Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communications (RCOM)
Telecom
Twin challenges – elusive revenue growth and stretched balance sheet. SELL.
RCOM’s struggle to grow revenues, wireless as well as non-wireless, continued in the
Dec 2010 quarter with the company reporting a 2.2% qoq decline in revenues.
Delivering revenue/EBITDA growth in the backdrop of stiff constraints posed by a
stretched balance sheet and weak competitive positioning in the market appears
extremely challenging to us; we see downside risk to Street’s estimates. SELL.
Another weak quarter
RCOM reported a 2.2% qoq and 5.8% yoy decline in consolidated revenues to Rs50 bn, 7%
below our estimate. EBITDA at Rs16.7 bn (3.5% lower than estimate) was flat qoq, but down 8%
yoy. EBITDA margin expansion of 90 bps qoq, despite the sequential decline in revenues, was
aided by aggressive cost control initiatives, especially on the network opex side. EBIT at Rs6.3 bn
(down 10% qoq, 35% yoy) fell 15% short of estimates. Net income of Rs4.8 bn was broadly in
line with our estimate despite the EBIT miss on account of lower-than-expected net finance
charges – the company attributed the same to higher forex gains in the quarter.
Same underlying issue – poor revenue performance
Revenue pressure sustained across business lines – wireless revenues were down 2.3% qoq (in a
seasonally strong quarter), BB segment revenues declined 6.5% qoq, while ‘others’ segment
revenues were down 22% qoq. We note that this is the 7th consecutive quarter of weak revenue
trajectory for RCOM. Its Dec 2010 quarter revenues of Rs50 bn are 18% lower than Mar 2009
quarter levels. What makes this even more disappointing is that the company has expanded into a
pan-India GSM player in this timeframe; gross asset turnover has declined to 0.24X for the Dec
2010 quarter from 0.32X in Mar 2010, severely denting the company’s return ratios in the process.
Balance sheet remains stretched
Exhibit 2 depicts the end-Dec 2010 balance sheet of RCOM – net debt to ttm EBITDA now stands
at 4.9X, while net debt to annualized Dec quarter EBITDA is at 4.8X, stretched in our view. Fresh
equity infusion (through dilution at the parent/ subsidiary level or asset sale, options that company
has been contemplating) could only serve as a temporary respite unless underlying business
challenges are resolved – stretched balance sheet makes aggressive actions to do so difficult.
Reiterate SELL on fundamentals; regulatory risk is additional and not in our target price
Even as one can blame the 2G spectrum allocation controversy for stock’s recent poor
performance, we see no fundamental earnings-based case for a positive view on the stock at
current prices, even ignoring regulatory risks. Reiterate SELL with a revised TP of Rs90 (from Rs125).
Dec 2010 quarter operating performance – key highlights
Wireless segment – poor performance continues, company admits portfolio
challenges. RCOM’s struggle to grow its wireless business continued with the company
reporting a 2.3% qoq decline in wireless revenues in what is a seasonally strong quarter
for the industry. The company attributed the same to the ongoing portfolio rebalancing in
the wireless segment – flushing out low-value minutes from the portfolio with a focus on
driving high-value minutes and hi-speed data usage in the system. Even as we agree with
the company to an extent, we believe RCOM has a stiff challenge ahead in growing its
wireless revenues on account of
Still-large PCO base – declining PCO base (see Exhibit 3) has been a drag on RCOM’s
wireless revenue base for the past several quarter; we note that PCOs still form 1.3%
of RCOM’s CDMA subs base.
Continued pressure on CDMA-voice business even as CDMA EVDO data business
continues to gain traction in the market. MNP could put pressure on this segment, in
our view.
Network disadvantage on the 2G GSM side – RCOM is saddled with an inferior 2G
GSM spectrum asset (4.4 MHz of 1800 MHz spectrum in most circles) relative to
GSM incumbents and has lower # of cell sites as well.
Stretched balance sheet - prevents the company from a being a price warrior in the
2G market and may hinder aggressive 3G network spends or pricing tactics; we fail
to see RCOM arresting the sustained decline in its India wireless revenue/ minutes/
EBITDA market share (see Exhibit 4) without substantially investing in the network
and/or resorting to price discounts.
That said, we believe the company’s strategy to focus on profitability, even if it
comes at the expense of revenue growth, is a logical choice, given the balance sheet
strain that a revenue-growth-centric strategy can entail.
Wireless business metrics – total minutes on the network declined 3.3% qoq and grew
just 2.8% yoy to 91.5 bn. Note that the GSM incumbents have all reported a 4.4-10.2%
qoq growth in minutes in this quarter. MOU fell 9.2% qoq to 251, while ARPU was down
8.7% qoq to Rs111. RPM inched up 0.5% qoq to Rs0.442 – understandable given weak
voice traffic performance and sharply increasing data contribution, especially on the
EVDO data card business.
Global business – good sequential growth, but yoy comps still weak. RCOM reported a
robust quarter for its global business with revenue growth of 4.6% qoq and OPM
expansion of 220 bps. That said revenues of Rs19.2 bn and EBITDA of Rs4 bn were still
down 3% and 5% on a yoy basis, respectively.
BB segment – sharp decline in ARPU. RCOM reported a sharp 6.5% qoq (and 12% yoy)
decline in BB segment revenues to Rs6.2 bn. Revenue decline was led by a sharp 7.8%
decline in ARPU for the segment to Rs1,494 from Rs1,377 in the Sep 2010 quarter. OPM
fell 80 bps qoq, driving an 8.6% qoq decline in segment EBITDA.
Other segment – surprising drop in revenues. ‘Others’ segment revenues were down
22% qoq to Rs3.1 bn even as EBITDA loss in this segment remained flat at Rs1.3 bn.
Capex for the quarter was Rs19.1 bn, led by Rs16.8 bn capex in the wireless
segment; 9MFY11 capex stands at Rs36 bn. The company maintained its ex-3G capex
guidance for FY2011E at Rs30 bn, implying that a bulk of wireless capex in 3QFY11 was
on the 3G network.
RCOM reported an absolute decline of 9.6% qoq in its network opex at the
consolidated level, driving the 200 bps qoq expansion in margins. The company
attributed the same to relentless focus on driving cost efficiencies.
We note that RCOM did not expense any 3G-related interest or spectrum
amortization costs during the quarter, citing its limited-city launch in Dec 2010 as ‘soft
launches’. The company has indicated that these costs will start impacting the P&L only
from 1QFY12E.
Net finance charge for the quarter was a low Rs1.3 bn, despite a high net debt of
Rs323 bn at end-Dec 2010. The company attributed the same to forex gains. Exhibit 5
depicts our estimate of the forex gain in this line item.
Cut estimates; reiterate SELL. Valuations still expensive despite the recent fall
Exhibit 7 gives the key changes to our earnings estimates for RCOM. We have cut our
revenue/EBITDA estimates for the company by 6/4% and 10/12% for FY2012/13E. Our
revised EPS estimates for FY2012E and FY2013E now stand at Rs7.9/share (Rs9.2 earlier) and
Rs11.3/share (Rs13.7 earlier), respectively.
We cut our end-FY2012E DCF-based target price on the stock to Rs90/share (Rs125 earlier).
We note that the valuations at 7.2X FY2012E and 6.2X FY2013E EV/EBITDA remain
expensive despite building in reasonably aggressive EBITDA growth estimates. We also note
that out target price does not include any impact of any adverse regulatory decision – for
example, if the recent TRAI recommendations on spectrum pricing on license renewal are
accepted, RCOM faces a negative NPV hit of Rs19/share, as per our computation (see Exhibit
6). Reiterate SELL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communications (RCOM)
Telecom
Twin challenges – elusive revenue growth and stretched balance sheet. SELL.
RCOM’s struggle to grow revenues, wireless as well as non-wireless, continued in the
Dec 2010 quarter with the company reporting a 2.2% qoq decline in revenues.
Delivering revenue/EBITDA growth in the backdrop of stiff constraints posed by a
stretched balance sheet and weak competitive positioning in the market appears
extremely challenging to us; we see downside risk to Street’s estimates. SELL.
Another weak quarter
RCOM reported a 2.2% qoq and 5.8% yoy decline in consolidated revenues to Rs50 bn, 7%
below our estimate. EBITDA at Rs16.7 bn (3.5% lower than estimate) was flat qoq, but down 8%
yoy. EBITDA margin expansion of 90 bps qoq, despite the sequential decline in revenues, was
aided by aggressive cost control initiatives, especially on the network opex side. EBIT at Rs6.3 bn
(down 10% qoq, 35% yoy) fell 15% short of estimates. Net income of Rs4.8 bn was broadly in
line with our estimate despite the EBIT miss on account of lower-than-expected net finance
charges – the company attributed the same to higher forex gains in the quarter.
Same underlying issue – poor revenue performance
Revenue pressure sustained across business lines – wireless revenues were down 2.3% qoq (in a
seasonally strong quarter), BB segment revenues declined 6.5% qoq, while ‘others’ segment
revenues were down 22% qoq. We note that this is the 7th consecutive quarter of weak revenue
trajectory for RCOM. Its Dec 2010 quarter revenues of Rs50 bn are 18% lower than Mar 2009
quarter levels. What makes this even more disappointing is that the company has expanded into a
pan-India GSM player in this timeframe; gross asset turnover has declined to 0.24X for the Dec
2010 quarter from 0.32X in Mar 2010, severely denting the company’s return ratios in the process.
Balance sheet remains stretched
Exhibit 2 depicts the end-Dec 2010 balance sheet of RCOM – net debt to ttm EBITDA now stands
at 4.9X, while net debt to annualized Dec quarter EBITDA is at 4.8X, stretched in our view. Fresh
equity infusion (through dilution at the parent/ subsidiary level or asset sale, options that company
has been contemplating) could only serve as a temporary respite unless underlying business
challenges are resolved – stretched balance sheet makes aggressive actions to do so difficult.
Reiterate SELL on fundamentals; regulatory risk is additional and not in our target price
Even as one can blame the 2G spectrum allocation controversy for stock’s recent poor
performance, we see no fundamental earnings-based case for a positive view on the stock at
current prices, even ignoring regulatory risks. Reiterate SELL with a revised TP of Rs90 (from Rs125).
Dec 2010 quarter operating performance – key highlights
Wireless segment – poor performance continues, company admits portfolio
challenges. RCOM’s struggle to grow its wireless business continued with the company
reporting a 2.3% qoq decline in wireless revenues in what is a seasonally strong quarter
for the industry. The company attributed the same to the ongoing portfolio rebalancing in
the wireless segment – flushing out low-value minutes from the portfolio with a focus on
driving high-value minutes and hi-speed data usage in the system. Even as we agree with
the company to an extent, we believe RCOM has a stiff challenge ahead in growing its
wireless revenues on account of
Still-large PCO base – declining PCO base (see Exhibit 3) has been a drag on RCOM’s
wireless revenue base for the past several quarter; we note that PCOs still form 1.3%
of RCOM’s CDMA subs base.
Continued pressure on CDMA-voice business even as CDMA EVDO data business
continues to gain traction in the market. MNP could put pressure on this segment, in
our view.
Network disadvantage on the 2G GSM side – RCOM is saddled with an inferior 2G
GSM spectrum asset (4.4 MHz of 1800 MHz spectrum in most circles) relative to
GSM incumbents and has lower # of cell sites as well.
Stretched balance sheet - prevents the company from a being a price warrior in the
2G market and may hinder aggressive 3G network spends or pricing tactics; we fail
to see RCOM arresting the sustained decline in its India wireless revenue/ minutes/
EBITDA market share (see Exhibit 4) without substantially investing in the network
and/or resorting to price discounts.
That said, we believe the company’s strategy to focus on profitability, even if it
comes at the expense of revenue growth, is a logical choice, given the balance sheet
strain that a revenue-growth-centric strategy can entail.
Wireless business metrics – total minutes on the network declined 3.3% qoq and grew
just 2.8% yoy to 91.5 bn. Note that the GSM incumbents have all reported a 4.4-10.2%
qoq growth in minutes in this quarter. MOU fell 9.2% qoq to 251, while ARPU was down
8.7% qoq to Rs111. RPM inched up 0.5% qoq to Rs0.442 – understandable given weak
voice traffic performance and sharply increasing data contribution, especially on the
EVDO data card business.
Global business – good sequential growth, but yoy comps still weak. RCOM reported a
robust quarter for its global business with revenue growth of 4.6% qoq and OPM
expansion of 220 bps. That said revenues of Rs19.2 bn and EBITDA of Rs4 bn were still
down 3% and 5% on a yoy basis, respectively.
BB segment – sharp decline in ARPU. RCOM reported a sharp 6.5% qoq (and 12% yoy)
decline in BB segment revenues to Rs6.2 bn. Revenue decline was led by a sharp 7.8%
decline in ARPU for the segment to Rs1,494 from Rs1,377 in the Sep 2010 quarter. OPM
fell 80 bps qoq, driving an 8.6% qoq decline in segment EBITDA.
Other segment – surprising drop in revenues. ‘Others’ segment revenues were down
22% qoq to Rs3.1 bn even as EBITDA loss in this segment remained flat at Rs1.3 bn.
Capex for the quarter was Rs19.1 bn, led by Rs16.8 bn capex in the wireless
segment; 9MFY11 capex stands at Rs36 bn. The company maintained its ex-3G capex
guidance for FY2011E at Rs30 bn, implying that a bulk of wireless capex in 3QFY11 was
on the 3G network.
RCOM reported an absolute decline of 9.6% qoq in its network opex at the
consolidated level, driving the 200 bps qoq expansion in margins. The company
attributed the same to relentless focus on driving cost efficiencies.
We note that RCOM did not expense any 3G-related interest or spectrum
amortization costs during the quarter, citing its limited-city launch in Dec 2010 as ‘soft
launches’. The company has indicated that these costs will start impacting the P&L only
from 1QFY12E.
Net finance charge for the quarter was a low Rs1.3 bn, despite a high net debt of
Rs323 bn at end-Dec 2010. The company attributed the same to forex gains. Exhibit 5
depicts our estimate of the forex gain in this line item.
Cut estimates; reiterate SELL. Valuations still expensive despite the recent fall
Exhibit 7 gives the key changes to our earnings estimates for RCOM. We have cut our
revenue/EBITDA estimates for the company by 6/4% and 10/12% for FY2012/13E. Our
revised EPS estimates for FY2012E and FY2013E now stand at Rs7.9/share (Rs9.2 earlier) and
Rs11.3/share (Rs13.7 earlier), respectively.
We cut our end-FY2012E DCF-based target price on the stock to Rs90/share (Rs125 earlier).
We note that the valuations at 7.2X FY2012E and 6.2X FY2013E EV/EBITDA remain
expensive despite building in reasonably aggressive EBITDA growth estimates. We also note
that out target price does not include any impact of any adverse regulatory decision – for
example, if the recent TRAI recommendations on spectrum pricing on license renewal are
accepted, RCOM faces a negative NPV hit of Rs19/share, as per our computation (see Exhibit
6). Reiterate SELL.
No comments:
Post a Comment