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Reliance Communication:: Marred by disappointing performance,
regulatory overhangs...
Reliance Communications (Rcom) reported a disappointing set of
Q3FY11 numbers with the topline at | 4865.0 crore, declining 3.1% QoQ
and 7.9% YoY. The wireless business declined 2.3% QoQ even though
the subscriber base grew 7.1%. EBTIDA margin was stable at 31.4%
improving 29 bps QoQ. The company reported an EBITDA of | 1528.9
crore against our expectation of | 1583.0 crore. The company capitalised
interest cost to the tune of | 120 crore on 3G related debt and booked a
gain of ~ | 100 crore on exchange fluctuation on foreign currency debt.
Aided by interest adjustments, the reported PAT was at | 480.3 crore
against our expectation of | 300.6 crore, improving 7.7% QoQ and
declining 56.7% YoY.
Highlights for the quarter
Key metrics for RCom have been declining at a more rapid pace
compared to its competitors. ARPU and MoU declined 9% QoQ to |
111 and | 251, respectively. However, with further drying up of free
minutes, the ARPM remained stable at 44 paisa. This is in sharp
contrast to its peers, which witnessed a modest decline in key metrics.
Overall traffic on the network has declined 3.1% QoQ to 91.5 billion
minutes. The management has attributed this to a conscious shift in
focus away from the low margin businesses.
Valuation
We have revised our estimates downwards in light of the quarterly results.
At the CMP of | 101, the stock is trading at 14.6x FY11E EPS of | 6.9 and
24.9x FY12E EPS of | 4.1. We have valued the stock using DCF
methodology and arrived at a target price of | 99/share, assuming 4.5%
CAGR in revenue over FY11E–FY20E and terminal growth rate of 3%.
Though the stock has corrected significantly over the last few weeks, the
balance sheet and regulatory concerns loom large. We have downgraded
the stock from ADD to REDUCE.
Result Analysis
Wireless business
The wireless business contributed | 4064.4 crore to gross revenues
as against | 4161.3 crore in Q2FY11 and | 4022.5 crore in Q3FY10.
The company managed to keep margins at stable levels in this
business at 29.0%, even as it rolls out 3G networks.
The company added 8.3 million subscribers during the quarter taking
the total subscriber base to 125.6 million. ARPU for the quarter for
RCom fell 9.0% to | 111 even though it declined 2% for Bharti and
increased marginally for Idea Cellular.
The management has attributed the steep decline in key metrics to a
conscious strategy to move away from free minutes and low margin
businesses. Consequently, ARPM has been stable for four quarters at
44 paisa. The MoU declined 9.1% QoQ to 251. Total traffic on the
network also declined 3.1% QoQ to 91.5 billion minutes.
Broadband and global segment
The broadband segment has again started to see traction in terms of
subscriber addition with net adds at 26,000 subscribers against the
last four quarter average of 11,250. However, revenue per subscriber
declined 7.8% QoQ to | 1377 from | 1494 in Q2FY11. Consequently,
revenue from the broadband segment de-grew 6.5% QoQ and 12.2%
YoY to | 618.4 crore in Q3FY11. Margins also contracted by 83 bps
QoQ and 245 bps YoY to 36.7%.
The global segment reported gross revenues of | 1923.3 crore in
Q3FY11, growing 4.6% QoQ and declining 3.0% YoY. Margins in this
segment improved to 20.6% from 18.4% in Q2FY11.
Stable EBITDA margins, forex gain aid PAT
The company did well to manage its EBITDA margin at 31.4% even in
the wake of additional cost in the 3G network roll out. Network
operating expense fell to 25.7% of revenues from 27.5% in Q2FY11,
in line with lower traffic and reduction of free minutes.
PAT margins declined to 9.9% from 21.0% in Q3FY10, primarily due
to net interest cost of | 129.6 crore against net interest income of |
407.6 crore in Q3FY10. On a QoQ basis, the finance cost declined
from | 279.7 crore aided by ~ | 100 profit on forex currency
fluctuation, thereby aiding 99 bps expansion in PAT margin.
Outlook & Valuation
Outlook
The Q3FY11 numbers were disappointing on the topline front though the
company did well to manage the margins at a stable level. Going forward,
the management is upbeat on gaining corporate clients in the wireless
segment with the introduction of MNP and pushing data services on its 3G
and EVDO platform. This would also enable the company to increase its
ARPU and improve margins.
However, the mounting debt remains a paramount concern. The company
has capitalised interest cost to the tune of ~ | 120 crore in Q3FY11. It will
have to charge this cost and amortisation of 3G license fee to P&L once the
3G network is fully rolled out, which would put further pressure on
profitability. At the end of Q3FY11, the consolidated gross debt stood at |
33,934.8 crore while the net debt stood at | 32447.0 crore. Though the
management has indicated its desire to reduce the debt levels it has not
highlighted any concrete near term plans for the same.
Valuation
We have revised our estimates downwards in light of the quarterly results.
At the CMP of | 101, the stock is trading at 14.6x FY11E EPS of | 6.9 and
24.9x FY12E EPS of | 4.1. We have valued the stock using the DCF
methodology and arrived at a target price of | 99/ share, assuming 4.5%
CAGR in revenue over FY11E–FY20E and terminal growth rate of 3%.
Though the stock has corrected significantly over the last few weeks, the
balance sheet and regulatory concerns loom large. We are downgrading
the stock from ADD to REDUCE.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communication:: Marred by disappointing performance,
regulatory overhangs...
Reliance Communications (Rcom) reported a disappointing set of
Q3FY11 numbers with the topline at | 4865.0 crore, declining 3.1% QoQ
and 7.9% YoY. The wireless business declined 2.3% QoQ even though
the subscriber base grew 7.1%. EBTIDA margin was stable at 31.4%
improving 29 bps QoQ. The company reported an EBITDA of | 1528.9
crore against our expectation of | 1583.0 crore. The company capitalised
interest cost to the tune of | 120 crore on 3G related debt and booked a
gain of ~ | 100 crore on exchange fluctuation on foreign currency debt.
Aided by interest adjustments, the reported PAT was at | 480.3 crore
against our expectation of | 300.6 crore, improving 7.7% QoQ and
declining 56.7% YoY.
Highlights for the quarter
Key metrics for RCom have been declining at a more rapid pace
compared to its competitors. ARPU and MoU declined 9% QoQ to |
111 and | 251, respectively. However, with further drying up of free
minutes, the ARPM remained stable at 44 paisa. This is in sharp
contrast to its peers, which witnessed a modest decline in key metrics.
Overall traffic on the network has declined 3.1% QoQ to 91.5 billion
minutes. The management has attributed this to a conscious shift in
focus away from the low margin businesses.
Valuation
We have revised our estimates downwards in light of the quarterly results.
At the CMP of | 101, the stock is trading at 14.6x FY11E EPS of | 6.9 and
24.9x FY12E EPS of | 4.1. We have valued the stock using DCF
methodology and arrived at a target price of | 99/share, assuming 4.5%
CAGR in revenue over FY11E–FY20E and terminal growth rate of 3%.
Though the stock has corrected significantly over the last few weeks, the
balance sheet and regulatory concerns loom large. We have downgraded
the stock from ADD to REDUCE.
Result Analysis
Wireless business
The wireless business contributed | 4064.4 crore to gross revenues
as against | 4161.3 crore in Q2FY11 and | 4022.5 crore in Q3FY10.
The company managed to keep margins at stable levels in this
business at 29.0%, even as it rolls out 3G networks.
The company added 8.3 million subscribers during the quarter taking
the total subscriber base to 125.6 million. ARPU for the quarter for
RCom fell 9.0% to | 111 even though it declined 2% for Bharti and
increased marginally for Idea Cellular.
The management has attributed the steep decline in key metrics to a
conscious strategy to move away from free minutes and low margin
businesses. Consequently, ARPM has been stable for four quarters at
44 paisa. The MoU declined 9.1% QoQ to 251. Total traffic on the
network also declined 3.1% QoQ to 91.5 billion minutes.
Broadband and global segment
The broadband segment has again started to see traction in terms of
subscriber addition with net adds at 26,000 subscribers against the
last four quarter average of 11,250. However, revenue per subscriber
declined 7.8% QoQ to | 1377 from | 1494 in Q2FY11. Consequently,
revenue from the broadband segment de-grew 6.5% QoQ and 12.2%
YoY to | 618.4 crore in Q3FY11. Margins also contracted by 83 bps
QoQ and 245 bps YoY to 36.7%.
The global segment reported gross revenues of | 1923.3 crore in
Q3FY11, growing 4.6% QoQ and declining 3.0% YoY. Margins in this
segment improved to 20.6% from 18.4% in Q2FY11.
Stable EBITDA margins, forex gain aid PAT
The company did well to manage its EBITDA margin at 31.4% even in
the wake of additional cost in the 3G network roll out. Network
operating expense fell to 25.7% of revenues from 27.5% in Q2FY11,
in line with lower traffic and reduction of free minutes.
PAT margins declined to 9.9% from 21.0% in Q3FY10, primarily due
to net interest cost of | 129.6 crore against net interest income of |
407.6 crore in Q3FY10. On a QoQ basis, the finance cost declined
from | 279.7 crore aided by ~ | 100 profit on forex currency
fluctuation, thereby aiding 99 bps expansion in PAT margin.
Outlook & Valuation
Outlook
The Q3FY11 numbers were disappointing on the topline front though the
company did well to manage the margins at a stable level. Going forward,
the management is upbeat on gaining corporate clients in the wireless
segment with the introduction of MNP and pushing data services on its 3G
and EVDO platform. This would also enable the company to increase its
ARPU and improve margins.
However, the mounting debt remains a paramount concern. The company
has capitalised interest cost to the tune of ~ | 120 crore in Q3FY11. It will
have to charge this cost and amortisation of 3G license fee to P&L once the
3G network is fully rolled out, which would put further pressure on
profitability. At the end of Q3FY11, the consolidated gross debt stood at |
33,934.8 crore while the net debt stood at | 32447.0 crore. Though the
management has indicated its desire to reduce the debt levels it has not
highlighted any concrete near term plans for the same.
Valuation
We have revised our estimates downwards in light of the quarterly results.
At the CMP of | 101, the stock is trading at 14.6x FY11E EPS of | 6.9 and
24.9x FY12E EPS of | 4.1. We have valued the stock using the DCF
methodology and arrived at a target price of | 99/ share, assuming 4.5%
CAGR in revenue over FY11E–FY20E and terminal growth rate of 3%.
Though the stock has corrected significantly over the last few weeks, the
balance sheet and regulatory concerns loom large. We are downgrading
the stock from ADD to REDUCE.
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