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Reliance Comm.: Aggression still not paying - Views on News from Equitymaster

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Reliance Comm.: Aggression still not paying
Jul 31, 2009

Performance summary
  • Net sales grow by 16% YoY during 1QFY10. Growth led by 24% YoY growth in the global segment and 16% YoY growth in wireless business. The company’s broadband business’s revenues grow by 22% YoY.
  • Operating margins decline by 0.9% YoY during the quarter.
  • Net profits grow by a mere 8% YoY during 1QFY10.
  • Wireless average revenue per user (ARPUs) stood at Rs 210 in 1QFY10, as against Rs 244 in FY09. Average minutes of usage (MOUs) stood at 365 as against 389.


Consolidated financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Sales 47,358 55,055 16.3%
Expenditure 31,361 36,927 17.7%
Operating profit (EBDIT)^ 15,997 18,128 13.3%
Operating profit margin (%) 33.8% 32.9%  
Other income 5,864 6,397 9.1%
Interest expense/(income) (2,340) (6,205) 165.2%
Depreciation 8,638 11,144 29.0%
Extraordinary gains/(losses) - (111)  
Profit before tax 15,563 19,475 25.1%
Tax (194) 2,267  
Minority interest 630 832 31.9%
Share of associates (5) (9) 104.3%
Profit after tax/(loss) 15,122 16,366 8.2%
Net profit margin (%) 31.9% 29.7%  
No. of shares   2,064.0  
Diluted Earnings per share (Rs)*   29.8  
P/E ratio (x)*   9.3  
* On a trailing 12-months earnings;
^1QFY09 includes amortisation of compensation under employee stock option scheme

< What has driven performance in 1QFY10?
  • Reliance Communications’ (RCL) grew its net sales by 16% YoY during 1QFY10. Mobile services revenues grew by a mere 16% YoY. This growth was largely a result of subscriber additions as ARPU and MoU both came under pressure. The company added around 7 m wireless subscribers during the quarter, taking its total base to about 80 m. A large proportion of these incremental subscribers have come in through the company’s GSM foray across the country, as it extended these services beyond eight circles starting last fiscal. Also, given the aggression with which it has targeted such a growth in the subscriber base, the company was able to curb the fall in MOUs. While MOUs stood at 365 against 372 in 4QFY09, wireless ARPUs stood at Rs 210 in 1QFY10, as against Rs 224 in 4QFY09. It may be noted that ARPUs were also impacted by the reduction in call termination charges. The government earlier this year reduced the termination charge for domestic calls to 20 paisa a minute from 30 paisa.

  • RCL’s second services line of national and international long distance telephony grew by 24% YoY during the quarter. As for the third business segment of ‘Broadband’, sales grew by 22% YoY.

  • RCL’s operating margins contracted by 0.9% YoY during 1QFY10. This was on account of higher other costs. Based on segments, PBIT margins of the wireless business came in lower at 23.9% during 1QFY10, as compared to 25.5% in 1QFY09.

  • RCL’s net profits grew by a marginal 8% YoY during 1QFY10. While the company was impacted by pressure on operating margins and higher depreciation, a surprise component was the large interest/ finance income which the company earned inspite of having a net debt of about Rs 222 bn. As per the management, this was on account of an appreciation in the Rupee against the US dollar, which led to the value of its overseas loans to come down in rupee terms. As such these notional gains allowed the company to offset the interest expenses.

What to expect?
At the current price of Rs 275, the stock is trading at a multiple of 9.2 times its trailing 12-month earnings. Given the company’s aggressive GSM foray, we expect the effects of the same to come into its numbers in the future quarters. Giving its view on the movement of ARPUs and MOUs going forward, the company’s management has indicated the same are likely to fall to a point when the incremental subscriber additions will not impact these figures. As telecom operators are foraying aggressively into rural markets (where usage is low), the general consensus is that there will be significant pressure on MOUs and ARPUs going forward. We maintain a cautious view on the stock.

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