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Reliance Comm.: Strong connections!
Nov 1, 2007

Performance summary
  • Net sales grow 32% YoY apiece in 2QFY08 and 1HFY08. Growth led by strong addition to the subscriber base.
  • Wireless subscriber base cross the 36 m – net addition of 4.4 m during the second quarter.

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

  • Net profits jump 86% YoY in 2QFY08, led by operating margin expansion and a large gain on sale of 5% stake in Reliance Telecom Infrastructure Limited, the telecom tower subsidiary of the company.

Consolidated financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 34,564 45,533 31.7% 66,632 88,011 32.1%
Expenditure 21,776 26,166 20.2% 42,379 51,061 20.5%
Operating profit (EBDIT) 12,788 19,367 51.5% 24,253 36,950 52.4%
Operating profit margin (%) 37.0% 42.5%   36.4% 42.0%  
Other income 696 252 -63.7% 1,129 811 -28.2%
Interest 14 (1,125)   850 (2,399)  
Depreciation 6,237 6,754 8.3% 11,751 12,945 10.2%
Profit before tax 7,233 13,989 93.4% 12,781 27,215 112.9%
Miscellaneous income/(expenditure) (150) 12,203   (300) 12,217  
Tax 59 698 1075.4% 330 1,730 423.5%
Minority interest - 12,444   - 12,444  
Share of associates - (4)     (8)  
Profit after tax/(loss) 7,023 13,046 85.7% 12,151 25,250 107.8%
Net profit margin (%) 20.3% 28.7%   18.2% 28.7%  
No. of shares         2,044.5  
Diluted Earnings per share (Rs)*         23.7  
P/E ratio (x)*         32.8  
* 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 over 36 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 2QFY08?
Stable ARPUs, rising base aids topline: RCL recorded a 32% YoY growth in topline during 2QFY08. This was made possible by a 39% YoY growth in wireless subscriber base and 2% YoY increase in average revenue per user (ARPU). The company’s wireless subscriber base (inclusive of GSM and CDMA) crossed the 36 m mark during the quarter, with the company adding 4.4 m subscribers during the three-month period. Further, RCL recorded a 2% YoY growth in its ARPU, which is a positive considering that its peers like Bharti Airtel have witnessed continued decline in this metric. The company’s wireless ARPUs stood at Rs 361 during 2QFY08, against Rs 354 in 2QFY07. The 6% YoY growth in its minutes of usage (MoU) was also higher than Bharti’s 4% YoY.

The company has recently got an approval from the Department of Telecom for offering nationwide GSM services under its existing unified access service license. Towards this approval, the company has made a payment of Rs 16.5 bn as the license fee. RCL already operates GSM services in 8 telecom circles in India and has a subscriber base on 5 m connected through this technology in these circles.

The second services line of the company – Global (inclusive of national and international long distance telephony), reported a flat performance during the quarter, which was largely due to the 34% YoY decline in average revenue per minute. As for the third business segment of ‘Broadband’, sales grew at a robust rate of 61% YoY during 2QFY08. This was led by an 87% YoY growth in the number of access lines, which increased from 425,000 at the end of 2QFY07 to 792,000 at the end of 2QFY08. In line with the industry performance, however, realisations were under pressure as average revenue per line for RCL declined by 13% YoY. RCL incurred a capex of Rs 19.5 bn during the quarter, a large part of which was towards expansion of its wireless network.

Segment-wise performance
  2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Wireless            
Revenue (Rs m) 25,744 37,231 44.6% 50,064 70,961 41.7%
% of total revenues* 61.9% 68.0%   62.2% 67.4%  
Minutes billed (m) 33,520 50,700 51.3% 64,964 96,500 48.5%
Revenue per minute (Rs) 0.77 0.73 -4.4% 0.77 0.74 -4.6%
EBIT margin 17.9% 27.5%   19.5% 27.5%  
EBIT per minute (Rs) 0.1 0.2 47.2% 0.1 0.2 34.9%
Global (ILD & NLD)            
Revenue (Rs m) 13,158 13,161 0.0% 25,498 26,194 2.7%
% of total revenues* 31.6% 24.0%   31.7% 24.9%  
Minutes billed (m) 5,009 7,541 50.5% 9,308 14,770 58.7%
Revenue per minute (Rs) 2.63 1.75 -33.6% 2.74 1.77 -35.3%
EBIT margin 14.5% 14.5%   10.4% 14.5%  
EBIT per minute (Rs) 0.4 0.3 -33.5% 0.3 0.3 -9.5%
Broadband            
Revenue (Rs m) 2,710 4,372 61.3% 4,982 8,204 64.7%
% of total revenues* 6.5% 8.0%   6.2% 7.8%  
Access lines ('000) 425 792 86.4% 425 792 86.4%
Revenue per line (Rs) 6,376 5,520 -13.4% 11,721 10,359 -11.6%
EBIT margin 31.6% 34.5%   27.6% 33.9%  
* Excluding interest and other revenue

Lower access charges, license fees aid margins: RCL recorded a strong 5.5% expansion in its operating margins during 2QFY08. This was on account of lower access charges and license fees. While the former declined from 18.8% of 2QFY07 sales to 15% in 2QFY08, the latter declined from 7.4% to 6.4%. Based on business segments, wireless and broadband segments were the star performers, recoding EBIT margin expansion of nearly 10% and 3% respectively.

Operating margin expansion, gain from stake sale powers net: RCL recorded an 86% YoY growth in its consolidated net profits during 2QFY08. This was on the back of expansion in operating margins and a substantial one-time income from stake sale in a subsidiary. As a matter of fact, the company has sold a 5% stake in its telecom tower subsidiary, Reliance Telecom Infrastructure Limited, for a consideration of Rs 14 bn, thus valuing the business at almost Rs 270 bn. This transaction netted the company a gain of Rs 12.2 bn, which has been recorded in 2QFY08 numbers. As a consequence of this sale, the company has recorded an almost equal amount as minority interest during the quarter. Excluding both these adjustments, net profits have grown by 89% YoY during the second quarter.

What to expect?
At the current price of Rs 809, the stock is trading at a multiple of 20.5 times our estimated FY10 earnings, which makes it fairly valued. We had recommended a ‘Hold’ on the stock in September 2007 at Rs 587, with a March 2010 target price of Rs 790, which was breached in a matter of 2 weeks, surprising us on the negative considering the fast up move. While we maintain our positive stance on the company’s growth prospects, we are a bit cautious on the stock’s valuations.

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