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Reliance Comm.: Seasonality impacts profits

Nov 15, 2010

Reliance Communications declared its 2QFY11 results. The company has reported an 8.6% YoY decline in revenues, while its net profits have fallen by 39.8% YoY. Here is our analysis of the results.

Performance summary
  • Net sales fall by 9% YoY during 1QFY11.
  • Operating margins contract by 2.0% YoY to 31.1% during the quarter. This is on the back of higher access charges, higher license fee as well as higher employee costs (all as percentage of sales) during the quarter.
  • Net profits fall by a sharp 39.8% YoY during the quarter, impacted by weaker sales and margins, a big drop in other income as well as higher depreciation charges during the quarter.


Consolidated financial performance snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales 54,963 50,230 -8.6% 113,392 100,915 -11.0%
Expenditure 36,743 34,588 -5.9% 73,581 69,360 -5.7%
Operating profit (EBDIT)^ 18,219 15,642 -14.1% 39,811 31,555 -20.7%
Operating profit margin (%) 33.1% 31.1%   35.1% 31.3%  
Other income 2,063 953 -53.8% 5,085 1,360 -73.3%
Interest expense/(income) 6,636 2,797   520 7,194  
Depreciation 7,144 9,553 33.7% 18,288 19,201 5.0%
Extraordinary gains/(losses) (29) -††   (140) -†† -
Profit before tax 6,475 4,245 -34.4% 25,949 6,521 -74.9%
Tax (1,739) (661)   528 (1,380)  
Minority interest (805) (438)   (1,637) (927)  
Share of associates (6) (8)   (15) (5)  
Profit after tax/(loss) 7,403 4,459 -39.8% 23,769 6,968 -70.7%
Net profit margin (%) 13.5% 8.9%   21.0% 6.9%  
No. of shares 2,064.3 2,064.1   2,064.3 2,064.1  
Diluted Earnings per share (Rs)*         14.5267  
P/E ratio (x)*         11.4  
* On a trailing 12-months earnings, adjusted for extraordinary items

What has driven performance in 2QFY11?
  • Reliance Communications (RCOM) witnessed a 9% YoY drop in consolidated sales during the quarter. The decline was primarily due to the decline in the global and the broadband segments, which declined by 19% YoY and 14% YoY respectively. The companyís wireless business saw its revenues increase marginally by 4% YoY. This was on the back of higher total minutes on the network as well as higher subscriber base. While average revenue per user per month (ARPU) and minutes of usage per user per month (MOU) declined during the quarter, the rate per minute remained stable on a quarter on quarter basis.

  • RCOMís operating margins declined by 2% YoY during 2QFY11. While the company was able to reduce most of its operating costs in absolute terms, as a percentage of sales, the access charges, license fees as well as employee costs increased during the quarter. This along with the decline in sales led to margin contraction in 2QFY11.

  • RCOMís net profits dropped by 40% YoY during the quarter. Lower operating income and other income were the reasons behind the sharp fall in profits. The decline was also magnified by higher depreciation charges on account of network expansion as well as amortization of the 3G spectrum. The company has offset a forex gain during the quarter with a forex loss during the previous quarter (ended June 2010). If this gain were included, then the profits would have been higher by 165%.

What to expect?
At the current price of Rs 166, the stock is trading at a multiple of 11.4 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 growth in data services, as it hopes that these developments will help it garner a higher revenue market share. The company plans to launch its 3G services in the next few months. On the pricing for 3G, the company expects pricing to be rational unlike the highly competitive 2G market.

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