Liquidity-profitability analysis & prediction of bankruptcy - A study of select telecom companies

Abstract

Indian Telecommunication sector is going through intense competition and this has increased after the Reliance Jio entered into the Indian Telecom sector. Companies have started to enter into mergers in order to survive in this competitive environment. Due to this intense competition, one of the Telecom companies has already filed for bankruptcy and other players in the sector have shown a low profitability performance due to the price war between the players. Despite many initiatives by the government, the sector is still not showing evident signs of improvement and if this condition persists, there can be some more bankruptcy filings in this sector. The present study aims at analyzing the financial health of Indian Telecom Industry and predicting the bankruptcy of selected companies. There are around ten telecom companies in Indian Telecom Industry. The top six companies were selected for the study on the basis of market capitalization. The study analyzedimpact of liquidity and profitability on Altman Z-score model developed exclusively for service companies. The study is empirical and descriptive in nature and the period under study was from 2006-07 to 2016-17. The data was extracted from the financial reports of selected telecom companies. The study found that most of the telecom companies in Indian Telecom Industry fall in "Grey" zone of Altman Z-score model, which is not a good sign for the Industry and study also found out that most of the companies, did not perform well in terms of liquidity and profitability. There was a significant impact of liquidityZ-score, but impact of profitability on Z-score not significant. The study concluded that Indian Telecom companies should improve their liquidity and profitability performance so that the sector shows signs of stability.