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Reliance Comm.: Scaling up - Views on News from Equitymaster
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Reliance Comm.: Scaling up
Oct 30, 2006

Performance summary
Reliance Communications Limited (RCL) has announced strong results for the second quarter and half year ended September 2006. For 2QFY07, while revenues have grown by 40% YoY, the company has reported a Rs 7 bn in net profit against Rs 190 m of losses in 2QFY06. The topline performance has been duly aided by robust growth in the wireless (45% YoY in 2QFY07) and broadband (201% YoY) businesses, led by rapid accretion to the subscriber base. Operating margins have more than doubled for the quarter. This has been due to decline (as percentage of sales) in all the cost heads, especially in license fee and access charges.

Consolidated financial performance: A snapshot…
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Total revenues* 25,220 35,260 39.8% 48,050 67,761 41.0%
Expenditure 20,950 21,734 3.7% 42,113 42,174 0.1%
Operating profit (EBDIT)* 4,270 13,525 216.8% 5,937 25,587 331.0%
Operating profit margin (%) 16.9% 38.4%   12.4% 37.8%  
Interest 650 56 -91.4% 993 1,055 6.3%
Depreciation 3,790 6,237 64.6% 7,550 11,751 55.6%
Profit before tax (170) 7,233   (2,606) 12,781  
Extraordinary income/(expenditure) - (150)   - (300)  
Tax 20 59 197.0% 80 330 313.0%
Profit after tax/(loss) (190) 7,023   (2,686) 12,151  
Net profit margin (%) -0.8% 19.9%   -5.6% 17.9%  
No. of shares         2,044.6  
Diluted Earnings per share (Rs)**         9.4  
P/E ratio (x)**         40.3  
* Includes other income; ** Based on trailing 12-month earnings

What is the company’s business?
RCL is one of India’s largest integrated telecommunication service providers. Through its pan-India services like wireless, long distance and broadband, the company serves around 26 m subscribers. The company holds a 20.5% share of the Indian wireless market (GSM and CDMA combined). Apart from the domestic business, the company also has a strong international presence through the provision of international long distance, data and Internet services and submarine cable network infrastructure. RCL also boasts of the largest retail distribution and customer service facilities of any communications services provider in the country.

What has driven performance in 2QFY07?
Wireless leads the way: Strong performance of RCL’s topline during 2QFY07 has been largely owing to robust growth of the wireless (mobile) business. Revenues from this segment have grown by 45% YoY during 2QFY07, contributing to 60% of the company’s total revenues during the quarter. This growth has been on the back of strong growth in volumes, with RCL adding 3.5 m net subscribers during the quarter (1.6 m in 2QFY06). However, this, when compared to the over 4 m net subscriber addition for Bharti during 2QFY07, has been a slight underperformance. However, against a 22% YoY decline in revenue per minute billed for Bharti (at 98 paise) for its mobile business, RCL was able to maintain the same at 0.77 paise.

Segment-wise performance
  2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Wireless
Revenue (Rs m) 17,780 25,744 44.8% 32,630 50,064 53.4%
% of total revenues 56.1% 60.2%   54.4% 60.5%  
EBIDTA margin 28.7% 36.1%   26.2% 36.0%  
Global (ILD & NLD)
Revenue (Rs m) 12,590 13,158 4.5% 23,790 25,498 7.2%
% of total revenues 39.7% 30.8%   39.7% 30.8%  
EBIDTA margin 9.0% 24.3%   7.0% 23.7%  
Broadband
Revenue (Rs m) 900 2,710 201.1% 1,910 4,982 160.8%
% of total revenues 2.8% 6.3%   3.2% 6.0%  
EBIDTA margin 16.7% 44.8%   -4.2% 42.1%  
Others
Revenue (Rs m) 450 1,128 150.6% 1,670 2,156 29.1%
% of total revenues 1.4% 2.6%   2.8% 2.6%  
EBIDTA margin -353.3% 2.8%   -175.4% 12.4%  

As for the global business, which includes revenues from national and international long distance (NLD and ILD), the performance has been somber during 2QFY07. This has been largely due to a huge 66% cut in international call rates that RCL affected during 2QFY07. As for the NLD business, volumes grew by 20% QoQ. To enhance its global bandwidth capacity, during the quarter, RCL commissioned FALCON, the world’s largest private submarine cable system to be constructed in the last five years. Tis cable provides connectivity to 12 countries.The broadband business continues to be a shining star in the company’s portfolio, as it almost trebled its revenues during 2QFY07. This strong growth was on the back of 49% YoY increase in the number of buildings connected through the company’s broadband network.

Lower license costs, access charges aid margins: Considerable decline in license fee and access charges has helped RCL almost double its operating margins during 2QFY07. These costs have declined from 41% of revenues in 2QFY06 to 26% in 2QFY07. Network, staff and sales & marketing costs have also declined as percentage of sales, thus having the doubling effect on operating margins. Based on segments, all the three divisions have reported strong expansion in margins. The wireless division’s EBIDTA margins of 36.9% during 2QFY07 are now marginally higher than the 36.1% margins reported by Bharti for the quarter.

Topline, margin expansion aid bottomline: RCL posted a net profit of Rs 7 bn during 2QFY07, against a net loss of Rs 190 bn during 2QFY06. Strong topline growth combined with the sharp expansion in operating margins has helped the company rake in this robust bottomline performance during the quarter. The company has also benefited from lower interest costs as its net debt declined to Rs 20 bn (Rs 24 bn at the end of June 2006).

What to expect?
At the current price of Rs 380, RCL is trading at 40.3 times its trailing 12-month earnings and EV per subscriber of US$ 685 (Bharti trades at 36.4 times and US$ 860 respectively). We expect RCL to continue to reap in the opportunity that the Indian telecom sector provides for all its constituents, especially those having reach across the length and breadth of the country. Apart from mobile, NLD, ILD and broadband businesses are also likely to drive long-term growth for the company.

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