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Reliance Comm. 3QFY08: Our view - Views on News from Equitymaster

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Reliance Comm. 3QFY08: Our view
Jan 31, 2008

Introduction to results
  • Net sales grow 28% YoY in 3QFY08, 31% YoY in 9mFY08. Growth led by strong addition to the subscriber base - wireless subscriber base cross the 41 m – net addition of 4.6 m during the third quarter.

  • Operating margins expand by 2%, led by lower access charges and other costs (each as percentage of sales).

  • Net profits grow 49% YoY in 3QFY08, led by operating margin expansion and strong rise in interest income. 9mFY08 profits growth of 82% YoY aided by margin expansion, higher interest income and a large forex gain due to change in accounting policy.

Consolidated financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 37,257 47,763 28.2% 103,889 135,774 30.7%
Expenditure 22,323 27,678 24.0% 64,665 78,738 21.8%
Operating profit (EBDIT) 14,934 20,085 34.5% 39,224 57,036 45.4%
Operating profit margin (%) 40.1% 42.1%   37.8% 42.0%  
Other income 296 979 231.1% 1,425 1,790 25.6%
Interest expense/(income) (699) (1,518) 117.2% 189 (3,916)  
Depreciation 6,524 7,252 11.1% 18,275 20,197 10.5%
Profit before tax 9,404 15,330 63.0% 22,184 42,545 91.8%
Miscellaneous income/(expenditure) (30) -   (330) 12,217  
Tax 130 1,379 960.0% 466 3,109 566.9%
Minority interest (0) 220   (0) 12,664  
Share of associates (0) (3)   (0) (11)  
Profit after tax/(loss) 9,244 13,728 48.5% 21,388 38,979 82.2%
Net profit margin (%) 24.8% 28.7%   20.6% 28.7%  
No. of shares         2,062.8  
Diluted Earnings per share (Rs)*         25.6  
P/E ratio (x)*         23.7  
* On a trailing 12 months basis

What has driven performance in 3QFY08?
  • RCL recorded a 28% YoY growth in topline during 3QFY08. This was largely a result of strong accretion to the subscriber base, which increased by 4.6 m during the third quarter. Apart from this, the company also benefited from a 3% YoY increase in its average revenue per user (ARPU). The company’s wireless subscriber base (inclusive of GSM and CDMA) almost crossed the 41 m mark by the end of December 2007. The 1% YoY decline in its minutes of usage (MoU), however, pared a further improvement in topline during 3QFY08.

    3QFY08 saw RCL getting government approval and spectrum to rollout GSM based mobile services in additional 14 circles. Towards this approval, the company has made a payment of Rs 16.5 bn as the license fee. RCL already operates GSM services in 8 telecom circles in India and has a subscriber base on 6 m connected through this technology in these circles.

    The second services line of the company – Global (inclusive of national and international long distance telephony), reported a marginal decline in revenues during 3QFY08, which was largely due to the 18% YoY decline in average revenue per minute. As for the third business segment of ‘Broadband’, sales grew by 44% YoY, led by a 70% YoY growth in the number of access lines, which increased from 530,000 at the end of 3QFY07 to 901,000 at the end of 3QFY08. In line with the industry performance, however, realisations were under pressure as average revenue per line declined by 15% YoY.

    Segment-wise performance
      3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Wireless            
    Revenue (Rs m) 27,520 39,567 43.8% 50,064 110,527 120.8%
    % of total revenues* 62.5% 68.9%   62.2% 67.9%  
    Minutes billed (m) 38,100 52,500 37.8% 103,060 149,000 44.6%
    Revenue per minute (Rs) 0.72 0.75 4.3% 0.49 0.74 52.7%
    EBIT margin 20.0% 27.1%   30.6% 27.4%  
    EBIT per minute (Rs) 0.1 0.2 41.7% 0.1 0.2 36.7%
    Global (ILD & NLD)            
    Revenue (Rs m) 13,335 13,299 -0.3% 25,498 39,494 54.9%
    % of total revenues* 30.3% 23.2%   31.7% 24.3%  
    Minutes billed (m) 6,187 7,542 21.9% 15,495 22,312 44.0%
    Revenue per minute (Rs) 2.16 1.76 -18.2% 1.65 1.77 7.6%
    EBIT margin 18.7% 14.6%   21.4% 14.5%  
    EBIT per minute (Rs) 0.4 0.3 -36.3% 0.4 0.3 -26.8%
    Broadband            
    Revenue (Rs m) 3,161 4,564 44.4% 4,982 12,768 156.3%
    % of total revenues* 7.2% 7.9%   6.2% 7.8%  
    Access lines ('000) 530 901 70.0% 530 901 70.0%
    Revenue per line (Rs) 5,963 5,065 -15.1% 9,399 14,171 50.8%
    EBIT margin 34.5% 35.4%   49.1% 34.5%  
    * Excluding interest and other revenue

  • Lower access charges and other costs (both as percentage of sales) helped RCL report a 2% improvement in its operating margins during 3QFY08. While access charges declined from 18.7% of 3QFY07 sales to 16.4% of sales in 3QFY08, the latter declined from 28.5% to 28.1%. Based on business segments, wireless and broadband segments recorded improvement in profitability while the long distance business saw its PBIT margins decline to 14.6% in 3QFY08, from 18.7% in 3QFY07.

  • RCL’s net profits grew by 49% YoY during 3QFY08. This was chiefly led by expansion in operating margins and a strong rise in interest income (up 117% YoY). The company’s 9mFY08 net profit growth of 82% YoY was aided by margin expansion, higher interest income and a large forex gain due to change in accounting policy.

What to expect?
At the current price of Rs 609, the stock is trading at a multiple of 15.5 times our estimated FY10 earnings, which makes it fairly attractive from a long-term investment perspective. We had recommended a ‘Hold’ on the stock in September 2007 at Rs 587, with a March 2010 target price of Rs 790, which was breached in a matter of few weeks, surprising us on the negative considering the fast up move. Now, with the broader market correction, the price has declined to realistic levels.

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