Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communications Neutral
RLCM.BO, RCOM IN
Profitability low; Leverage high: Q4'FY11 Wrap
The ~7% revenue growth in Q4 was welcome but higher operating and
interest and tax expenses kept profitability low. EBITDA margin declined
~3.5pp Q/Q while EPS was 65% lower Q/Q. We have increased our 3G
revenue estimates but we don’t expect to see a meaningful operational
recovery in the existing business in the near term. Furthermore we note that
3G related expenses will start impacting the P&L from FY12 and leverage
remains high at ~5x net debt/EBITDA.
• Wireless: ARPM stability but margin pressure: RCOM reported a fifth
quarter of stable ARPMs at 44 paisa and management commented that
competitive intensity is easing. Importantly, wireless margin declined 1.6pp
to 27.4% (higher SG&A and network opex). We expect wireless margin to
remain under pressure in FY12 but with 3G data helping toward year-end.
• Capex cut sharply: Capex guidance for FY12 is INR 15bn, ~50% lower
than the FY11 underlying capex. We have reduced JPMe FY12/FY13 capex
by 56%/50% and capex/sales is now 7.7%/7.3% vs. 20.9% in FY11.
• Leverage concerns persist: Debt at end-FY11 was INR339bn (~US$7.5bn)
and net debt/EBITDA ratio was 4.9x vs. 2.6x in FY10. We estimate this
can will fall to ~4x by FY12 however this would still be higher than peers.
• Forecast changes: We have increased our estimates for 3G revenue (4%/
10% of wireless revenue in FY12/FY13 vs. 3%/6% earlier). This is the
primary driver of the INR 0.6/1.0 increase in our FY11/FY12 EPS to INR
6.6/12.1. Without the 3G rev change, our EPS would be 2%/15% lower.
• Our Mar-12 price target (PT) is INR 95 (vs. Dec-11 of INR 82 earlier).
Our PT is adjusted downward for INR38/share for the regulatory risk. Our
underlying valuation of RCOM’s businesses increases primarily due to
higher 3G revenue, lower capex estimates and the PT time-frame shift. We
don’t see any near-term positive triggers for RCOM however de-leveraging
of the balance sheet would make us more positive. Downside risks include
sharper decline in minutes and also in ARPM; longer-than-expected
regulatory uncertainty.
Key takeaways from the results and
analyst call
Q4 results included INR 25.45bn of a one-off IRU license income revenue and INR
25.3bn of EBITDA due to accounting changes.
Robust top-line sequential growth: Q4 revenue at INR 53.3bn (adjusted for IRU
income) grew +6.5% Q/Q, +4.7% Y/Y and beat JPMe/consensus of INR
51.3bn/50.9bn by 4/5%. RCOM saw Q/Q growth after eight quarters. Relative to our
estimates, wireless revenue at INR 41,978mn beat JPMe by 2% growing 3.3% Q/Q.
ARPM protected over minutes: RCOM has now reported 5 consecutive quarters of
ARPM at 44 paisa. We note that Vodafone’s ARPM declined 1.5 paisa Q/Q, and
Bharti’s 1paisa. RCOM continues to focus on ARPM vs. minutes and removing free
minutes will take another 2 quarters. RCOM’s total wireless minutes increased only
3.2% Q/Q (Vodafone +7.8%, Bharti: +6.4%) after the 3.3% decline in Q3. MOU was
241, down 4% Q/Q in-line with JPMe of 241 min. ARPU continued to decline,
falling 3.6% to INR 107 vs. the 9.0%/6.2% decline in Q3FY11/Q2FY11.
3G update: RCOM is present in 350 towns across the 13 circles where it has 3G
licenses. 9000 (~20%) of its towers are 3G enabled. RCOM stated it had 1.7m 3G
subs. RCOM has not expensed 3G spectrum and license fee yet – this will start in
FY12.
Global flat, Broadband disappoints: Adjusting for IRU license fee of INR
25,450m, global revenue of INR 19,308m was flat Q/Q despite the 2.2% growth in
minutes. EBITDA margin here declined 80bp to 19.8%. Despite a 12% Q/Q growth
in top-line, Broadband margin declined ~4pp to 32.7%. Management indicated that
pricing was tough and network opex increased.
Adjusted EBITDA margin declines in Q4: Reported group EBITDA of
INR41.22bn included a one-time income from IRU license fee. Management
commented that Global included EBITDA of INR 25,300m. Adjusting for this,
EBITDA margin at 29.9% (-3.5pp Q/Q, -1.8pp Y/Y) missed JPMe/cons by
2.9/3.0pp. Wireless margins dipped 1.6pp Q/Q while broadband too saw a 3.9pp
margin decline. We note that network opex increased 23% Q/Q to INR 15.3bn
(28.8% of sales vs. 25.0% in Q3) driven by expansion of 3G and high-speed data
network (to over 500 towns) as power and fuel costs increased and some increase for
DTH content.
Wireless margin declined 1.64pp Q/Q to 27.4% due to higher 3G related SG&A and
network expenses. We expect data revenue contribution to help margins but 2-3
quarters out and in the interim we expect higher costs to keep margins from
recovering quickly.
Net profit of INR 1.7bn, EPS of INR 0.8: RCOM reported net income of INR
1.7bn, missing JPMe/cons of INR 3.6/3.1bn by a large margin driven by higher
interest and tax expenses. 3G related expenses are expected to hit the P&L from
Q1FY12. Q4 EPS was INR 0.8.
Leverage remains at ~5.0x: Net debt at the quarter end was INR 320.5bn
(~US$7bn) and we estimate that the net debt/EBITDA ratio was 5.0x vs. 4.9 in Q3.
This is based on an adjusted Q4 EBITDA of INR15.9bn. High leverage at RCOM
remains a concern for us.
Q4 capex low; FY12 guidance of INR 15bn: Capex for the quarter was INR 6.6bn
(12.4% of sales), including INR 5.8bn in the wireless segment. Management’s capex
guidance for FY12 is INR 15bn, ~50% lower than the underlying capex for FY11
with the bulk of the reduction driven by wireless. Management believes the peak
capex is in the past and future capex will be driven by capacity needs.
Valuation and rating analysis
Our March-12 price target is now INR 95 (vs. Dec-11 INR 82 earlier). This is based
on our SOTP-based fair market value of INR 134/share for RCOM's core businesses
and an INR 38 reduction for estimated risk of the current regulatory environment.
We quantify the risk relating to the 2G spectrum issues. These include [1] excess
spectrum payment [2] renewal of licenses [3] the loss attributed to dual-technology
telcos by the CAG report [4] others like the shareholding in Swan Telecom and the
CBI investigation. We estimate the impact at INR 38. We note that these are known
risks to the market now and we acknowledge that the risk here may be different.
Risks to our ratings and price target include
Upside risks: [1] Better minute volume performance in wireless; [2] Better
performance in Globalcom from data revenue; [3] Wireless margin strength; [4]
consolidation in the market; [5] Stake sale confirmation – the RCOM board has
approved a 26% stake sale in the company. An equity infusion would be positive and
help de-lever the company.
Downside risks: [1] Less success for ROCM in Mobile Number Portability resulting
in continued declines in ARPMs vs. the stabilization we forecast; [2] Delays in or
unsuccessful stake sale (cash inflow from which would be used for debt reduction)
[3] Continued regulatory-related issues.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communications Neutral
RLCM.BO, RCOM IN
Profitability low; Leverage high: Q4'FY11 Wrap
The ~7% revenue growth in Q4 was welcome but higher operating and
interest and tax expenses kept profitability low. EBITDA margin declined
~3.5pp Q/Q while EPS was 65% lower Q/Q. We have increased our 3G
revenue estimates but we don’t expect to see a meaningful operational
recovery in the existing business in the near term. Furthermore we note that
3G related expenses will start impacting the P&L from FY12 and leverage
remains high at ~5x net debt/EBITDA.
• Wireless: ARPM stability but margin pressure: RCOM reported a fifth
quarter of stable ARPMs at 44 paisa and management commented that
competitive intensity is easing. Importantly, wireless margin declined 1.6pp
to 27.4% (higher SG&A and network opex). We expect wireless margin to
remain under pressure in FY12 but with 3G data helping toward year-end.
• Capex cut sharply: Capex guidance for FY12 is INR 15bn, ~50% lower
than the FY11 underlying capex. We have reduced JPMe FY12/FY13 capex
by 56%/50% and capex/sales is now 7.7%/7.3% vs. 20.9% in FY11.
• Leverage concerns persist: Debt at end-FY11 was INR339bn (~US$7.5bn)
and net debt/EBITDA ratio was 4.9x vs. 2.6x in FY10. We estimate this
can will fall to ~4x by FY12 however this would still be higher than peers.
• Forecast changes: We have increased our estimates for 3G revenue (4%/
10% of wireless revenue in FY12/FY13 vs. 3%/6% earlier). This is the
primary driver of the INR 0.6/1.0 increase in our FY11/FY12 EPS to INR
6.6/12.1. Without the 3G rev change, our EPS would be 2%/15% lower.
• Our Mar-12 price target (PT) is INR 95 (vs. Dec-11 of INR 82 earlier).
Our PT is adjusted downward for INR38/share for the regulatory risk. Our
underlying valuation of RCOM’s businesses increases primarily due to
higher 3G revenue, lower capex estimates and the PT time-frame shift. We
don’t see any near-term positive triggers for RCOM however de-leveraging
of the balance sheet would make us more positive. Downside risks include
sharper decline in minutes and also in ARPM; longer-than-expected
regulatory uncertainty.
Key takeaways from the results and
analyst call
Q4 results included INR 25.45bn of a one-off IRU license income revenue and INR
25.3bn of EBITDA due to accounting changes.
Robust top-line sequential growth: Q4 revenue at INR 53.3bn (adjusted for IRU
income) grew +6.5% Q/Q, +4.7% Y/Y and beat JPMe/consensus of INR
51.3bn/50.9bn by 4/5%. RCOM saw Q/Q growth after eight quarters. Relative to our
estimates, wireless revenue at INR 41,978mn beat JPMe by 2% growing 3.3% Q/Q.
ARPM protected over minutes: RCOM has now reported 5 consecutive quarters of
ARPM at 44 paisa. We note that Vodafone’s ARPM declined 1.5 paisa Q/Q, and
Bharti’s 1paisa. RCOM continues to focus on ARPM vs. minutes and removing free
minutes will take another 2 quarters. RCOM’s total wireless minutes increased only
3.2% Q/Q (Vodafone +7.8%, Bharti: +6.4%) after the 3.3% decline in Q3. MOU was
241, down 4% Q/Q in-line with JPMe of 241 min. ARPU continued to decline,
falling 3.6% to INR 107 vs. the 9.0%/6.2% decline in Q3FY11/Q2FY11.
3G update: RCOM is present in 350 towns across the 13 circles where it has 3G
licenses. 9000 (~20%) of its towers are 3G enabled. RCOM stated it had 1.7m 3G
subs. RCOM has not expensed 3G spectrum and license fee yet – this will start in
FY12.
Global flat, Broadband disappoints: Adjusting for IRU license fee of INR
25,450m, global revenue of INR 19,308m was flat Q/Q despite the 2.2% growth in
minutes. EBITDA margin here declined 80bp to 19.8%. Despite a 12% Q/Q growth
in top-line, Broadband margin declined ~4pp to 32.7%. Management indicated that
pricing was tough and network opex increased.
Adjusted EBITDA margin declines in Q4: Reported group EBITDA of
INR41.22bn included a one-time income from IRU license fee. Management
commented that Global included EBITDA of INR 25,300m. Adjusting for this,
EBITDA margin at 29.9% (-3.5pp Q/Q, -1.8pp Y/Y) missed JPMe/cons by
2.9/3.0pp. Wireless margins dipped 1.6pp Q/Q while broadband too saw a 3.9pp
margin decline. We note that network opex increased 23% Q/Q to INR 15.3bn
(28.8% of sales vs. 25.0% in Q3) driven by expansion of 3G and high-speed data
network (to over 500 towns) as power and fuel costs increased and some increase for
DTH content.
Wireless margin declined 1.64pp Q/Q to 27.4% due to higher 3G related SG&A and
network expenses. We expect data revenue contribution to help margins but 2-3
quarters out and in the interim we expect higher costs to keep margins from
recovering quickly.
Net profit of INR 1.7bn, EPS of INR 0.8: RCOM reported net income of INR
1.7bn, missing JPMe/cons of INR 3.6/3.1bn by a large margin driven by higher
interest and tax expenses. 3G related expenses are expected to hit the P&L from
Q1FY12. Q4 EPS was INR 0.8.
Leverage remains at ~5.0x: Net debt at the quarter end was INR 320.5bn
(~US$7bn) and we estimate that the net debt/EBITDA ratio was 5.0x vs. 4.9 in Q3.
This is based on an adjusted Q4 EBITDA of INR15.9bn. High leverage at RCOM
remains a concern for us.
Q4 capex low; FY12 guidance of INR 15bn: Capex for the quarter was INR 6.6bn
(12.4% of sales), including INR 5.8bn in the wireless segment. Management’s capex
guidance for FY12 is INR 15bn, ~50% lower than the underlying capex for FY11
with the bulk of the reduction driven by wireless. Management believes the peak
capex is in the past and future capex will be driven by capacity needs.
Valuation and rating analysis
Our March-12 price target is now INR 95 (vs. Dec-11 INR 82 earlier). This is based
on our SOTP-based fair market value of INR 134/share for RCOM's core businesses
and an INR 38 reduction for estimated risk of the current regulatory environment.
We quantify the risk relating to the 2G spectrum issues. These include [1] excess
spectrum payment [2] renewal of licenses [3] the loss attributed to dual-technology
telcos by the CAG report [4] others like the shareholding in Swan Telecom and the
CBI investigation. We estimate the impact at INR 38. We note that these are known
risks to the market now and we acknowledge that the risk here may be different.
Upside risks: [1] Better minute volume performance in wireless; [2] Better
performance in Globalcom from data revenue; [3] Wireless margin strength; [4]
consolidation in the market; [5] Stake sale confirmation – the RCOM board has
approved a 26% stake sale in the company. An equity infusion would be positive and
help de-lever the company.
Downside risks: [1] Less success for ROCM in Mobile Number Portability resulting
in continued declines in ARPMs vs. the stabilization we forecast; [2] Delays in or
unsuccessful stake sale (cash inflow from which would be used for debt reduction)
[3] Continued regulatory-related issues.
No comments:
Post a Comment