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Reliance Comm.: Tough times continue - Views on News from Equitymaster
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Reliance Comm.: Tough times continue
Feb 2, 2010

Performance summary
  • Net sales fall by 6% YoY during 3QFY10, grow by 5% YoY during 9mFY10. During the quarter, the decline in sales was due to a 9% YoY fall in revenues of the wireless business. The global and broadband businesses report growth of 18% YoY and 8% YoY respectively.
  • Operating margins fall by 3.2% YoY to 31.8% during 3QFY10. For 9mFY10, margins stood at 32% against 33.7% during 9mFY09. Operating margins fall during the quarter on the back of higher other expenditure and access charges (as a percentage of sales).
  • Net profits fall by a sharp 21% YoY and 22% YoY during 3QFY10 and 9mFY10 respectively.


Consolidated financial performance snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 54,415 51,290 -5.7% 152,036 159,868 5.2%
Expenditure 35,335 34,971 -1.0% 100,777 108,726 7.9%
Operating profit (EBDIT)^ 19,080 16,318 -14.5% 51,259 51,142 -0.2%
Operating profit margin (%) 35.1% 31.8%   33.7% 32.0%  
Other income 4,087 1,808 -55.8% 16,138 11,707 -27.5%
Interest expense/(income) (1,496) (4,076) 172.4% (6,189) (3,729)  
Depreciation 10,070 8,331 -17.3% 27,888 26,619 -4.6%
Extraordinary gains/(losses) - (221) - - (360) -
Profit before tax 14,594 13,651 -6.5% 45,698 39,600 -13.3%
Tax 153 2,003 1212.3% (608) 2,531 -
Minority interest (338) (561) 65.7% (1,767) (2,197) 24.4%
Share of associates (0) (8) 2433.3% (7) (23) 219.4%
Profit after tax/(loss) 14,103 11,080 -21.4% 44,532 34,849 -21.7%
Net profit margin (%) 25.9% 21.6%   29.3% 21.8%  
No. of shares         2,064.0  
Diluted Earnings per share (Rs)*         24.8  
P/E ratio (x)*         6.8  
* On a trailing 12-months earnings, adjusted for extraordinary items; ^2QFY09 and 1HFY09 include amortisation of compensation under employee stock option scheme

What has driven performance in 3QFY10?
  • Reliance Communications (RCOM) witnessed a 6% YoY drop in consolidated sales during the quarter. However, sales for 9mFY10 was higher by 5% YoY. Performance during the quarter was affected by a 9% YoY decline in sales of the companyís wireless business. This business contributed to nearly 60% of total sales during the quarter ended December 2009 as against 65.4% during 3QFY09.

  • The key reason behind the weak performance of RCOMís wireless business during 3QFY10 was the decline in key parameters such as ARPU (average revenues per user), MOU (average minutes of usage) and ARPM (average revenue per minute). While MOU fell by 21% YoY and 3% QoQ, ARPU was lower by 41% YoY and 8% QoQ. However, the company has managed to somewhat contain the fall in ARPM to just 4% on a quarter on quarter basis. ARPM during the quarter stood at 45 paisa as compared to 47 paisa during the previous quarter. However, when compared to market leader Bharti Airtelís ARPM of 52 paisa, a difference of about 14%, it does throw up some concern.

  • RCOM's other two businesses Ė global services (national and international long distance telephony) brought some respite to the company as their revenues grew by 18% YoY and 8% respectively.

  • RCOM's operating margins declined by 3.2% YoY during 3QFY10 and by 1.7% YoY during 9mFY10. While the company was able to reduce most of its operating costs in absolute terms, its other expenditure (network operations and SG&A expenses), which increased by about 3% YoY in absolute terms led to margin contraction during the quarter. This led to the operating profits to decline by 15% YoY during the quarter.

  • RCOM's net profits dropped by 21% YoY during the quarter, and 22% YoY during 9mFY10. The key reason behind the further decline in net profits (as compared to the decline in operating profits) was higher tax outgo.

What to expect?
At the current price of Rs 169, the stock is trading at a multiple of 6.8 times it trailing 12-month earnings. Considering RCOMís peer group companies have reported more stable numbers during the quarter, we maintain our cautious view on the stock. On the whole, while RCOMís valuations may seem low, we feel more confident with the approach that Bhartiís management is taking (of being less aggressive). We reckon telecom leader Bharti Airtel to be a safer pick at the current levels.

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