Reliance Communication – 3QFY2011 Result Update- Angel Broking

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Reliance Communication – 3QFY2011 Result Update

Angel Broking recommends a Neutral on  Reliance Communication.

Poor revenue growth due to mixed KPIs in the wireless business: For 3QFY2011,

RCOM reported consolidated revenue of `4,865cr, down 3.1% qoq. The decline

was on the back of mixed KPIs in the wireless business. The wireless business

witnessed a 2.3% decline in revenue to `4,064cr. This poor performance was on

the back of MOU tumbling to 251mins (v/s 276mins in 2QFY2011); the decline

in MOU was arrested to a great extent by robust subscriber growth of 7.1% qoq

and held-up ARPM at `0.44/min. Thus, ARPU slipped by 8.8% qoq to `111 in

3QFY2011 from `122 in 2QFY2011.

EBITDA margin improvement: Overall EBITDA margin improved marginally by

30bp qoq to 31.4% due to better operational performance in its global business

segment supporting the positive impact of held-up EPM in the wireless business.

Outlook and valuation: Going forward, we expect ARPM as well as MOU to

stabilise. The GSM rollout is majorly completed and we expect it to aid the

company’s margins, as network operating expenditure would decline going

forward. In addition to this, stabilising ARPM would aid margins. We expect

RCOM’s mobile business to report a 21% CAGR in its subscriber base over

FY2010–12E and ARPM as well as MOU to stabilise going forward. We

recommend Neutral rating on the stock with a fair value of `106, valuing the

stock at 6.1x FY2012E EV/EBITDA.

Poor revenue growth due to mixed KPIs in the wireless business
For 3QFY2011, RCOM reported consolidated revenue of `4,865cr, down 3.1%
qoq. The flattish revenue growth was due to mixed KPIs in the wireless business.



Wireless: The wireless business registered a 2.3% decline in revenue to `4,064cr.
This poor performance was on the back of MOU tumbling to 251mins (v/s
276mins in 2QFY2011). The MOU decline was arrested to a great extent by robust
subscriber growth of 7.1% qoq and held-up ARPM at `0.44/min. Thus, ARPU
slipped by 8.8% qoq to `111 in 3QFY2011 from `122 in 2QFY2011.



Global: The global business witnessed muted revenue growth of 4.6% qoq to
`1,923cr, driven by decent qoq growth in ILD as well as NLD minutes of 8.8% and
1.1%, respectively. This was primarily because of a steep drop in realisations in
each of the verticals.
Broadband: Revenue of the broadband business declined by 6.5% qoq to `618cr
on the back of a 7.8% qoq fall in ARLP to `1,377, overshadowing the effect of
healthy net additions of 26,000 lines in 3QFY2011.



EBITDA margin improvement
Overall EBITDA margin improved marginally by 30bp qoq to 31.4% due to better
operational performance in its global business segment supporting the positive
impact of held-up EPM in the wireless business.



Recommendation rationale
Stabilising ARPM and completion of GSM rollout: To aid margins
ARPM is now stabilising with the company managing to hold it up to `0.44/min in
3QFY2011. Also, most of the expenses related to the GSM rollout are through,
which is further expected to accrue in margins going forward as promotion cost
will settle down at current levels and network operating expenditure will likely
decline. Hence, we expect margins to improve, expanding to 33.9% and 33.7% in
FY2011E and FY2012E, respectively.
Outlook and valuation
We expect RCOM’s mobile business to record a 21% CAGR in its subscriber base
over FY2010–12E and ARPM as well as MOU to stabilise going forward. We
recommend a Neutral rating on the stock with a fair value of `106, valuing the
stock at 6.1x FY2012E EV/EBITDA.