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Rel. Comm.: Not quite ringing a bell - Views on News from Equitymaster
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Rel. Comm.: Not quite ringing a bell
Jul 31, 2008

Introduction to results
  • Net sales grow by 23% YoY in 1QFY09. Growth led by strong addition to the subscriber base. Lower ARPUs and minutes of usage though pare gains in topline.
  • Operating margins remain almost stable at 41.3%. Margins for the mobile services division record a decline.

  • Net profits grow 24% YoY during the quarter, aided by higher other income and interest income.



Consolidated financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Sales 42,479 52,295 23.1%
Expenditure 24,895 30,721 23.4%
Operating profit (EBDIT) 17,584 21,574 22.7%
Operating profit margin (%) 41.4% 41.3%  
Other income 558 927 66.1%
Interest expense/(income) (1,274) (2,340) 83.6%
Depreciation 6,192 8,638 39.5%
Profit before tax 13,225 16,203 22.5%
Miscellaneous income/(expenditure) 15 (640)  
Tax 1,031 (194)  
Minority interest - 630  
Share of associates (4) (5)  
Profit after tax/(loss) 12,204 15,122 23.9%
Net profit margin (%) 28.7% 28.9%  
No. of shares   2,063.8  
Diluted Earnings per share (Rs)*   27.6  
P/E ratio (x)*   18.0  
* On a trailing 12-months earnings

What has driven performance in 1QFY09?
  • Reliance Communications’ (RCL) grew its net sales by 23% YoY during 1QFY09. Mobile services revenues grew by 22% YoY. This growth was largely a result of a strong performance on the subscriber addition front. RCL added a net of 4.9 m wireless subscribers during the quarter, taking its total base to over 50 m. Out of this, while GSM subscriber base (16% of total subscribers) grew by 94% YoY, the CDMA base recorded growth of 54% YoY. RCL marginally increased its wireless market share to 18% at the end of 1QFY09, from 17.9% in the previous quarter (17.6% at the end of 1QFY08).

    As for its GSM business, the company already operates services in 8 telecom circles in India, where it has a 25% share of the wireless market. The management has indicated in the conference call that the GSM momentum is yet to pick up pace for the company and it plans to capture a larger nationwide share of mobile customers on this technology platform in the years to come. A greater GSM play will also give the company an upside in average revenue per user, or ARPU (as GSM ARPU is higher than CDMA ARPU on account of the latter’s lower calling rate per minute and relatively lesser nationwide coverage).

    Talking about ARPU, the same declined by a whopping 25% YoY during 1QFY09. Against an ARPU of Rs 375 per month in 1QFY08, RCL earned only Rs 282 during the latest completed quarter. The management has attributed the same to a one time impact on its PCO tariffs as also to decline in STD calling rate for mobile customers. As a matter of fact, telecom companies like RCL (and Bharti) have recently passed on the ADC cut to customers by way of lower per minute tariffs. The effect is being seen in their revenue per minute (rpm). RCL’s rpm, for instance, has declined from 74 paise in 4QFY08 to 66 paise in 1QFY09 (Bharti earned an equivalent rpm during 1QFY09). Apart from lower ARPU, RCL also got hit on the minutes of usage (MoU) front, which declined by 17% YoY during the quarter. This is interesting as lower telecom tariffs have not really resulted in higher calling by subscribers, which is unlike what happened in the past. If this continues (MoU fall further), RCL’s profitability could be hit as the company has been vouching on a rising MoU to drive its mobile services growth while ARPU remains under pressure.

    RCL’s second services line of Global (inclusive of national and international long distance telephony), reported a growth of 17% YoY growth in sales during the quarter. Here, while volumes (calling minutes) grew by 16% YoY, per minute tariff recorded a marginal 1.2% YoY growth. As for the third business segment of ‘Broadband’, sales grew by a robust 46% YoY, led by a 63% YoY growth in the number of access lines, which increased from 705,000 at the end of 1QFY08 to 1,147,000 at the end of 1QFY09.

    Segment-wise performance
      1QFY08 1QFY09 Change
    Wireless      
    Revenue (Rs m) 33,730 41,187 22.1%
    % of total revenues* 66.7% 66.4%  
    EBIT margin 27.5% 25.5%  
    Global (ILD & NLD)      
    Revenue (Rs m) 13,033 15,260 17.1%
    % of total revenues* 25.8% 24.6%  
    EBIT margin 14.6% 10.4%  
    Broadband      
    Revenue (Rs m) 3,833 5,603 46.2%
    % of total revenues* 7.6% 9.0%  
    EBIT margin 33.2% 35.2%  
    * Excluding interest and other revenue

  • Lower access charges and license fee (both as percentage of sales) helped RCL maintain its operating margin at above 41% levels during 1QFY09. While access charges declined from 15.8% of 1QFY08 sales to 12% in 1QFY09, the latter declined from 7% to 5.5%. Based on business segments, while wireless and long distance businesses recorded decline in profitability, broadband business witnessed a marginal expansion in the same.

  • RCL’s net profits grew by 24% YoY during 1QFY09. This was chiefly led by higher other income and interest income.

What to expect?
At the current price of Rs 496, the stock is trading at a multiple of 12.5 times our estimated FY10 earnings. RCL has seen pressure on its wireless business growth over the past two quarters and this has been brought about by a decline in both ARPU and MoU. While wireless net additions have remained robust, there are increased chances that the company’s profitability could be impacted due to a fall in these two variables. The management seems confident of raking in a strong growth and ARPU upside from its GSM foray. However, we believe that execution will be the key to growth, especially considering that the GSM market is already so competitive.

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