Reliance Communications-Broadly in line 2QFY11;Sell: Anand Rathi

Visit http://indiaer.blogspot.com/ for complete details �� ��


Reliance Communications
Broadly in line 2QFY11 results; retain Sell
 2QFY11 broadly inline. Revenue was 1.5% below our estimate due to
weaker non-wireless revenues and EBITDA was in line owing to qoq
decline in SG&A costs. Adjusted PAT was 30% higher than our
estimates, thanks to tax write-backs and lower-than-expected
depreciation. Maintain Sell with Dec-11e target price of `160.


 Wireless trend subdued, but in line with peers. RCom’s wireless traffic,
ARPM and margins were flat qoq, resulting in stable (and in line) wireless
revenues/EBITDA. While EBITDA in the Global and Broadband
segments was 2-4% below our estimates, it increased qoq for first time in
the past four quarters. Notably, the overall top-line was supported by the
‘Others’ segment (including DTH), revenues of which were up 19% qoq.

 Capex and net debt. RCom incurred capex of `9.3bn in 2Q (1HFY11
capex at `17bn vis-à-vis FY11 guidance of `30bn). Net debt increased
`7bn qoq despite positive free cash flows (cash profits less capex) due to
`18bn decline in current liabilities (mainly equipment payables). Net debt
stood at `292bn (84% of market cap), implying net debt-to-EBITDA of
4.4x; which is alarming in our view and could pose challenges for debt
refinancing. We believe RCom’s gross debt of `407bn (including buyer‘s
credit) includes 3G-related short-term loans (`87bn), other short-term
loans (estimated at ~`50bn) and significantly out-of-money FCCBs worth
~`50bn (`65bn including redemption premium), which mature in FY12.

 Estimate revisions. We tweak down our FY11e and long-term
revenue/EBITDA estimates 1-2%, factoring in the weak Broadband
segment performance. However, our target price of `160 remains
unchanged due to rollover of DCF to Dec-11 from Sep-11.

 Valuation and risks. We maintain Sell on RCom due to continued
weakness in KPIs (e.g., 2Q wireless traffic up 12% yoy vs. 30-50% for
GSM incumbents), high balance-sheet leverage and unattractive valuations
(EV/EBITDA at premium to Idea/Bharti). Upside risks are tower
monetization at higher than `6m EV per tower and equity stake sale at
significant premium to the current share price.