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Reliance Comm.: Connecting India - Views on News from Equitymaster
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Reliance Comm.: Connecting India
Jul 31, 2007

Performance summary
  • Net sales grow 33% YoY in 1QFY08, led by strong performance from the wireless and broadband businesses

  • Wireless subscriber base nears 32 m – net addition of 3.8 m during the quarter.

  • Operating margins expand by 580 basis points (5.8%), led by lower access charges and general & administrative expenses (each as percentage of sales).

  • Net profits jump 138% YoY led by operating margin expansion and higher interest income.

Consolidated financial performance snapshot
(Rs m) 1QFY07 1QFY08 Change
Sales 31,988 42,479 32.8%
Expenditure 20,601 24,895 20.8%
Operating profit (EBDIT) 11,387 17,584 54.4%
Operating profit margin (%) 35.6% 41.4%  
Other income 513 558 8.8%
Interest 836 (1,274)  
Depreciation 5,514 6,192 12.3%
Profit before tax 5,550 13,225 138.3%
Miscellaneous income/(expenditure) (150) 15  
Tax 272 1,031 279.6%
Profit after tax/(loss) 5,128 12,208 138.1%
Net profit margin (%) 16.0% 28.7%  
No. of shares   2,044.5  
Diluted Earnings per share (Rs)*   18.9  
P/E ratio (x)*   29.6  
* On a trailing 12-months basis

What is the company’s business?
Reliance Communication Ltd. (RCL) is the second largest private sector mobile telephony operator in India with a wireless (CDMA and GSM) subscriber base of nearly 32 m across its 23 circles of operation. The business of the company is spread across three segments - Global, Enterprise and Personal. The ‘Global’ business caters to voice and data market. In the voice market, it is the carrier of national and international voice traffic for telecom operators, telecom service providers and its internal customers. The data business owns the largest private submarine cable system in the world, which carries data across six continents. The ‘Enterprise’ segment serves 750 of the top 1,000 enterprises in India, by offering a wide array of products that comprise of voice, data, Internet, and IT infrastructure management services. The ‘Personal’ segment offers voice, data and value added services for the individual consumers and enterprises, via its CDMA and GSM-based mobile and fixed wireless services.

What has driven performance in 1QFY08?
Subscriber addition, stable ARPUs the key: RCL’s 33% YoY growth in 1QFY08 topline was a combined result of growth in the subscriber base as also stable ARPUs. The company’s wireless subscriber base (inclusive of GSM and CDMA) neared the 32 m mark at the end of 1QFY08, aided by a net addition of 3.8 m subscribers during the three-month period. The company’s wireless market share stood at 17.6%, which is still way below the leader Bharti Airtel’s share of above 25%. The widened gap between the two company’s market shares is largely a result of the previous quarter’s performance, when RCL reported a net subscriber subtraction of 1.9 m (as customers were removed from the network as part of the verification process) against Bharti’s net addition of 5.2 m.

What is, however, more heartening to note is the fact that RCL has managed to maintain its wireless ARPUs (average revenue per user per month) in a much better way than its peers, including Bharti. The company’s wireless ARPUs stood at Rs 375 during 1QFY08, against Rs 377 in 1QFY07. Against this, Bharti reported a 4% QoQ decline in the same a few days back. Nearly stable revenue per minute for RCL’s wireless business (see table below) has been the reason for these stable ARPUs, despite the fact that the company has reported a 6% QoQ decline in its average minutes of usage per subscriber.

Segment-wise performance
  1QFY07 1QFY08 Change
Wireless
Revenue (Rs m) 24,320 33,730 38.7%
% of total revenues 62.5% 66.7%  
Minutes billed (m) 31,440 45,800 45.7%
Revenue per minute (Rs) 0.77 0.74 -4.8%
EBIDTA margin 36.0% 39.7%  
EBIDTA per minute (Rs) 0.28 0.29 5.0%
Global (ILD & NLD)
Revenue (Rs m) 12,340 13,033 5.6%
% of total revenues 31.7% 25.8%  
Minutes billed (m) 4,299 7,229 68.2%
Revenue per minute (Rs) 2.87 1.80 -37.2%
EBIDTA margin 23.0% 24.9%  
EBIDTA per minute (Rs) 0.66 0.45 -32.0%
Broadband
Revenue (Rs m) 2,271 3,833 68.8%
% of total revenues 5.8% 7.6%  
Revenue per minute (Rs) 2,618 1,929 -26.3%
EBIDTA margin 38.8% 47.9%  

The second services line of the company – Global (inclusive of national and international long distance telephony), reported a marginal 6% YoY growth in sales during the quarter. This performance was largely due to the 37% YoY decline in average revenue per minute, while the minutes of usage increased by 68% YoY during 1QFY08. Within this segment, RCL had recently announced the acquisition of the US based Yipes Holdings, which is a leading provider of data services for the global enterprises. Valued at US$ 300 m, this is the largest acquisition that Reliance Communications has ever made (its last major acquisition was of Flag Telecom at US$ 207 m in 2003). As indicated by the management, Yipes will accelerate Reliance Communications penetration into the lucrative US$ 100 bn global enterprise data market. The company is reported to have sales of US$ 100 m and operates at EBIDTA margins of over 50%.

As for the third business segment of ‘Broadband’, sales grew at a robust rate of 69% YoY during 1QFY08. This was led by more than doubling of the company’s access lines, which increased from 322,000 at the end of 1QFY07 to 705,000 at the end of 1QFY08. In line with the industry performance, however, realisations were under pressure as average revenue per line for RCL declined by 26% YoY to Rs 1,929 during 1QFY08.

Lower access charges and employee costs aid margins: RCL matched Bharti Airtel’s 1QFY08 margins to the tee, as it benefited from lower access charges and employee costs. As a matter of fact, access charges declined from 29% of 1QFY07 sales to 23% in 1QFY08. Based on business segments, wireless and broadband segments were the star performers, recoding operating margin expansion of nearly 4% and 9% respectively.

Operating margin expansion, higher interest income powers bottomline: RCL recorded a 138% YoY growth in its consolidated net profits during 1QFY08. This was on the back of expansion in operating margins and higher interest income.

Capex for FY08: Out of the planned capex of US$ 4 bn for FY08 (US$ 2.5 bn for Indian operations and the remaining for global expansion), the management has indicated of already incurring the Indian portion of capex during the first quarter.

What to expect?
At the current price of Rs 560, the stock is trading at a multiple of 29.6 times its trailing 12 months earnings and an EV per subscriber of US$ 764. The company continues to perform in line with our estimates. The success of its low cost handset sold under the ‘Classic’ range has been one of the key growth drivers for the wireless business during the quarter. The management has indicated of further offering even lower priced handsets to reduce the entry cost for a subscriber, which shall aid the growth process in the future. Inorganic growth initiatives in the non-wireless segments, though not likely to add meaningfully in the near term, are expected to be strong long-term positives for the company. We maintain our positive view on RCL from a 2 to 3 years perspective.

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