

17.32

13.18

12.07

13.14

16.65

23.86

28.4

27.95

29.06

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19.66

23.31

20.18

S.D.

C.V.(%)

4.04

11.18%

5.62

28.6%

5.46

24.41%

7.12

35.27%

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Imperial Journal of Interdisciplinary Research (IJIR) Vol-2, Issue-3 , 2016 ISSN : 2454-1362 , http://www.onlinejournal.in

11. Estimated Relationship Between Liquidity And To know the relation between liquidity and profitability, only two ratios are taken. Current ratio is taken as the indicator of overall liquidity and return on capital employed is taken as the principal indicator of profitability. Karl Pearson’s correlation coefficient has been calculated to know the relationship between the two variables whether exist or not. To test the significance of the relationship between liquidity and profitability, work out by way of correlation coefficient, ‘t’-test has been applied. The t- statistics as follows _____ _____ t = R√ (n-2) / √ (1-R2) Where r = correlation coefficient n = number of observations The correlation coefficient between liquidity and profitability of the selected company is observed to be 0.27under the study period. The calculated value of t = .08. At 5% level of significance the table value of t (2 tailed) = 3.18. Therefore, the null hypothesis is accepted and concludes that there is an inverse relationship between liquidity and profitability under the study period.

satisfactory in terms of current ratio during the study period.  Quick Ratio of the year 2012 showed satisfactory performance.  Debtors turnover ratio, gross profit ratio, operating profit ratio showed satisfactory performance.  Except 2012 and 2014, Working Capital Turnover ratio showed negative results.  Motaals test also indicates significant improvement in liquidity performance during the study period. Finally, there exists significant negative relationship between liquidity and profitability, which indicates that Bharti Airtel has maintained post optimal level of liquidity (i.e., excess liquidity) during the period under study.

14. References 1.

2.

3.

12. Limitations of the study The study suffers from certain limitations which are stated as follows1. 2.

3.

The study has been conducted over a limited period of nine years only. It is mainly based on secondary data and thus it carries all the limitations pertaining to the data collected from secondary sources. The study is based on a single company only. Hence, it will reflect only a partial view of the overall working capital management in the Indian telecom industry.

4.

5.

6.

13. Findings and conclusions 



Except cash and bank balances, the selected performance indicators have shown positive and significant trend growth rate during the period under study. The current ratio of the company always remained below the standard norm of 2:1, during all the years under study. Hence, the performance of the company is not

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7.

Dutta, Sukamal (1995). “Working Capital Management through Financial Statements Analysis of Paper Industry in West Bengal”, The Management Accountant, I.C.W.A.I., November Issue, pp.826-832 Eljelly, A. (2004). “Liquidity and Profitability trade off: An empirical investigation in an emerging market,” International Journal of Commerce and Management, volume 14, no- 2 PP (4861). Jafar, Amir and Sur, Debasish (2006). “Efficiency of Working Capital Management in Indian Public Enterprise during the Post Liberalization Era: A Case Study of NTPC”, The Icfaian Journal of Management Research, Vol.5, No.6, June Issue. Padaachi, Kesseven (2006). “Trend in working capital management and its impact on firm’s performance: an analysis of Mauritian small manufacturing firms, International Review of Business Research papers, Vol.2, no 2, PP 45-58. Haresh, Barot (2012). “Working Capital Management and Profitability: Evidence from India – An Empirical Study” GFJMR Vol. 5 July-December, 2012. Joshi , Lalit Kumar and Ghosh, Sudipta (2012). “Working Capital Management of Cipla Limited: An Empirical Study” International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 8, August 2012, ISSN 2277 3622 Akoto, Richard Kofi et.al. (2013). “Working capital management and profitability: Evidence from Ghanaian

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Imperial Journal of Interdisciplinary Research (IJIR) Vol-2, Issue-3 , 2016 ISSN : 2454-1362 , http://www.onlinejournal.in listed manufacturing firms.” Vol. 5(9), pp. 373-379, December, 2013 DOI: 10.5897/JEIF2013.0539 ISSN 2141-6672 © 2013 Academic Journals. 8. Chakraborty, Nirmal (2014). “Working Capital Management And Its Impact On Profitability: A Case Study of Dr. Reddy’s Laboratories Ltd.” Volume No. 4 (2014), Issue No. 02 (February) ISSN 2231-5756 9. Sabo Muhammad et.al. (2015). “The Effect of Working Capital Management on Corporate Profitability: Evidence from Nigerian Food Product Firm” Applied Finance and Accounting Vol. 1, No. 2, August 2015 ISSN 2374-2410 E-ISSN 2374-2429 Published by Redfame Publishing 10. K T, Srinivas. “A Study On Working Capital Management Through Ratio Analysis With Reference To Karnataka Power Corporation Limited” Abhinav National Monthly Refereed Journal Of Research In Commerce & Management Volume No.2, Issue No.12 Issn 22771166

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