North South University

Finance 254
Section: 4
Summer 2010

Financial Statement Analysis

Of Grameenphone

By: H. H. Nazirul Islam

ID: 071874030

Submitted To:
AHR Karim
13 August, 2010
 Background and structure

In 1989, Bangladesh Rural Telecom Authority (BRTA) became the first

private operator in Bangladesh after they received a license to operate rural
telecom systems in 198 thanas in Northern Bangladesh. PBTL (City Cell) was the
first company to receive the license to operate mobile phone service in the year
1989 and started its operation in 1993. Sheba (currently known as Banglalink),
Grameenphone Ltd. (GP) and Aktel received their licenses in 1996 and GP started
its operation on 26 March 1997. There are other two operators i.e. Teletalk and
Warid who launched their operation in 2005 and 2006 respectively. Healthy
competition between private operators and the state-owned operator with
protection from the Government cannot be ensured as they function on unequal
footings. The BTRC is essentially required to be an independent and neutral entity
acting as a facilitator to further the cause of telecommunication services without
having any inclination for and discrimination against any body active in the field.
However, the degree of this independence depends to a great extent on the
political, social, legal, institutional and cultural traditions of Bangladesh. The
regulator has the responsibility to create an environment where the development
activities related to the affairs of telecommunications can thrive without any
hindrance and to insulate it from any undue fear or favor. Interconnection is one of
the major issues that are casting negative influence on the expected expansion and
smooth operation of services by the private sector. The chronic inability and
possibly unwillingness on the part of the incumbent state-owned operator BTTB to
provide interconnections of sufficient capacity to the private operators was a
largely talked about issue. BTRC re-devised regulations on interconnection of
telecommunications through awarding of Interconnection Exchange (ICX) license
to resolve the issue. BTRC on 26 July 2007 issued a directive to all mobile
operators mentioning various aspects of tariff structure with cap and floor. The
telecommunication and information technology is undergoing phenomenal
transformations in its contents and character, the policy and regulatory approaches
could absorb the impact. In fine, consumer’s interest is protected through
establishing a liberal, competitive and market oriented regime and it is well
understood that one regulates the best when one regulates the least.

During the last 10 years Bangladesh’s economy has regained pace and GDP
grew at a consistent rate. Increased economic activity, reflected in the GDP
growth, is the key driver behind the increase in the business expansion; the country
has also seen an emergence of progressive entrepreneurs. Overall, GDP growth in
FY09 is likely to be around 6.0 percent and if no drastic shock affects the economy
and business confidence and investment climate improve further, the economy
could grow faster. The growth rate of industry and service sector stands at 6.9%
and 6.7% respectively against 7.4% for industry in 2007-08. The broader industry
sector includes manufacturing, mineral resources, electricity, gas & water and
construction sector. Telecommunication sector shows steady growth during the last
couple of years. The telecommunication industry of Bangladesh as a whole
possesses great potential. Penetration rate of 32.04% of wireless as of June 2008,
indicates it’s comparability to other neighboring countries. At the very inception,
cell phone usage was expensive and could only be afforded by the affluent. Well-
established foreign and local companies have invested heavily for the development
of the telecommunication infrastructure of Bangladesh thereby creating a
competitive environment, which has eventually led to drastic reduction in tariffs.
 Telecommunications is a highly capital intensive industry. The significant
investment in network infrastructure for maintenance and the introduction of new
services to replace declining legacy products is likely to be permanent
characteristics of all sectors of the telecommunications industry, worldwide.
Despite the expanding use of telecommunications networks to deliver a broader
array of service offerings, telecom revenue growth rates are multiple of GDP
growth. Furthermore, fast moving technological trends have generally reduced
asset life cycles. Together with increased competition, the return on investment in
future will be under more pressure than has been the case for the industry
historically.
Performance at a Glance 2009
Statement of Financial Position
(as at 31st December, 2009)
 Financial Summery of 2009 & 2008
Operational Results (in million BDT) 2009 2008
Revenue 65,300 61,359
Gross Profit 32,222 28,667
Operating Profit 20,518 15,350
Profit before tax 18,596 11,579
Net Profit after tax 14,968 2,984

Financial Position (in million BDT) 2009 2008

Paid-up Capital 13,503 12,152
Shareholders' equity 50,154 27,588
Total assets 109,162 108,194
Total liabilities 59,008 80,606
Current assets 22,182 14,430
Current liabilities 38,952 50,231
Non current assets 86,981 93,765
Non current liabilities 20,056 30,375

Financial Ratios 2009 2008

Current Asset to Current Liability 0.57 0.29
Debt to Equity 0.14 0.68
Gross Profit Margin 49% 47%
Operating Profit Margin 31% 25%
Net Profit Margin 23% 5%
Return on Equity 38.5% 11.1%
Return on Total Assets 13.8% 3.0%
 Credit Rating Report of Grameenphone

Current Ratings: (2009)* Previous Ratings: (2008)*

Long Term: AAA Long Term: AAA
Short Term: ST1 Short Term: ST1
Date of Rating: 16 July 2009 Date of Rating: 07 April 2008
Validity: One Year Validity: One Year

* Credit Rating is done by Credit Rating Agency of Bangladesh Ltd. (CRAB)

Credit Rating Agency of Bangladesh Limited (CRAB) has reaffirmed

AAA (Pronounced Triple A) rating in the Long Term and ST1 rating in the Short
Term of Grameenphone Ltd (hereinafter referred to as GP or the Company).

The reaffirmation of GP‟s rating recognizes the Company’s track record of

consistently achieving good operating results, its leading position in the cellular
market in term of market share for decade (market share as of June 2009 is 45.0%),
its strong presence all over the country and its large network of last-mile
connectivity and growth prospect. CRAB rating also reflects the financial and
operating strength of its major shareholders.

The telecom sector in Bangladesh has been experiencing a healthy growth,

fueled by intense competition that resulted in expansion in both network coverage
and subscriber base. While the country’s cellular teledensity currently stands at
around 32.31%, there is yet sound growth prospects for mobile operators.
Although GP has been facing a decline in its market share (June 2009: 45.0%;
FY08: 47.0%; FY07: 48%), it still holds the leadership position with the largest
network as well as subscriber base. GP reported a customer base of 20.99 million
as of FYE08, which represents annualized growth of 27.4% from previous year. At
the end of June 2009, the subscriber base of GP stood at 21.16 million. As a result
of implementation of policies directed by the regulators, dormant subscribers have
been eliminated from total subscriber base. However the Company took initiative
to activate the dormant subscribers with attractive packages.

The rating also factors in steady growth in revenue (FY03-FY08, CAGR:

32.85%) and high EBITDA Margin (49.7%) due to a changing business mix.
Considering the ARPU trend over the last five years, a further decline in ARPUs is
expected, largely because of price war among the cellular operators, revenue
growth of the Company may come under pressure. However through diversifying
its product base, adding more value added features, GP is expected be able to
maintain its revenue level.

The rating also recognizes GP‟s profitability and operating cash flows,
which along with expected inflow from its proposed IPO would improve its credit
metrics.

The rating reflects GP‟s sustained leading market position in an increasingly

competitive telecom industry- a result of expanding network, growing product and
subscriber range, increasing business volume. Financial risk is high emanating
from the company’s highly leveraged capital structure that would be eased out
subsequent to recent fresh equity injection plan through IPO. The ratings have
drawn comfort from strong cash flows that helped in managing the coverage at an
adequate level.

GP’s total debt increased to BDT 18,883.99 million at FY08, (BDT

16,383.54 million in FY07) mainly due to issuance of BDT 4216.41 million bond;
nevertheless, the financial leverage is still comfortable for the rating supported by
its high EBITDA. GP‟s liquidity has historically been comfortable with cash and
EBITDA comfortably covering the current debt maturities and interest payments.
As of FY08, GP had comfortable liquidity, against the total debt it had cash
balance of BDT 7,020.67, which was 37.18% of total debt (FY07: 4.91%; FY06:
36.14%) and undrawn committed facilities of BDT 11,120 million.

The high CAPEX combination with working capital requirements resulted in

negative free cash flow (FCF) in the last few years (FY08: -189.81 million, FY07:
-7,792.66 million). The Company has BDT 8,950 million fund based limits and
BDT 19,532 million of non fund based limits. GP‟s high working capital
requirements with major CAPEX plan for the next few years are likely to keep
debt at high level.

Rating also considers the future growth potential of GP; effective and
efficient allocation and utilization of resources; shareholding structure,
composition of Board as well as willingness and ability of the shareholders to bail
out the company in case of need; high profitability level and leadership process.
The rating also draws comfort from the fact the organizational structure and
practices of the company avoids dependence of management team on one or a few
persons as well as coherence of the team, the independence of the management
from the Board of Directors, and good track record of the management till date in
terms of building up solid business mix, and maintaining operating efficiency.
CRAB also views Corporate Social Responsibility of GP as a positive factor to its
rating. GP adopted a framework approach in CSR whereby it aims to play a role in
the development process of Bangladesh by, on the other hand, introducing
services, which will ensure higher access to information and public services and on
the other, launching development projects to provide assistance in meeting the
basic needs of the poor people. In the process, to bring about sustainable change,
GP identified 4 focus areas for possible intervention, i.e. Poverty alleviation,
Healthcare, Empowerment, and Education.

GP makes effort to mitigate environmental risk through compliance with

Environmental Laws and Regulations and Other Compliance Requirements of the
country. Besides, the senior lenders i.e. IFC, ADB, NORFUND, Eksportfinas, and
NORAD of GP stipulated few binding clauses regarding environmental and safety
issues, which are to be adhered by GP. There is no instance of invoking the clauses
as of today. It indicates GP‟s capacity to address environmental risk.

Being an integral component of the information, communications and

technology (ICT) industry has been earmarked as the key driver of the economy‟s
growth momentum; the telecommunications industry is of strategic importance to
the nation. The Regulator has already taken appropriate measures to eliminate
various regulatory hurdles such as interconnection fees between operators, call
tariffs and the degree of foreign participation, etc. Within the industry,
liberalization policies have been introduced in varying degrees, thereby shaping the
level of competition faced by the operators. The Government policy with respect to
new technology is also an important element in shaping the future operating
landscape. The policies of the Regulator support future growth potential of
telecommunication industry.

Key Rating Drivers

¾ Maintaining revenue growth and profitability over the long term without
significant increase in financial leverage is positive for rating
¾ Increased competition from other players leading to a significant reduction
in profitability or revenue growth, or significant debt-led CAPEX or
acquisition activity increasing financial leverage, is negative for rating.

¾ The stable outlook reflects CRAB‟s expectation that GP is well positioned

to manage industry pressures while maintaining sound financial profile.
¾ It is noted that the modalities of issuing 3G license may constitute a
significant event risk if existing operators are kept outside from participating
in the licensing process.

Corporate rated 'AAA' has extremely strong capacity to meet its financial
commitments. 'AAA' is the highest issuer credit rating assigned by CRAB. AAA is
judged to be of the highest quality, with minimal credit risk.