ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
B. LIQUIDITY Liquidity Sources
The main source of our corporate liquidity is cash generated by operating activities and long-term and short-term loans under credit facilities available from banks. See "— Internal Liquidity Sources" and "— External Liquidity Sources"
below for additional information. We aim to maintain a strong financial position and have enough liquidity for our operations and to support our growth. Our main cash requirements consist of operating expenses, cash payments relating to the acquisition of properties and purchase of equipment, repayment of borrowings from banks, payment of salaries, payment of cash dividends and corporate income tax. See "— Cash Flows" below for additional information. See also our consolidated statement of cash flows included in our Consolidated Financial Statements included in this annual report on Form 20-F. We seek to keep optimizing our balance sheet and financing capabilities.
We divide our liquidity sources into internal and external liquidity sources.
A. Internal Liquidity Sources
To fulfill our obligations we rely primarily on our internal liquidity. As of December 31, 2020, we had Rp20,589 billion (US$1,465 million) in cash and cash equivalents available, representing an increase of Rp2,348 billion, or 12.9%, from Rp18,241 billion as of December 31, 2019.
Cash receipts from revenues comprised primarily cash receipts from revenues from customers, which amounted to Rp133,610 billion (US$9,510 million) in 2020, and were used for the payment of operating expenses, the acquisition of property and equipment, the payment of cash dividends and the repayment of loans and other borrowings.
Our internal liquidity strength is reflected in our current ratio, which we calculate as current assets divided by current liabilities. As of December 31, 2019 and 2020, our current ratio was 0.67 and 0.68, respectively.
B. External Liquidity Sources
Our primary external sources of liquidity are short and long-term bank loans, bonds and notes, other borrowings and two-step loans. We had external liquidity from loans and other borrowings of Rp64,722 billion as of December 31, 2020.
External Liquidity Sources
As of December 31, 2020, we had undrawn loan facilities which included the following sources of unused liquidity:
• a credit facility with BCA in the amount of Rp7,550 billion;
• a credit facility with Bank Mandiri in the amount of Rp2,136 billion;
• a credit facility with BTPN Bank in the amount of Rp1,664 billion;
• a credit facility with BNI in the amount of Rp1,551 billion;
• a credit facility with HSBC Bank in the amount of Rp1,531 billion;
• a credit facility with Bank of China in the amount of Rp1,000 billion;
• a credit facility with Bank CIMB Niaga in the amount of Rp628 billion;
• a credit facility with DBS Bank in the amount of Rp626 billion;
• a credit facility with Citibank in the amount of Rp500 billion;
• a credit facility with Permata Bank in the amount of Rp400 billion;
• a credit facility with UOB Bank in the amount of Rp300 billion; and
• a credit facility with MUFG Bank in the amount of Rp223 billion;
Cash Flows
The following table sets out information concerning our consolidated cash flows, as set out in (and prepared on the same basis as) our Consolidated Financial Statements for 2018, 2019 and 2020:
Years Ended December 31,
2018 2019 2020
(Rp billion) (Rp billion) (Rp billion) (US$ million)
Net cash flows:
provided by operating activities 45,671 58,966 65,317 4,649
used in investing activities (35,090) (35,875) (35,099) (2,499)
used in financing activities (18,458) (22,175) (27,910) (1,985)
Net increase (decrease) in cash and cash equivalents (7,877) 916 2,308 165
Effect of exchange rate changes on cash and cash equivalents 171 (109) 40 2
Allowance for expected credit losses on cash and cash equivalents (4) (1) - 0
Cash and cash equivalents at beginning of year 25,145 17,435 18,241 1,298
Cash and cash equivalents at end of year 17,435 18,241 20,589 1,465
Year ended December 31, 2020 compared to year ended December 31, 2019
As of December 31, 2020, total cash and cash equivalents amounted to Rp20,589 billion, an increase of Rp2,348 billion, or 12.9%, from Rp18,241 billion as of December 31, 2019.
In 2020, operating activities generated the largest cash receipts which amounted to Rp139,451 billion, or 84.8%
of total cash receipts, followed by financing activities which generated cash receipts of Rp24,469 billion, or 14.9% of total cash receipts, and investing activities which generated cash receipts of Rp475 billion, or 0.3% of total cash receipts. In total, cash receipts decreased by Rp4,282 billion, or 2.5%, compared to 2019.
In 2020, cash used for operating activities amounted to Rp74,134 billion, or 45.7% of total cash disbursements, followed by cash used for financing activities which amounted to Rp52,379 billion, or 32.4% of total cash disbursements, and cash used for investing activities which amounted to Rp35,574 billion, or 21.9% of total cash disbursements.
Compared to 2019, cash disbursements decreased by Rp5,674 billion, or 3.4%.
Cash Flows from Operating Activities
Net cash generated by operating activities in 2020 was Rp65,317 billion (US$4,649 million), compared to Rp58,966 billion in 2019, representing an increase of Rp6,351 billion, or 10.8%.
Cash receipts from operating activities in 2020 amounted to Rp139,451 billion, an increase of Rp690 billion, or 0.5%, compared to 2019. Cash receipts principally originated from:
• cash receipts from customers and other operators of Rp133,610 billion;
• cash receipts from tax refunds for corporate income tax and VAT of Rp4,687 billion, in aggregate; and
• cash receipts from finance income of Rp806 billion.
Cash disbursements from operating activities in 2020 amounted to Rp74,134 billion, a decrease of Rp5,661 billion, or 7.1%, compared to 2019. The cash disbursements were primarily used for:
• cash payments for expenses of Rp40,533 billion;
• cash payments for corporate and final income taxes of Rp11,452 billion
• cash payments to employees of Rp11,057 billion;
• cash payments for finance costs of Rp4,768 billion;
• cash payments for short-term lease and low-value assets lease of Rp3,731 billion; and
• cash payments for Value Added Taxes-net of Rp2,593 billion.
Cash Flows used in Investing Activities
Net cash flows used in investing activities in 2020 amounted to Rp35,099 billion (US$2,499 million), compared to Rp35,875 billion in 2019, representing a decrease of Rp776 billion, or 2.2%.
Cash receipts from investing activities amounted to Rp475 billion, a decrease of Rp2,858 billion, or 85.7%, compared to 2019. The cash receipts principally originated from:
• proceeds from sale of property and equipment of Rp236 billion; and
• proceeds from insurance claims of Rp234 billion.
Cash disbursements from investing activities in 2020 amounted to Rp35,574 billion, a decrease of Rp3,634 billion, or 9.3%, compared to 2019. The cash disbursements were used for:
• purchases of property and equipment of Rp29,403 billion;
• additional long-term investments in financial instrument of Rp2,809 billion, primarily consisting of the subscription for convertible bonds in Gojek and other equity investments;
• purchases of intangible assets of Rp2,538 billion; and
• placements in other current financial assets - net in the amount of Rp796 billion.
Cash Flows used in Financing Activities
Net cash flows used in financing activities in 2020 amounted to Rp27,910 billion (US$1,985 million), compared to Rp22,175 billion in 2019, representing a decrease of Rp5,735 billion, or 25.9%.
Cash receipts from financing activities amounted to Rp24,469 billion in 2020, a decrease of Rp2,114 billion, or 8.0%, compared to 2019. The cash receipts originated from proceeds from loans and other borrowings of Rp24,469 billion.
Cash disbursements from financing activities amounted to Rp52,379 billion in 2020, an increase of Rp3,621 billion, or 7.4%, compared to 2019. The cash disbursements were used for:
• repayments of loans and other borrowings of Rp24,380 billion;
• cash dividends paid to the Company's stockholders of Rp15,262 billion;
• cash dividends paid to non-controlling interests of subsidiaries of Rp7,778 billion; and
• payments of principal portion of lease liabilities of Rp4,959 billion.
Current Assets
As of December 31, 2020, our current assets were Rp46,529 billion (US$3,312 million) compared to Rp40,917 billion as of December 31, 2019, an increase of Rp5,612 billion, or 13.7%. This increase was primarily due to:
• an increase in our cash and cash equivalents of Rp2,348 billion, or 12.9%, from Rp18,241 billion as of December 31, 2019 to Rp20,589 billion as of December 31, 2020, primarily due to an increase in cash deposited with banks in the amount of Rp2,008 billion;
• an increase in other current assets of Rp1,045 billion, or 18.9%, from Rp5,541 billion as of December 31, 2019 to Rp6,586 billion as of December 31, 2020, primarily due to an increase in advances by Rp692 billion and prepaid annual frequency licenses of Rp681 billion;
• an increase in prepaid income taxes by Rp769 billion, or 248.1%, from Rp310 billion as of December 31, 2019 to Rp1,079 billion as of December 31, 2020, primarily due to an increase in our subsidiaries corporate income tax;
• an increase in other current financial assets by Rp749 billion, or 135.2%, from Rp554 billion as of December 31, 2019 to Rp1,303 billion as of December 31, 2020, primarily due to an increase in time deposits of Rp920 billion;
• an increase in contract assets by Rp407 billion, or 64.7%, from Rp629 billion as of December 31, 2019 to Rp1,036 billion as of December 31, 2020, primarily due to an increase in Enterprise's contract assets from government customers in connection with the request to delay of the billing considering the reallocation of government's budget by them related to COVID-19 recovery program in 2020;
• an increase in inventory by Rp398 billion, or 68.0%, from Rp585 billion as of December 31, 2019 to Rp983 billion as of December 31, 2020, primarily due to an increase in component, SIM cards and blank prepaid vouchers.
This increase was partially offset by a decrease in our prepaid other taxes of Rp306 billion, or 9.4%, from Rp3,251 billion as of December 31, 2019 to Rp2,945 billion as of December 31, 2020, primarily due to a decrease in VAT payable by Telkom and its subsidiaries.
Current Liabilities
As of December 31, 2020, our current liabilities were Rp68,500 billion (US$4,875 million) compared to Rp61,349 billion as of December 31, 2019, an increase of Rp7,151 billion, or 11.7%. This increase was primarily due to:
• an increase in trade and other payable of Rp3,253 billion, or 22.7%, from Rp14,324 billion as of December 31, 2019 to Rp17,577 billion as of December 31, 2020 due to an increase in trade payables to third parties;
• an increase in short-term bank loans and current maturities of long-term liabilities of Rp1,833 billion, or 10.5%, from Rp17,451 billion as of December 31, 2019 to Rp19,284 billion as of December 31, 2020, primarily due to an increase in short-term bank loans of Rp1,229 billion and an increase in current maturities of long-term liabilities of Rp604 billion. We primarily increased our short-term bank loans to have additional funds to use for working capital purposes. The increase in current maturities of long term liabilities was primarily due to an increase in current maturities of bank loans of Rp2,214 billion and other borrowings of Rp413 billion. This increase was offset by a decrease in bonds and notes with maturity dates falling in 2020 of Rp2,013 billion;
• an increase in accrued expenses of Rp1,504 billion, or 11.8%, from Rp12,761 billion as of December 31, 2019 to Rp14,265 billion as of December 31, 2020 due to an increase in accrued expenses for operation, maintenance and telecommunication services of Rp934 billion and an increase in salaries and benefit of Rp741 billion;
• an increase in customers deposits of Rp735 billion, or 57.0%, from Rp1,289 billion as of December 31, 2019 to Rp2,024 billion as of December 31, 2020, primarily due to an increase in incidental deposits from new IndiHome customers; and
• an increase in contract liabilities of Rp402 billion, or 5.4%, from Rp7,430 billion as of December 31, 2019 to Rp7,832 billion as of December 31, 2020, primarily due to an increase in advances from enterprise customers of Rp623 billion.
This increase was partially offset by:
• a decrease in other tax liabilities of Rp464 billion, or 24.6%, from Rp1,886 billion as of December 31, 2019 to Rp1,422 billion as of December 31, 2020, due to a Rp503 billion decrease in VAT payable by our subsidiaries; and
• a decrease in current income tax liabilities of Rp254 billion, or 16.4%, from Rp1,545 billion as of December 31, 2019 to Rp1,291 billion as of December 31, 2020, due to a decrease in corporate income tax payable by Telkom by Rp245 billion.
Working Capital
As of December 31, 2020, our working capital, defined as the difference between current assets and current liabilities as of the same date, decreased by Rp1,539 billion compared to our working capital as of December 31, 2019. As at December 31, 2020, our current assets were lower than our current liabilities, resulting in a current ratio, defined as our current assets divided by our current liabilities, of 0.68 as of December 31, 2020. We closely monitor our working capital and generally try to lower it to maintain it at an optimal level so that we may manage our working capital efficiently, without restricting our ability to meet our current liabilities. This decrease in working capital was primarily due to:
• an increase in current assets of Rp5,612 billion, or 13.7%, from Rp40,917 billion as of December 31, 2019 to Rp46,529 billion as of December 31, 2020. See"— Current Assets."
• an increase in current liabilities of Rp7,151 billion, or 11.7% from Rp61,349 billion as of December 31, 2019 to Rp68,500 billion as of December 31, 2020. See"—Current Liabilities."
We believe that our available cash, working capital, cash generated by future operations, and borrowings from banks and other financial institutions are sufficient for our present requirements. We expect that our working capital requirements will continue to be addressed by various funding sources, including cash from operating activities, bank loans and potential offerings of debt securities in the capital markets.
Capital Structure
Our capital structure as of December 31, 2020 is described as follows:
Amount Portion (Rp billion) (%)
Short-term debt 9,934 5.9
Long-term debt 54,788 32.8
Total debt 64,722 38.7
Equity attributable to owners of the parent company 102,374 61.3
Total 167,096 100.0
As of December 31, 2020, our net debt to equity ratio was 0.43 and our debt service coverage ratio was 2.5 times, indicating our strong ability to meet our debt obligations. Our debt levels are primarily driven by our plans to develop our existing and new strategic businesses. In determining our optimum debt levels, we also consider our debt ratios with reference to regional peers in the telecommunications industry.
For further information on our Company's management policies related to capital, see Note 36 to our Consolidated Financial Statements.
Indebtedness
Consolidated total indebtedness (consisting of short-term bank loans, long-term liabilities, current maturities of long-term liabilities and other borrowings) as of December 31, 2018, 2019 and 2020 were as follows:
As of December 31,
2018 2019 2020
(Rp billion) (Rp billion) (Rp billion) (US$ million)
Indonesian Rupiah 41,722 65,085 63,256 4,502
U.S. Dollar(1) 1,631 1,315 1,007 72
Japanese Yen(2) 602 491 418 30
Malaysian Ringgit(3) 127 66 41 3
Total 44,082 66,957 64,722 4,607
Notes:
(1) The amounts as of December 31, 2018, 2019 and 2020 translated into Rupiah at Rp14,380, Rp13,882.5, and Rp14,050 = US$1, respectively, being the Reuters average rates for U.S. Dollar at each of those dates.
(2) The amounts as of December 31, 2018, 2019 and 2020 translated into Rupiah at Rp130.63, Rp127.79, and Rp136.03 = Yen 1, respectively, being the Reuters average rates for Yen at each of those dates.
(3) The amount as of December 31, 2018, 2019 and 2020 translated into Rupiah at Rp3,476.39, Rp3,391.77, and Rp3,481.17 = Ringgit 1, being the Reuters average rates for Ringgit.
Of our total indebtedness, as of December 31, 2020, Rp24,089 billion, Rp20,193 billion, Rp13,974 billion, and Rp6,466 billion were scheduled for repayment in 2021, 2022-2023, 2024-2025 and thereafter, respectively.
For further information on our Company's indebtedness, see Notes 20 and 21 to our Consolidated Financial Statements.
Capital Expenditures
In 2020, we incurred capital expenditures of Rp29,279 billion (US$2,084 million). Our capital expenditures are grouped into the following categories for planning purposes:
• Broadband services, which consist of mobile (4G) and fixed broadband access;
• Network infrastructure, which consists of core transmission network, metro-ethernet and Regional Metro Junction ("RMJ") and IP backbone;
• Data centers, IT, applications and content, as well as service node; and
• Capital expenditure supports, such as capital expenditure for the construction or maintenance of telecommunications towers.
Of our Rp29,279 billion capital expenditure in 2020, Telkom, as the parent company, incurred capital expenditures of Rp15,205 billion (US$1,082 million), Telkomsel incurred capital expenditures of Rp9,820 billion (US$699 million) and our other subsidiaries incurred capital expenditures of Rp4,254 billion (US$303 million). The following table set forth our capital expenditure breakdown between Telkom as a parent company, Telkomsel and our other subsidiaries for the periods indicated.
Years Ended December 31,
2018 2019 2020
(Rp billion) (Rp billion) (Rp billion) (US$ million)
Telkom (parent company) 13,186 16,956 15,205 1,082
Subsidiaries
Telkomsel 13,885 11,849 9,820 699
Others 6,549 7,680 4,254 303
Subtotal for subsidiaries 20,434 19,529 14,074 1,002
Total for Telkom Group 33,620 36,485 29,279 2,084
Material Commitments for Capital Expenditures
As of December 31, 2020, we had material commitments for capital expenditures under contractual arrangements totaling Rp10,727 billion (US$763 million), principally relating to procurement and installation of data, internet and information technology, cellular, transmission equipment and cable network in Indonesia. We also have capital expenditure planned for investments outside Indonesia, in particular, in relation to Telin.
The following table sets forth information on our committed capital expenditures under contractual arrangements as of December 31, 2020.
Currencies Amounts in Foreign Currencies Equivalent in Rupiah
(in millions) (in billions)
Rupiah — 9,798
U.S. Dollar 66.05 929
Euro — —
HK$ 0.24 0
Total 10,727
For a more detailed discussion regarding our material commitments for capital expenditures, see Note 34a to our Consolidated Financial Statements.
Source of Funds
We have historically funded our capital expenditures primarily with cash generated from operations. In 2021, we expect that our capital expenditure to revenue ratio will range approximately from 24% to 27%. We expect that the most significant proportions of capital expenditure will be allocated to the development of infrastructure to support broadband services, both for mobile and fixed line broadband services. A portion of our capital expenditure is allocated to our subsidiaries, primarily to Telkomsel. We expect to fund the above commitments with our internal and external source of funds.
The realization and use of future capital expenditures may differ from the amounts indicated above due to various factors, including but not limited to changes in the Indonesian and global economy, the Rupiah/U.S. Dollar or other applicable foreign exchange rates, the availability of supply or vendor or other financing on terms acceptable to us, and also any technical or other problems in the implementation.
Critical Accounting Policies, Estimates and Judgments
For a complete discussion of our critical accounting policies, estimates and judgments, see Note 2.aa to our Consolidated Financial Statements.
New Standards and Interpretations
We have applied IFRS 16 (Leases) ("IFRS 16") since January 1, 2019. Previous financial years have not been restated following these changes in accounting policies. See Note 2.aa to the Consolidated Financial Statements included in this Form 20-F. As a result, our Consolidated Financial Statements as of and for the year ended December 31, 2018 are not directly and fully comparable to our consolidated financial statements as of and for the years ended December 31, 2019 and 2020.
IFRS 16 sets out a comprehensive model for identification of lease agreements and their treatment in the financial statements of both lessees and lessors. IFRS 16 introduces a control model for the identification of leases, distinguishing between leases and service contracts on the basis of whether there is an identified asset controlled by the customer.
IFRS 16 supersedes a number of existing standards and interpretations, including IAS 17 (Leases), IFRIC 4 (Determining whether an Arrangement contains a Lease), SIC 15 (Operating Leases - Incentives), and SIC 27 (Evaluating the Substance of Transactions Involving the Legal Form of a Lease). We elected to apply IFRS 16 by using the modified retrospective approach. Therefore, we recognize the cumulative effect of adopting IFRS 16 as an adjustment to the opening balance of retained earnings at January 1, 2019, with no restatement of comparative information.
Under IAS 17 (Leases), lessees recognized a periodic lease expense over the lease term for operating leases. The adoption of IFRS 16 resulted in our consolidated future minimum lease payments under non-cancelable operating leases to be recognized as lease liabilities with corresponding right-of-use assets. These amounts are adjusted for the effects of discounting and of the practical expedients available under the transition guidance for IFRS 16 that we selected.
We elected the package of practical expedients permitted under the transition guidance for IFRS 16, which among other things, allows us to carryforward the historical lease assessments. This allowed us not to reassess our prior conclusions on lease identification, lease classification, and initial direct costs.
Please see Note 2.l to our Consolidated Financial Statements for a detailed discussion of IFRS 16. For other new standards, amendments to standards and interpretations not yet adopted in 2020 which have not been applied in preparing the Consolidated Financial Statements, see Note 39 to our Consolidated Financial Statements. For amendments to standards and interpretations adopted in 2020 which have not been applied in preparing the Consolidated Financial Statements, see Note 2.a. Such amendments had no material impact on our Consolidated Financial Statements.