Goldman Sachs: Reliance Communications -Below expectations on rev/EBITDA

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EARNINGS REVIEW
Reliance Communications (RLCM.BO)
Neutral  Equity Research
Below expectations on rev/EBITDA; net profit beat on lower int. exp.
What surprised us
RCOM reported 3QFY11 revenues/EBITDA that were 6.0%/2.1% below our
(and 5.1%/1.7% below Bloomberg consensus) estimates. Net profit at
Rs4.80 bn was 33% higher than our (and 32% higher than consensus) est.
due to lower finance charges (Rs1.3 bn vs. GS est. of Rs2.5 bn) and a tax
gain of Rs214 mn (vs. GS est. of tax expenses of Rs717 mn). Positives: 1)
Revenue from Global business grew 4.6% qoq and was 1.0% above our
estimate due to better utilization of cable landing facilities as per mgmt.  2)
Total EBITDA margin improved 90bp qoq and was 130bp above our
estimate largely due to lower network opex (-9.6% qoq, 13.7% below GS
est.)  3) RCOM continued to maintain a stable RPM (revenue per minute) at
4QFY10 levels of Rs0.44/min whereas RPMs of Bharti and Idea declined by
Rs0.03/Rs0.04  (or 6%/10%) over the same time period, respectively.

Negatives: 1) Wireless revenues declined 2% qoq (vs. 4%/8% qoq growth
for Bharti/Idea) as RCOM moved away from low margin businesses (such
as wholesale PCO businesses) and mainly due to weaker execution in our
view. Despite moving to high margin business, RCOM did not show qoq
improvement in wireless EBITDA margin.  2) Broadband revenues declined
6.5% qoq (and was 9.7% below our est.) mainly due to higher decline in
tariffs (ARPL down 8% qoq). 3) D&A expenses increased 8.2% qoq and
were 6.1% above our estimate largely led by higher wireless/global D&A
(+10%/+6% qoq), in our view.
What to do with the stock
We maintain our Neutral rating on RCOM. Our 12-month SOTP-based
target price of Rs155 remains unchanged. Higher-than-expected data
uptake is upside risk. Regulatory overhang is a downside risk