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Rel. Comm.: Paying the price of aggressiveness
May 19, 2010

Reliance Communications declared its FY10 results. The company has reported marginal 0.3% YoY decline in revenues, while its net profits have fallen by 23% YoY. Here is our analysis of the results.

Performance summary
  • Net sales fall marginally during the full year FY10, decline 15% YoY during 4QFY10.
  • Operating margins contract by 4% YoY to 30.8% during FY10 on the back of higher other expenditure.
  • All other major cost heads decline as percentage of sales on a year on year basis.
  • Net profits fall by 23% YoY during FY10.
  • Declares dividend of Rs 0.85 (dividend yield 0.5%)

Consolidated financial performance snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Sales 55,393 46,982 -15.2% 207,429 206,851 -0.3%
Expenditure 34,395 34,392 0.0% 135,171 143,118 5.9%
Operating profit (EBDIT)^ 20,999 12,591 -40.0% 72,258 63,733 -11.8%
Operating profit margin (%) 37.9% 26.8%   34.8% 30.8%  
Other income 5,917 2,765 -53.3% 22,056 14,472 -34.4%
Interest expense/(income) 2,383 (8,134)   (3,806) (11,863)  
Depreciation 8,189 10,847 32.4% 36,077 37,465 3.8%
Extraordinary gains/(losses) (75) (15) - (75) (375)  
Profit before tax 16,269 12,629 -22.4% 61,967 52,228 -15.7%
Tax 90 1,923 2039.4% (518) 4,454  
Minority interest (285) 1,005   (2,052) (1,193) -41.9%
Share of associates 23 (9)   16 (32)  
Profit after tax/(loss) 15,917 11,701 -26.5% 60,449 46,550 -23.0%
Net profit margin (%) 28.7% 24.9%   29.1% 22.5%  
No. of shares         2,064.0  
Diluted Earnings per share (Rs)*         22.7  
P/E ratio (x)*         6.4  
* On a trailing 12-months earnings, adjusted for extraordinary items

What has driven performance in FY10?
  • Reliance Communications (RCOM) witnessed a marginal 0.3% YoY drop in consolidated sales during the year. Sales declined by 15% YoY during the quarter. While the company's wireless business saw its sales decline by 4% YoY, sales of its other two segments i.e., global and broadband increased by 23% YoY and 13% YoY during the year. The wireless business contributed to nearly 60% of total sales during the year as compared to about 65% during FY09.

  • RCOM's wireless business was under pressure this year as there was a strong decline in its key parameters. ARPUs (average revenues per user) during 4QFY10 stood at Rs 139 as compared to Rs 224 during 4QFY09. MOUs (average minutes of usage) declined by 13% YoY and stood at 318 minutes during the final quarter. ARPM (average revenue per minute) stood at Rs 0.44 as compared to Rs 0.60 during 4QFY09. On a quarter on quarter basis, ARPUs, MOUs and ARPM was lower by 7%, 4% and 2% respectively. The company has blamed the overall decline in parameters on the price war witnesses in the industry. In addition, the aggressive campaigns that the company launched over the past few quarters seem to have taken a toll on its financials. When compared to market leader Bharti Airtel's parameters, RCOM's ARPU, MOU and ARPM are lower by 37%, 32% and 6% respectively (as compared to Bharti's 4QFY10 data).

  • RCOM's operating margins declined by 4% YoY during FY10. While the company was able to reduce most of its operating costs in absolute terms and as percentage of sales, its other expenditure (network operations and SG&A expenses) increased by about 15% YoY in absolute terms and stood at nearly 46% of sales (as compared to 40% last year). This was the key factor that led to margin contraction in FY10.

  • RCOM's net profits dropped by 23% YoY during the year. Lower other income and higher tax outgo were the key reasons behind the sharp fall in profits. However, higher interest income pared a further decline in profits.

What to expect?
At the current price of Rs 146, the stock is trading at a multiple of 6.4 times it trailing 12-month earnings (adjusted for extraordinary items). RCOM's aggressive marketing campaigns have taken a toll on its numbers. While the campaigns have allowed it to cross the 100 m subscriber base milestone, the same has had a negative impact on the financials. Also, when compared to its peers (which saw recovery in certain parameters this quarter), the company's performance this quarter has not been very commendable.

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