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International Journal of Disaster Recovery and Business Continuity

Vol.11, No. 3, (2020), pp. 175–185

Impact of Liquidity on Profitability in Telecom Companies


Dr. Mohmad Mushtaq Khan *
Dr. K. Bhavana Raj **

* Dr. Mohmad Mushtaq Khan, Assistant Professor, KLHBS, KLEF, KL University Hyderabad, Aziz
Nagar (P.O), RVS Nagar,Moinabad Road, Near TSPA (Telangana State Police Academy), R.R. Dist. –
500 075, Telangana, India.

** Dr. K. Bhavana Raj, Assistant Professor, IPE (Institute of Public Enterprise), Survey No. 1266,
Shamirpet (V&M), Medchal-Malkajgiri Dist., Hyderabad, Telangana – 500101, India.

Abstract
Indian telecom sector has shown a tremendous growth in the last decade and this has attracted more
companies into this sector, which has resulted in a cutthroat competition. The Indian telecom sector is in
consolidation phase and we have observed some mergers in this sector in recent past. The competition
between the telecom players has increased due to the Reliance Jio entry into the market. This has resulted
in reduced profits or even losses to some players due the price war. The spectrum prices by the Govt.
have also played a role in increasing the stress of telecom players.The findings of this study indicate that
the companies’ focus on liquidity management rather than just focusing on profitability.
Key words: Liquidity, Profitability, Impact Analysis, Indian Telecom
Introduction
It is expected that four million direct and indirect jobs will be generated by telecom sector in India
according to estimates by Randstad India. The job will be as a result of government efforts and increased
penetration in rural areas and further by increase of sales in smartphones and rising internet usage.
Earlier studies have shown that there is a significant relation between the two. “Liquidity means how
quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever
you need it.” “Profitability is the ability of a business to earn a profit.” This study attempts to see if
liquidity has an impact on profitability in Indian Telecom sector. The results of the study can give telecom
companies an advice on liquidity and profitability.
Significance of the study
Telecom sector in India is in a consolidation phase and mergers and bankruptcy filings can be seen in
recent past in this sector. Many companies strive to survive in this stiff competition and companies are
trying to improve their profitability. However, the price war between the telecom players is making it
difficult for the companies to sustain. The decrease in average revenue per user (ARPU) has severely hit
the companies. It becomes very difficult for the companies even to maintain a proper liquidity level when
the major source of revenue (ARPU) is showing a decreasing trend.
Review of Literature
Sastry, S., & Murthy, A. (2019) in their study found that Ploughing Back of Profits helps to manage the
liquidity crisis of a company. Subrahmanyam, K., & Murthy, A. (2019) in their study found that major
determinants of profitability in banking sector are interest income and interest expenditure. Ali, S.,
Mazeed, S., & Reddy, R. (2019) found operating and non-operating expenses have an impact on

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Copyright ⓒ2020 SERSC
International Journal of Disaster Recovery and Business Continuity
Vol.11, No. 3, (2020), pp. 175–185

profitability. Hymavathi, K., & Rao, K. (2019) found that companies with high quality work life enjoy
high profits.
Jaggavarapu, B., & Babu, K. (2017) found that working capital has an impact on the profits. This means
that if we invest more funds in liquid assets, profitability will increase.
Krishnamoorthi, M. (2016) found that profitability also influences influence Dividend Payment.
Khan et al., (2015) found that profitability of Modaraba companies operating in Pakistan has not been
significantly influenced by liquidity indicators, only CATCL had a significant impact over ROA.
Victor Chukwunweike, E. (2014) found that there is a significant positive correlation between current
ratio and profitability, there is no definite significant correlation between Acid-test ratio and profitability
and there is no significant positive correlation between return on capital employed and profitability.
If telecom companies invest more funds in liquid assets they will not generate good return that is what has
been found so far from the earlier studies. In addition, if liquidity does not affect profitability of Indian
telecom companies, then they can invest more into current assets and have a safe working capital strategy.
Hypotheses
H01: Liquidity of Airtel does not impact the profitability of Airtel.
H02: Liquidity of Vodafone does not impact the profitability of Vodafone.
H03: Liquidity of Idea does not impact the profitability of Idea.
H04: Liquidity of Reliance does not impact the profitability of Reliance.
H05: Liquidity of Aircel does not impact the profitability of Aircel.
H06: Liquidity of BSNL does not impact the profitability of BSNL.
Objective of the study
To assess the impact of liquidity on profitability.
Methodology
Six companies were selected for the study and these companies are having highest market capitalization
and the period of study is from 2007-2018. The ratios were calculated and the impact will be assessed
with simple linear regression using IBM SPSS 24.
Data Analysis
The ratios, which measure liquidity and profitability, were calculated from the annual reports of selected
companies.
Table 1.1 Showing liquidity and profitability ratios of select telecom companies

Ratios\
Company Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
CR 0.32 0.39 0.48 0.39 0.47 0.3 0.3 1.01 0.8 0.79 0.49
Airtel
QR 0.32 0.38 0.48 0.39 0.47 0.3 0.3 1 0.8 0.78 0.48

DE 1.6 1.52 2.13 1.37 1.42 1.46 1.35 0.26 0.47 0.44 0.46

ROA 1.42 2.76 2.68 1.51 1.26 2.9 5.44 13.34 14.04 16.7 17

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International Journal of Disaster Recovery and Business Continuity
Vol.11, No. 3, (2020), pp. 175–185

ROE 4.8 11.05 10.21 4.53 3.79 8.58 13.36 27.29 31.76 39.23 43.74

ROCE 9.49 14.02 11.34 10.03 7.27 8.89 12.42 23.16 29.47 32.94 34.53

CR
0.52 1.1 0.94 0.32 0.63 1.25 6.8 8.06 5.86 6.14 6.14
QR 0.52 1.1 0.91 0.31 0.63 1.25 6.8 8.06 5.86 6.14
5.14
Vodafone DE 1.38 1.49 2.6 1.63 1.55 1.27 0.46 0.49 0.33 0.2
0.25
ROA 0 1.81 0 0 0 0 1.67 1.05 2.99 3.35
3.35
ROE 0 5.76 0 0 0 0 2.63 1.57 4.03 4.55 4.55
ROCE 1.4 6.95 4.54 4.59 3.61 0 6.57 4.3 5.29 4.46 4.46
CR
0.42 0.34 0.9 0.31 0.39 0.31 0.36 1.3 1.82 0.82 1.15
QR 0.42 0.34 0.9 0.3 0.38 0.3 0.36 1.3 1.87 0.88 1.17
DE 2.33 1.65 1.18 1.24 0.92 0.94 0.86 0.57 0.67 1.84 1.95
Idea ROA 0 3.83 5.45 4.27 2.48 1.93 3.32 4.74 5.71 9.76 7.47
ROE
0 11.39 15.02 11.43 6.08 4.58 7.13 9.29 13.51 36.51 35.05
ROCE 3.64 10.39 12.78 11.07 8.39 7.48 6.23 9.4 13.46 19.23 16.15
CR
0.61 0.72 1 1 0.89 0.88 0.61 2.17 2.73 1.65 1.87
QR 0.61 0.71 1 1 0.87 0.85 0.6 2.14 2.7 1.63 1.86
DE 1.52 1.26 0.89 1.07 0.98 0.67 0.66 0.48 0.6 0.82 0.71
Reliance ROA 0 0 0 0.05 0.77 0.18 0 0.54 6.48 5.06 7.87
ROE
0 0 0 2.27 1.61 0.34 0 0.94 12.55 11.4 13.64
ROCE 0 0.65 4.56 1.59 3.72 1.84 0 2.2 9.16 8.66 11.19
CR
0.36 0.63 0.19 0.27 0.63 1.65 2.91 2.18 2.2 2.2 2.2
QR 0.61 0.71 1 1 0.87 0.85 0.6 2.14 2.7 1.63 1.86
DE 1.52 1.26 0.89 1.07 0.98 0.67 0.66 0.48 0.6 0.82 0.71
Aircel ROA 0 0 0 0 0 0 0 2.26 7.28 7.05 7.28
ROE
0 0 0 0 0 0 0 5.27 11.96 10.58 11.96
ROCE 0 0.19 0 0 0 0 0 8.77 13.59 10.09 13.59
BSNL CR
1.09 0.78 1.11 0.88 1.02 1.28 1.14 2.01 2.21 2.26 2.3
QR 0.85 0.62 0.93 0.69 0.82 1.13 1.05 1.87 2.1 2.16 2.23
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International Journal of Disaster Recovery and Business Continuity
Vol.11, No. 3, (2020), pp. 175–185

DE 0.18 0.13 0.08 0.07 0.04 0.02 0.02 0.04 0.04 0.06 0.3
ROA 0 0 0 0 0 0 0 0.46 2.49 6.65 5.57
ROE
0 0 0 0 0 0 0 0.71 3.76 10.22 8.23
ROCE 0 0 0 0 0 0 0 1.88 5.79 9.92 7.72

Source: Ratios calculated from annual reports of selected companies


To assess the impact of liquidity on profitability, liquidity ratios are taken as independent variable and
profitability ratios are taken as dependent variable. Using simple linear regression, model was developed.
Model: Y = a + bX
Where Y = Dependent variables, a = Intercept, b = Slope and X = Independent variables.
The results of the regression analysis are represented in below tables
Table 1.2 showing regression results

S. No. Company Dependent R R2 Adjusted DF F Value Sig.


Variable R2
1 Airtel ROA .917 .841 .772 (3, 7) 12.29 .004
ROE .874 .764 .663 (3, 7) 7.543 .013
ROCE .876 .768 .669 (3, 7) 7.730 .013
2 Vodafone ROA .824 .679 .542 (3, 7) 4.938 .038
ROE .623 .388 .126 (3, 7) 1.482 .300
ROCE .449 .201 -.141 (3, 7) .589 .642
3 Idea ROA .755 .571 .387 (3, 7) 3.100 .098
ROE .737 .543 .347 (3, 7) 2.773 .120
ROCE .742 .550 .358 (3, 7) 2.856 .114
4 Reliance ROA .765 .585 .407 (3, 7) 3.288 .088
ROE .769 .592 .417 (3, 7) 3.385 .083
ROCE .759 .575 .393 (3, 7) 3.161 .095
5 Aircel ROA .897 .804 .720 (3, 7) 9.570 .007
ROE .928 .862 .802 (3, 7) 14.531 .002
ROCE .962 .925 .892 (3, 7) 28.595 .000
6 BSNL ROA .866 .750 .643 (3, 7) 7.016 .016
ROE .860 .739 .627 (3, 7) 6.612 .019
ROCE .905 .820 .742 (3, 7) 10.603 .005

Table 1.2 shows model summary, which shows the strength of relationship between dependent and
independent variables. The correlation between liquidity and profitability of Airtel is 0.91, 0.87 and 0.87,
for Vodafone the correlation between liquidity and profitability is 0.82, 0.62 and 0.44. The correlation

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International Journal of Disaster Recovery and Business Continuity
Vol.11, No. 3, (2020), pp. 175–185

between liquidity and profitability of Idea is 0.75, 0.73 and 0.74. The correlation between liquidity and
profitability of Aircel is 0.89, 0.92 and 0.96, and for BSNL the correlation is 0.86, 0.86 and 0.90.
From the results, it can be said that 84.1% variability in ROA, 76.4% variability in ROE and 66.9%
variability in ROCE in Airtel is explained by liquidity ratios (independent). In Vodafone, 67.9%
variability in ROA, 38.8% variability in ROE and 20.1% variability in ROCE is explained by liquidity
ratios. In Idea, 57.1% variability in ROA, 54.3% variability in ROE and 55% variability in ROCE is
explained by liquidity ratios. For Reliance, 58.5% variability in ROA. 59.2% variability in ROE and
57.5% variability in ROCE are explained by liquidity ratios. For Aircel, 80.4% variability in ROA, 86.2%
variability in ROE and 92.5% variability in ROCE is explained by liquidity ratios. For BSNL 75%
variability in ROA, 73.9% variability in ROE and 82% variability in ROCE are explained by liquidity
ratios.
Table 1.3 Coefficients

S. Company Dependent Significant Unstandardized Standardized t Sig.


No. Variable independent Coefficients Coefficients
Variables in
B Std. Beta
model
Error
(Constant) 14.954 6.288 2.378 .049
Current 180.286 246.013 6.519 .733 .487
1 Airtel ROA ratio
Quick - 246.345 -6.385 -.724 .492
ratio 178.401
Debt -8.285 2.753 -.775 -3.01 .020
Equity
(Constant) 36.649 17.105 2.143 .069
ROE Current 694.898 669.241 11.243 1.038 .334
ratio
Quick -697.11 670.143 -11.163 -1.040 .333
ratio
Debt -17.627 7.489 -.737 -2.35 .051
Equity
(Constant) 29.722 11.956 2.486 .042
Current 449.217 467.802 10.301 .960 .369
ROCE ratio
Quick - 468.432 -10.190 -.959 .370
ratio 449.009
Debt -12.223 5.235 -.725 -2.33 .052
Equity
(Constant) 2.025 1.467 1.381 .210
Current 1.198 1.089 2.610 1.100 .308
ROA ratio
Quick -1.120 1.072 -2.384 -1.045 .331
2 Vodafone ratio
Debt -1.045 .781 -.564 -1.338 .223
Equity
(Constant) 3.487 3.242 1.075 .318
Current 1.289 2.408 1.754 .535 .609
ROE ratio
Quick -1.259 2.369 -1.674 -.531 .612

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International Journal of Disaster Recovery and Business Continuity
Vol.11, No. 3, (2020), pp. 175–185

ratio
Debt -1.521 1.728 -.513 -.880 .408
Equity
(Constant) 1.070 3.283 .326 .754
Current .415 2.438 .638 .170 .870
ROCE ratio
Quick .101 2.399 .152 .042 .968
ratio
Debt 1.288 1.749 .490 .736 .486
Equity
(Constant) 3.638 2.611 1.394 .206
Current -78.045 41.670 -14.801 -1.873 .103
3 Idea ROA ratio
Quick 78.422 40.221 15.339 1.950 .092
ratio
Debt -8.285 2.753 -.775 -3.01 .020
Equity
(Constant) 2.398 11.814 .203 .845
Current - 188.544 -12.381 -1.519 .173
ROE ratio 286.378
Quick 288.325 181.990 12.857 1.584 .157
ratio
Debt 5.581 6.104 .273 .914 .391
Equity
(Constant) 8.414 4.482 1.877 .103
Current - 71.528 -13.876 -1.716 .130
ROCE ratio 122.751
Quick 123.596 69.042 14.410 1.790 .117
ratio
Debt .455 2.316 .058 .197 .850
Equity
(Constant) -2.443 4.633 -.527 .614
Current -47.027 85.613 -11.116 -.549 .600
ROA ratio
4 Reliance Quick 50.768 85.985 11.882 .590 .573
ratio
Debt .320 3.502 .033 .091 .930
Equity
(Constant) -5.031 8.582 -.586 .576
Current -89.261 158.590 -11.293 -.563 .591
ROE ratio
Quick 96.441 159.279 12.080 .605 .564
ratio
Debt 1.250 6.487 .069 .193 .853
Equity
(Constant) .321 6.177 .052 .960
Current -90.055 114.147 -16.149 -.789 .456
ROCE ratio
Quick 94.753 114.643 16.823 .827 .436

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International Journal of Disaster Recovery and Business Continuity
Vol.11, No. 3, (2020), pp. 175–185

ratio
Debt -1.158 4.669 -.091 -.248 .811
Equity
5 Aircel ROA (Constant) -10.215 4.226 -2.41 .046
Current 1.745 .867 .525 2.011 .084
ratio
Quick 4.111 1.005 .877 4.090 .005
ratio
Debt 5.373 3.071 .505 1.749 .124
Equity
(Constant) -15.561 5.711 -2.725 .030
Current 2.625 1.172 .491 2.240 .060
ROE ratio
Quick 6.833 1.358 .906 5.031 .002
ratio
Debt 7.763 4.150 .454 1.871 .104
Equity
(Constant) -15.483 4.724 -3.278 .014
Current 2.537 .970 .424 2.617 .035
ROCE Ratio
Quick 7.893 1.123 .935 7.026 .000
Ratio
Debt 6.951 3.433 .363 2.025 .083
Equity
(Constant) -1.612 3.193 -.505 .629
Current -7.089 13.267 -1.725 -.534 .610
6 BSNL ROA ratio
Quick 9.654 12.472 2.497 .774 .464
ratio
Debt 7.540 5.587 .260 1.350 .219
Equity
(Constant) -2.518 4.940 -.510 .626
Current -10.166 20.523 -1.635 -.495 .636
ROE ratio
Quick 14.087 19.293 2.408 .730 .489
ratio
Debt 10.737 8.642 .245 1.242 .254
Equity
ROCE (Constant) -3.853 4.074 -.946 .376
Current -4.437 16.928 -.719 -.262 .801
ratio
Quick 9.193 15.914 1.584 .578 .582
ratio
Debt 6.317 7.128 .145 .886 .405
Equity

Table 1.3 shows the coefficients and p values. The regression equations can be formulated from
this table.
Table 1.4 Hypotheses testing
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ISSN: 2005-4289 IJDRBC
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International Journal of Disaster Recovery and Business Continuity
Vol.11, No. 3, (2020), pp. 175–185

S. No. Null Hypotheses P Value Result


H01a: Liquidity does not have Rejected
significant impact on ROA of Airtel. 0.004<0.05

1 H01b: Liquidity does not have Rejected


significant impact on ROE of Airtel. 0.013<0.05
H01c: Liquidity does not have Rejected
significant impact on ROCE of Airtel. 0.013<0.05

H02a: Liquidity does not have 0.038 < 0.05 Rejected


significant impact on ROA of
Vodafone.
2
H02b: Liquidity does not have 0.300 > 0.05 Accepted
significant impact on ROE of
Vodafone.
H02c: Liquidity does not have 0.642 > 0.05 Accepted
significant impact on ROCE of
Vodafone.
H03a: Liquidity does not have 0.098 > 0.05 Accepted
significant impact on ROA of Idea.
3
H03b: Liquidity does not have 0.120 > 0.05 Accepted
significant impact on ROE of Idea.
H03c: Liquidity does not have 0.114 > 0.05 Accepted
significant impact on ROCE of Idea.
4 H04a: Liquidity does not have 0.088 > 0.05 Accepted
significant impact on ROA of Reliance.
H04b: Liquidity does not have 0.083 > 0.05 Accepted
significant impact on ROE of Reliance.
H04c: Liquidity does not have 0.095 > 0.05 Accepted
significant impact on ROCE of
Reliance.
5 H05a: Liquidity does not have 0.007 < 0.05 Rejected
significant impact on ROA of Aircel.
H05b: Liquidity does not have 0.002 < 0.05 Rejected
significant impact on ROE of Aircel.
H05c: Liquidity does not have 0.000 < 0.05 Rejected
significant impact on ROCE of Aircel.
6 H06a: Liquidity does not have 0.016 < 0.05 Rejected
significant impact on of BSNL.
H06b: Liquidity does not have 0.019 < 0.05 Rejected
significant impact on ROE of BSNL.
H06c: Liquidity does not have 0.005 < 0.05 Rejected
significant impact on ROCE of BSNL.
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International Journal of Disaster Recovery and Business Continuity
Vol.11, No. 3, (2020), pp. 175–185

From the table 1.4, it can be observed that in most of the companies, liquidity had a significant impact
on profitability.
Findings
1. The ratios concerning liquidity have an impact on all profitability ratios of Airtel, i.e. Return on
Assets (ROA), Return on Equity (ROE) and Return on Capital (ROC), which means company
should focus on liquidity management in order to improve its profitability.
2. The liquidity ratios have a significant impact on Return on Assets of Vodafone, which means
liquidity has affected only Return on assets of the company.
3. Liquidity ratios have not shown any significant impact on profitability ratios of Idea, therefore
liquidity did not affect the company’s profitability.
4. Liquidity ratios of Reliance have not shown a significant impact on profitability of Reliance,
which means profitability, has not shown any significant variability because of liquidity.
5. The liquidity ratios of Aircel have shown a significant impact on profitability ratios, which means
liquidity, had affected the ROA, ROE and ROC of the company.
6. There was an impact of liquidity ratios on the profitability ratios of BSNL, which signifies,
company’s profitability performance was affected by the liquidity.
If investment in liquidity is increased beyond a certain limit, it will have a negative impact on profitability
(Assaf Neto, A.) (2003) of a business, because investments made in current assets do not give higher
returns. However, having said so does not mean company should not invest in current assets, because lack
of liquidity can lead to failure of a business in meeting its short-term obligations and this can lead to
insolvency. Therefore, a business has to invest in current assets keeping in view the short-term
obligations, so that all the day-to-day operations of the business run smoothly. The findings of this study
show that liquidity has a significant impact on profitability of telecom companies, which means all the
telecom companies, should focus on liquidity management rather than just focusing on profitability. The
Indian telecom sector, which is going through a tough phase because of intense competition, should focus
on proper liquidity management apart from focusing on profitability and efficiency.
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