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Key operating metrics disappoint
Reliance Communications’ (RCOM) Q3FY11 revenue and EBITDA were below our
and street’s estimates, but PAT was higher owing to lower net interest cost and
tax write-back of INR 214 mn. But MOU dip of 9.1% Q-o-Q, 15th straight quarter
of decline, was a huge disappointment as Q3 is a seasonally strong quarter. The
company attributed the ramp down in its Public Call Office (PCO) business and
the fixed wireless business, both of which it claims yielded lower margins, for the
decline in revenues. Its revenue per minute at INR 0.44 remained resilient,
which is good news for its competitors. The management’s comments that it is
targeting corporate customers post-MNP and seeing early success will make the
ARPU and margin metrics a key monitorable for Q4FY11.
Focus is on data, but will it yield higher margins?
The company ‘soft’ launched its 3G services in mid-December 2010. It stated on
the analyst call that it expects data services to rise significantly in phases
starting with major cities and towns and percolating to rural areas. In our view,
it chose to launch its mobile services on the CDMA platform initially for similar
reasons. Our interaction with industry peers and our analysis indicates that data
margins at current pricing will be lower than voice margins. In the US, there has
been news flow on operators reducing speeds for customers who are intense
data users and unlimited plans are being withdrawn. Hence, it will be interesting
to monitor margins trends for RCOM given its stated intent to focus on data.
Outlook and valuations: Earnings downgrade; maintain ‘REDUCE’
RCOM continues to disappoint on key metrics, especially traffic growth, even as
peers reported marginal improvement Q-o-Q. While the company maintained
that the CDMA business remained resilient, we remain concerned on the
constant decline in revenues despite it operating a GSM network. The company’s
focus on 3G services and data is inspiring, but we believe it needs to offer them
to the ‘right’ customer segment and not to the existing customer base (ARPU of
INR 111). The stock has crashed significantly, but we are revising down our FY12
earnings forecast 27% on back of disappointing metrics. This is primarily due to
the lower MOU assumption than before. Thus, even at 7.0x FY12E EV/EBITDA,
we maintain ‘REDUCE/Sector Underperformer’ recommendation/rating.
Company Description
RCOM is the flagship company of the Reliance-ADA Group. Incorporated in July 2004,
RCOM is India’s leading integrated teleco, providing the entire gamut of telecom services
including wireless, wireline, broadband, carrier and data services. The company
commenced cellular operations in December 2002, and is India’s second largest wireless
operator. RCOM offers pan-India CDMA- and GSM-based wireless services. It also enjoys
a strong position in the long distance and broadband segments. It operates undersea
cable systems through FLAG and FALCON, connecting over 40 countries.
Investment Theme
We expect competitive intensity to increase following the implementation of MNP and
launch of 3G services. RCOM, adopted a defensive 3G strategy and focused on circles
where it currently has a higher market share. In our view, it should have focused on
lucrative circles where it has lower market share currently as MNP would provide an
opportunity to increase share in those circles. RCOM would need to invest in its brand to
be able to increase market share. We believe, de-leveraging is a necessity for RCOM and
the trigger for the stock would be improvement in metrics. It expects to report trends in
metrics similar to its peers from Q2FY11. At current valuations, it is trading at par with
its peers.
Key Risks
If RCOM is able to monetize its tower assets and sell stake to a strategic investor, it
could lead to a relief rally.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key operating metrics disappoint
Reliance Communications’ (RCOM) Q3FY11 revenue and EBITDA were below our
and street’s estimates, but PAT was higher owing to lower net interest cost and
tax write-back of INR 214 mn. But MOU dip of 9.1% Q-o-Q, 15th straight quarter
of decline, was a huge disappointment as Q3 is a seasonally strong quarter. The
company attributed the ramp down in its Public Call Office (PCO) business and
the fixed wireless business, both of which it claims yielded lower margins, for the
decline in revenues. Its revenue per minute at INR 0.44 remained resilient,
which is good news for its competitors. The management’s comments that it is
targeting corporate customers post-MNP and seeing early success will make the
ARPU and margin metrics a key monitorable for Q4FY11.
Focus is on data, but will it yield higher margins?
The company ‘soft’ launched its 3G services in mid-December 2010. It stated on
the analyst call that it expects data services to rise significantly in phases
starting with major cities and towns and percolating to rural areas. In our view,
it chose to launch its mobile services on the CDMA platform initially for similar
reasons. Our interaction with industry peers and our analysis indicates that data
margins at current pricing will be lower than voice margins. In the US, there has
been news flow on operators reducing speeds for customers who are intense
data users and unlimited plans are being withdrawn. Hence, it will be interesting
to monitor margins trends for RCOM given its stated intent to focus on data.
Outlook and valuations: Earnings downgrade; maintain ‘REDUCE’
RCOM continues to disappoint on key metrics, especially traffic growth, even as
peers reported marginal improvement Q-o-Q. While the company maintained
that the CDMA business remained resilient, we remain concerned on the
constant decline in revenues despite it operating a GSM network. The company’s
focus on 3G services and data is inspiring, but we believe it needs to offer them
to the ‘right’ customer segment and not to the existing customer base (ARPU of
INR 111). The stock has crashed significantly, but we are revising down our FY12
earnings forecast 27% on back of disappointing metrics. This is primarily due to
the lower MOU assumption than before. Thus, even at 7.0x FY12E EV/EBITDA,
we maintain ‘REDUCE/Sector Underperformer’ recommendation/rating.
Company Description
RCOM is the flagship company of the Reliance-ADA Group. Incorporated in July 2004,
RCOM is India’s leading integrated teleco, providing the entire gamut of telecom services
including wireless, wireline, broadband, carrier and data services. The company
commenced cellular operations in December 2002, and is India’s second largest wireless
operator. RCOM offers pan-India CDMA- and GSM-based wireless services. It also enjoys
a strong position in the long distance and broadband segments. It operates undersea
cable systems through FLAG and FALCON, connecting over 40 countries.
Investment Theme
We expect competitive intensity to increase following the implementation of MNP and
launch of 3G services. RCOM, adopted a defensive 3G strategy and focused on circles
where it currently has a higher market share. In our view, it should have focused on
lucrative circles where it has lower market share currently as MNP would provide an
opportunity to increase share in those circles. RCOM would need to invest in its brand to
be able to increase market share. We believe, de-leveraging is a necessity for RCOM and
the trigger for the stock would be improvement in metrics. It expects to report trends in
metrics similar to its peers from Q2FY11. At current valuations, it is trading at par with
its peers.
Key Risks
If RCOM is able to monetize its tower assets and sell stake to a strategic investor, it
could lead to a relief rally.
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