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India Equity Research Reports, IPO and Stock News
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Lurking doubts
We cut our FY12/13 earnings forecasts for Reliance Communications by
20%/6% in the wake of its poor 4QFY11 performance, despite a 3% QoQ
increase in mobile revenue following eight quarters of GSM expansion
and a significant push for data offering on the CDMA spectrum.
Meanwhile, the group has revived proposals for a stake sale in its tower
company on the back of its high debt, but with ongoing regulatory
uncertainties and the firm’s lofty leverage, we maintain our Underperform
call on the stock.
Yet again accounting change, but mobile revenue up 3% QoQ.
RCom’s 4QFY11 results included yet again a significant accounting change. This
boosted revenue and Ebitda by a significant Rs25.5bn, or 48-161% with the
inclusion of indefeasible right to use (IRU) income which is now recognised at the
time of signing the contract from straight line method. As a result, the firm
recognised earlier years contract revenues upfront and the net effect due to
higher depreciation was a loss of Rs470m. Excluding the exceptional/IRU income,
Ebitda declined 6% QoQ in 4Q (16% YoY in FY11) following a 23% QoQ climb in
network operating costs with 3G and EVDO rollouts causing a 375bp contraction in
margin to 29.6%. However, after eight quarters of GSM expansion, mobile
revenue rose 3% QoQ, traffic jumped 3% QoQ and the company is
aggressively focusing on data offerings on the CDMA spectrum, though
RCom’s high 35% share of inactive subscribers of total 136m (as per TRAI) and a
change in the use of the CDMA spectrum to data offering renders Arpu (down 4%
QoQ to Rs107, which is 36-45% below Idea Cellular and Bharti Airtel) and persubscriber
MoU (was down as well, declining 4% QoQ to 241 versus 425 of peers)
difficult to compare with industry.
High debt burden and inevitable tower stake sale/deals.
Meanwhile, RCom’s high Rs320bn (US$7.1bn) net debt and a delay in turning
around its core mobile operations pushed gearing to another new high at 4.9x net
debt to Ebitda (excl the exceptional IRU income from Ebitda (3.5x including the
same)). The lofty debt burden has revived proposals for a stake sale in the 95%-
owned Reliance Infratel tower company. On the regulatory front, RCom maintains
it held only 9.9% of Swan Telecom and did not violate any licence conditions. We
await the CBI third charge sheet (expected end of June) on Delphi Investments,
to which RCom sold its stake in Swan Telecom. Meanwhile, ongoing investigations
do not question the grant of the GSM spectrum to dual operators RCom and Tata
Teleservices, but the risk of additional payments for the same remains.
Earnings downgrade, regulatory uncertainties; maintain U-PF.
In view of RCom’s tough transition from dual network to GSM and yet another
miss on estimates, we lower our FY12-13 profit estimates by 20%/6%. The
company needs to charge a premium paid for the redemption of foreign
currency convertible bonds (FCCB) in FY12CL and our factored net-interest
costs are Rs16bn (versus Rs11bn in FY11) and a 2-6% tax rate for FY12-
13CL. Despite RCom’s turn in mobile revenue and expectations of a potential
deal, it is still in the midst of regulatory uncertainties and is highly levered. We
maintain our Underperform call on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lurking doubts
We cut our FY12/13 earnings forecasts for Reliance Communications by
20%/6% in the wake of its poor 4QFY11 performance, despite a 3% QoQ
increase in mobile revenue following eight quarters of GSM expansion
and a significant push for data offering on the CDMA spectrum.
Meanwhile, the group has revived proposals for a stake sale in its tower
company on the back of its high debt, but with ongoing regulatory
uncertainties and the firm’s lofty leverage, we maintain our Underperform
call on the stock.
Yet again accounting change, but mobile revenue up 3% QoQ.
RCom’s 4QFY11 results included yet again a significant accounting change. This
boosted revenue and Ebitda by a significant Rs25.5bn, or 48-161% with the
inclusion of indefeasible right to use (IRU) income which is now recognised at the
time of signing the contract from straight line method. As a result, the firm
recognised earlier years contract revenues upfront and the net effect due to
higher depreciation was a loss of Rs470m. Excluding the exceptional/IRU income,
Ebitda declined 6% QoQ in 4Q (16% YoY in FY11) following a 23% QoQ climb in
network operating costs with 3G and EVDO rollouts causing a 375bp contraction in
margin to 29.6%. However, after eight quarters of GSM expansion, mobile
revenue rose 3% QoQ, traffic jumped 3% QoQ and the company is
aggressively focusing on data offerings on the CDMA spectrum, though
RCom’s high 35% share of inactive subscribers of total 136m (as per TRAI) and a
change in the use of the CDMA spectrum to data offering renders Arpu (down 4%
QoQ to Rs107, which is 36-45% below Idea Cellular and Bharti Airtel) and persubscriber
MoU (was down as well, declining 4% QoQ to 241 versus 425 of peers)
difficult to compare with industry.
High debt burden and inevitable tower stake sale/deals.
Meanwhile, RCom’s high Rs320bn (US$7.1bn) net debt and a delay in turning
around its core mobile operations pushed gearing to another new high at 4.9x net
debt to Ebitda (excl the exceptional IRU income from Ebitda (3.5x including the
same)). The lofty debt burden has revived proposals for a stake sale in the 95%-
owned Reliance Infratel tower company. On the regulatory front, RCom maintains
it held only 9.9% of Swan Telecom and did not violate any licence conditions. We
await the CBI third charge sheet (expected end of June) on Delphi Investments,
to which RCom sold its stake in Swan Telecom. Meanwhile, ongoing investigations
do not question the grant of the GSM spectrum to dual operators RCom and Tata
Teleservices, but the risk of additional payments for the same remains.
Earnings downgrade, regulatory uncertainties; maintain U-PF.
In view of RCom’s tough transition from dual network to GSM and yet another
miss on estimates, we lower our FY12-13 profit estimates by 20%/6%. The
company needs to charge a premium paid for the redemption of foreign
currency convertible bonds (FCCB) in FY12CL and our factored net-interest
costs are Rs16bn (versus Rs11bn in FY11) and a 2-6% tax rate for FY12-
13CL. Despite RCom’s turn in mobile revenue and expectations of a potential
deal, it is still in the midst of regulatory uncertainties and is highly levered. We
maintain our Underperform call on the stock.
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