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Reliance Comm.: Interest costs impact profits

Aug 13, 2010

Reliance Communications declared its 1QFY11 results. The company has reported a 8.9% YoY decline in revenues, while its net profits have fallen by 84.7% YoY. Here is our analysis of the results.

Performance summary
  • Net sales fall by 9% YoY during 1QFY11.
  • Operating margins contract by 2.4% YoY to 30.7% during the quarter. This is on the back of lower sales which offset the decline in expenditure. However, the access charges and license fee went up (as percentage of sales) during the quarter.
  • Net profits fall by a sharp 85% YoY during the quarter, impacted by weaker sales and margins, and a big drop in other income.

Consolidated financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Sales 55,055 50,150 -8.9%
Expenditure 36,838 34,772 -5.6%
Operating profit (EBDIT)^ 18,217 15,378 -15.6%
Operating profit margin (%) 33.1% 30.7%  
Other income 6,397 942 -85.3%
Interest expense/(income) (6,115) 4,397  
Depreciation 11,144 9,648 -13.4%
Extraordinary gains/(losses) (111) - -
Profit before tax 19,474 2,276 -88.3%
Tax 2,267 (719) -131.7%
Minority interest (832) (489)  
Share of associates (9) 3  
Profit after tax/(loss) 16,365 2,509 -84.7%
Net profit margin (%) 29.7% 5.0%  
No. of shares 2,063.7 2,063.8  
Diluted Earnings per share (Rs)*   15.969  
P/E ratio (x)*   10.2  
* On a trailing 12-months earnings, adjusted for extraordinary items

What has driven performance in 1QFY11?
  • Reliance Communications (RCOM) witnessed a 9% YoY drop in consolidated sales during the quarter. All the segments declined during the quarter leading to a drop in revenues. The companyís wireless business saw its revenues decline by 13% YoY. The global and broadband segments declined by 4% YoY and 1% YoY respectively. The wireless business contributed to nearly 62% of total sales during the quarter as compared to about 65% during 1QFY10.

  • RCOMís operating margins declined by 2.4% YoY during 1QFY11. While the company was able to reduce most of its operating costs in absolute terms, as a percentage of sales the license fee and access charges increased during the quarter. This along with the decline in sales led to margin contraction in 1QFY11.

  • RCOMís net profits dropped by 85% YoY during the quarter. Lower operating income and other income were the reasons behind the sharp fall in profits. Another key reason was the interest expense during the quarter compared to the net interest income seen during the same quarter last year. A large part of this interest cost was related to the loss on foreign exchange. This was earlier adjusted through reserves, but following the order of the High Court, it is now being taken through the profit & loss statement.

What to expect?
At the current price of Rs 163, the stock is trading at a multiple of 10.2 times it trailing 12-month earnings (adjusted for extraordinary items). While on the rate per minute (ARPM) metric, the company has come at par with its peers, however the growth in the minutes of usage (MOU) has not been similar. In fact the MOU for RCOM has actually declined during the quarter. This was due to the removal of the free minutes in the quarter. Going forward, the company is optimistic about 3G as well as mobile number portability, as it hopes that these developments will help it garner a higher revenue market share.

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