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Reliance Communication’s (RCom) results were marginally
below our estimates as the company registered lower than
expected minutes of usage growth and lower sales in
‘others’ segment. We have revisited our estimates to
adjust for lower minutes growth and operating
expenditure. We re-iterate Buy rating considering the
value from its operations and revise target price to Rs127
(from Rs164 earlier), however, uncertain environment can
restrict the stock’s performance in the short term.
Revenue declines on lower traffic: Revenue was down
2.2% QoQ (5.8% YoY) to Rs50bn vs our expectation of
Rs52.6bn on lower minutes of usage in Q3FY11. We
believe this decline in minutes of usage is due to low
usage customers and loss of focus on the PCO business.
The management continues to clean the free minutes
from the system and this is expected to take 2-3 quarters.
Non-wireless business supported EBITDA: While
EBITDA margin of the wireless segment remained flat on
lower topline, operating margin expansion in the global
segment of 217bp (20.6%) supported the overall EBITDA
margin.
Revised earnings estimate: We are revising our EBITDA
estimates downward by 2.6% and 6.2% for FY11E and
FY12E respectively to factor in lower minutes growth and
slower growth in non-wireless segments and adjusting for
lower tax rate for FY11E.
Reiterate buy with a long term view: At the CMP, the
stock trades at 6.9x FY12E EV/EBITDA. We reiterate Buy on
the stock considering the value of existing business
However, uncertainty over 2G issue and higher debt
would determine the stock’s performance.
Minutes of usage not picking up
Revenue for the wireless segment was down 2.3% QoQ despite strong addition of subscribers
and flat RPM of 44p. This decline was mainly on account of a drop in minutes of usage during
Q3FY11 as the company continues to take out free minutes from the system. The management
indicated the process of clean-up will take 2-3 quarters more.
Wireless segment maintains margin
Wireless segment maintained margin despite lower topline on cost control measures. Lower
network expenses helped the company maintain its margin at 29% on q-o-q basis. We expect
the operating margin to improve going forward once the company starts getting 3G revenue.
Change in estimates
We have revised our revenue and EBITDA estimates downward for FY11E, FY12E and FY13E to
factor in lower minutes of usage. We had earlier assumed higher minutes of usage but are
lowering it on account of the strategic shift of the company from PCO related business and the
lengthy process of removal of free minutes from the system which would take 2-3 quarter
more. Our EBITDA margin, however, remains broadly in line with our previous assumptions. We
have also adjusted for the tax rate for FY11E and hiked the interest rate assumption as we
expect some refinancing activity to address the loan liability for FY12E.
Reiterate Buy, despite short term pressure on 2G related issues
The stock has taken a hit on account of 2G related issues. If we analyse the business, despite
slow performance we arrive at a fair value of Rs127 per share based on sum of the parts
valuation. We have also lowered our per tower EV/tower assumption of Rs6mn to Rs5mn/tower
considering the risk of lower tenancy from third parties and ascribing 30% discount to Bharti
Airtel’s multiple. We have revised our target price to Rs127 per share (Rs164 earlier), implying
31% upside from current levels. On the risk of loan payouts and high leverage ratio, we see the
debt to EBITDA ratio peaking out in FY11E and assuming that the peak capex is over for 2G
business and the enterprise segment, the company could start generating free cash flow from
FY12E. Hence, even if it does not get a financial investor in the parent company or in the tower
business, the higher loan payouts can be managed by re-financing of debt. We believe the
existing run rate of cash profit should be adequate to service the interest burden. However, in
the near term, 2G related issues can restrict the stock’s performance.
Risk to our recommendation
Any liability from 2G license/spectrum related issues which are under scrutiny can dent the
financial as well as stock performance
We believe MNP will not lead to a severe tariff war as 3G service offering is coming before
it. Hence, any base tariff decline would change our revenue estimates for FY12E
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communication’s (RCom) results were marginally
below our estimates as the company registered lower than
expected minutes of usage growth and lower sales in
‘others’ segment. We have revisited our estimates to
adjust for lower minutes growth and operating
expenditure. We re-iterate Buy rating considering the
value from its operations and revise target price to Rs127
(from Rs164 earlier), however, uncertain environment can
restrict the stock’s performance in the short term.
Revenue declines on lower traffic: Revenue was down
2.2% QoQ (5.8% YoY) to Rs50bn vs our expectation of
Rs52.6bn on lower minutes of usage in Q3FY11. We
believe this decline in minutes of usage is due to low
usage customers and loss of focus on the PCO business.
The management continues to clean the free minutes
from the system and this is expected to take 2-3 quarters.
Non-wireless business supported EBITDA: While
EBITDA margin of the wireless segment remained flat on
lower topline, operating margin expansion in the global
segment of 217bp (20.6%) supported the overall EBITDA
margin.
Revised earnings estimate: We are revising our EBITDA
estimates downward by 2.6% and 6.2% for FY11E and
FY12E respectively to factor in lower minutes growth and
slower growth in non-wireless segments and adjusting for
lower tax rate for FY11E.
Reiterate buy with a long term view: At the CMP, the
stock trades at 6.9x FY12E EV/EBITDA. We reiterate Buy on
the stock considering the value of existing business
However, uncertainty over 2G issue and higher debt
would determine the stock’s performance.
Minutes of usage not picking up
Revenue for the wireless segment was down 2.3% QoQ despite strong addition of subscribers
and flat RPM of 44p. This decline was mainly on account of a drop in minutes of usage during
Q3FY11 as the company continues to take out free minutes from the system. The management
indicated the process of clean-up will take 2-3 quarters more.
Wireless segment maintains margin
Wireless segment maintained margin despite lower topline on cost control measures. Lower
network expenses helped the company maintain its margin at 29% on q-o-q basis. We expect
the operating margin to improve going forward once the company starts getting 3G revenue.
Change in estimates
We have revised our revenue and EBITDA estimates downward for FY11E, FY12E and FY13E to
factor in lower minutes of usage. We had earlier assumed higher minutes of usage but are
lowering it on account of the strategic shift of the company from PCO related business and the
lengthy process of removal of free minutes from the system which would take 2-3 quarter
more. Our EBITDA margin, however, remains broadly in line with our previous assumptions. We
have also adjusted for the tax rate for FY11E and hiked the interest rate assumption as we
expect some refinancing activity to address the loan liability for FY12E.
Reiterate Buy, despite short term pressure on 2G related issues
The stock has taken a hit on account of 2G related issues. If we analyse the business, despite
slow performance we arrive at a fair value of Rs127 per share based on sum of the parts
valuation. We have also lowered our per tower EV/tower assumption of Rs6mn to Rs5mn/tower
considering the risk of lower tenancy from third parties and ascribing 30% discount to Bharti
Airtel’s multiple. We have revised our target price to Rs127 per share (Rs164 earlier), implying
31% upside from current levels. On the risk of loan payouts and high leverage ratio, we see the
debt to EBITDA ratio peaking out in FY11E and assuming that the peak capex is over for 2G
business and the enterprise segment, the company could start generating free cash flow from
FY12E. Hence, even if it does not get a financial investor in the parent company or in the tower
business, the higher loan payouts can be managed by re-financing of debt. We believe the
existing run rate of cash profit should be adequate to service the interest burden. However, in
the near term, 2G related issues can restrict the stock’s performance.
Risk to our recommendation
Any liability from 2G license/spectrum related issues which are under scrutiny can dent the
financial as well as stock performance
We believe MNP will not lead to a severe tariff war as 3G service offering is coming before
it. Hence, any base tariff decline would change our revenue estimates for FY12E
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