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Rel. Comm.: Lower ARPUs, MoUs pare growth - Views on News from Equitymaster

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Rel. Comm.: Lower ARPUs, MoUs pare growth

Apr 30, 2008

Performance summary
  • Net sales grow 32% YoY in FY08. Growth led by strong addition to the subscriber base.
  • Operating margins expand by 3.6% YoY during the fiscal, led by lower access charges and other costs (each as percentage of sales).

  • Net profits grow 71% YoY in FY08, led by operating margin expansion, strong rise in interest income and one time gain on sale of shares in the telecom tower subsidiary – Reliance Telecom Infrastructure Limited. Excluding this extraordinary income and the minority interest arising out of this subsidiary’s profits, net profit growth stands at 73% YoY.

  • Board recommends dividend of Rs 0.75 per share (dividend yield of 0.1%).

Consolidated financial performance snapshot
(Rs m) FY07 FY08 Change
Sales 142,625 188,274 32.0%
Expenditure 87,477 108,687 24.2%
Operating profit (EBDIT) 55,148 79,587 44.3%
Operating profit margin (%) 38.7% 42.3%  
Other income 2,058 2,404 16.8%
Interest expense/(income) 4 (3,997)  
Depreciation 24,653 28,053 13.8%
Profit before tax 32,550 57,935 78.0%
Miscellaneous income/(expenditure) (302) 12,828  
Tax 616 2,836 360.8%
Minority interest (50) 13,901  
Share of associates (5) (15)  
Profit after tax/(loss) 31,676 54,011 70.5%
Net profit margin (%) 22.2% 28.7%  
No. of shares 2,044.5 2,063.8  
Diluted Earnings per share (Rs) 26.2 26.2  
P/E ratio (x)   22.0  

Performance summary
  • Reliance Communications’ (RCL) 32% YoY growth in net sales during FY08 was largely a result of strong accretion to the subscriber base, which increased by 17.8 m during the fiscal. Out of this, while the company added a net of 14.2 m subscribers in the CDMA category (85% of RCL’s mobile subscriber base), the addition in the GSM space was around 3.6 m. As a matter of fact, during the previous quarter, RCL has received government approval and spectrum to rollout GSM based mobile services in additional 14 circles. Towards this approval, the company made a payment of Rs 16.5 bn as the license fee. RCL already operates GSM services in 8 telecom circles in India.

    On a value basis, the mobile services revenues (68% of consolidated revenues) grew by 42% YoY during the fiscal. Growth for this segment would have been higher but for the decline in wireless minutes of usage (MoU) and average revenue per user (ARPU). While the former declined by 16% YoY for the fourth quarter, the latter recorded a 21% YoY contraction.

  • The second services line of the company – Global (inclusive of national and international long distance telephony), reported a lackluster 6% YoY growth in sales during the fiscal. As for the third business segment of ‘Broadband’, sales grew by 56% YoY, led by a 66% YoY growth in the number of access lines, which increased from 620,000 at the end of 4QFY07 to 1,031,000 at the end of 4QFY08.

    Segment-wise performance
      FY07 FY08 Change
    Revenue (Rs m) 107,276 152,135 41.8%
    % of total revenues* 62.9% 67.7%  
    EBIT margin 21.0% 27.1%  
    Global (ILD & NLD)      
    Revenue (Rs m) 51,770 54,751 5.8%
    % of total revenues* 30.4% 24.4%  
    EBIT margin 14.2% 15.3%  
    Revenue (Rs m) 11,441 17,867 56.2%
    % of total revenues* 6.7% 7.9%  
    EBIT margin 31.0% 35.1%  
    * Excluding interest and other revenue

  • Lower access charges and license fee (both as percentage of sales) helped RCL report a 3.6% YoY improvement in its operating margins during FY08. While access charges declined from 19.1% of FY07 sales to 15% of sales in FY08, the latter declined from 7.4% to 6.6%. Based on business segments, all the three segments recorded improvement in profitability during the fiscal.

  • RCL’s net profits grew by 71% YoY during FY08. This was chiefly led by expansion in operating margins and a strong rise in interest income. A one time gain on sale of shares in the telecom tower subsidiary, Reliance Telecom Infrastructure Limited, also aided the bottomline growth during the fiscal. Excluding this extraordinary income and the minority interest arising out of this subsidiary’s profits, net profit growth stands at 73% YoY.

What to expect?
At the current price of Rs 575, the stock is trading at a multiple of 14.6 times our estimated FY10 earnings. We had recommended a ‘Hold’ on the stock in September 2007 with a 2-year target price that was breached in a matter of few weeks, surprising us on the negative considering the fast up move. Now, with the broader market correction and volatility over the past 2 months, the price has declined to the current levels. The company has been very proactive in its mobile subscriber addition initiatives, both in the CDMA and GSM spaces. As reported by the management in the conference call, the company has already placed orders worth US$ 1 bn for GSM electronic equipment, and plans to launch these services in 14 additional circles by the end of this year. While this shall continue to lead the company’s subscriber growth over the next 2 to 3 years, what will be interesting to see is whether a higher GSM population in its total base leads to improvement in ARPUs or not.

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