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Reliance Comm.: Paying cost of aggressiveness - Views on News from Equitymaster

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Reliance Comm.: Paying cost of aggressiveness

Nov 3, 2009

Performance summary
  • Net sales grow by 7% YoY during 2QFY10, 11% YoY during 1HFY10. During the quarter, growth in sales was led by a 34% YoY growth in the global segment (long distance services) and a 28% YoY growth in broadband business.
  • Sales from the company’s wireless segment (57% of total revenues excluding other revenues) declined by 8% YoY.
  • Operating margins decline by 1% YoY during the quarter, 0.9% YoY during 1HFY10.
  • Net profits drop by 52% YoY during 2QFY10 and 22% YoY during 1HFY10. The company has attributed drop in profits to losses on foreign currency and derivative contracts.
  • Average revenue per user (ARPU) stood at Rs 161 during the quarter, down by about 23% QoQ.

Consolidated financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Sales 50,263 53,524 6.5% 97,621 108,578 11.2%
Expenditure 34,081 36,828 8.1% 65,442 73,755 12.7%
Operating profit (EBDIT)^ 16,182 16,696 3.2% 32,179 34,824 8.2%
Operating profit margin (%) 32.2% 31.2%   33.0% 32.1%  
Other income 6,187 3,502 -43.4% 12,051 9,899 -17.9%
Interest expense/(income) (2,353) 6,551   (4,692) 346  
Depreciation 9,180 7,144 -22.2% 17,818 18,288 2.6%
Extraordinary gains/(losses) - (29)   - (140)  
Profit before tax 15,541 6,474 -58.3% 31,104 25,949 -16.6%
Tax (567) (1,739)   (760) 528  
Minority interest (798) (805) 0.9% (1,428) (1,637) 14.6%
Share of associates (2) (6) 160.9% (7) (15) 126.5%
Profit after tax/(loss) 15,308 7,403 -51.6% 30,429 23,769 -21.9%
Net profit margin (%) 30.5% 13.8%   31.2% 21.9%  
No. of shares         2,064.0  
Diluted Earnings per share (Rs)*         26.1  
P/E ratio (x)*         6.4  
* On a trailing 12-months earnings; ^2QFY09 and 1HFY09 include
amortisation of compensation under employee stock option scheme

What has driven performance in 2QFY10?
  • Reliance Communications (RCOM) reported a revenue growth of 7% YoY during 2QFY10 and an 11% YoY growth during 1HFY10. A key reason behind this slow growth in revenue was the 8% YoY drop in revenues from the wireless business, which contributes to nearly 60% of total revenues. As per the company, the reasons behind the same were lower tariffs (on account of tariff rebalancing), lower minutes of usage (impact of poor monsoons) and also lower sales of proprietary handsets (CDMA handsets; a major reason for the fall in revenues on a YoY basis), amongst others. However, the company’s management did add that voice revenues have increased by about 4% QoQ.

    Further, the company reported a 23% QoQ decline in ARPU for wireless services. It may be noted that all of this was despite a more than 50% increase in subscriber base, which stood at over 86 m at the end of the quarter. RCOM’s other two businesses - global services (national and international long distance telephony) grew by 34% YoY during 2QFY10, while its broadband business grew by 28% YoY.

  • RCOM’s operating margins contracted by 1% YoY during 2QFY10 and by 0.9% YoY during the first half of the financial year. As per the company, the reasons behind the same were increased competition and costs of deployment for its GSM network, which led to the company’s operating profits to grow at a slower pace as compared to sales.

  • RCOM’s net profits more than halved during the quarter ended September 2009 and 22% YoY during 1HFY10. However, the company has indicated that profits during the quarter would have stayed at Rs 10.2 bn (or 33% YoY lower), had it not been for the foreign exchange losses (on foreign currency and derivative contracts) of Rs 2.8 bn. Further, the company also saved some expenses by re-assessing the useful life of some of its telecommunications equipments, which led to lower depreciation costs during the quarter.

What to expect?
At the current price of Rs 167, the stock is trading at a multiple of 6.4 times its trailing twelve month earnings. During the month of October, the company launched a new tariff plan named ‘Simply Reliance’ which allows customers to make outgoing calls at any number within the country at a flat rate of Rs 0.5 a minute. With the launch of such a competitive plan, many industry incumbents have followed suit and have launched similar kinds of plans. As per RCOM, it has seen a strong response from the launch of the same and is banking to a certain extent to drive growth going forward. In addition, the company is evaluating the launch of a per second billing plan as well.

With the industry continuing to see price war and players preparing themselves to enter into battles, many experts have brought in the subject of consolidation considering that some of the smaller players will be gobbled up overtime. As per RCOM it sees consolidation taking place over the next 18 to 24 months.

However, concerned over the fact that the company has reported poor numbers this quarter and that also it has been surrounded by controversies in the recent past, we maintain our cautious view on the stock. While the stock may be available at attractive valuations, we reckon telecom leader Bharti Airtel to be a safer pick at current levels.

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