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Reliance Communications (RCOM)
Telecom
Sharp margin decline mars a good quarter on revenue growth. RCOM’s
consolidated EBITDA for 4QFY11 (adjusted for the accounting change in Global
segment) declined 5% qoq despite a healthy 6.4% qoq growth in revenues as margins
fell 340 bps qoq. Net income declined 65% qoq and 86% yoy to Rs1.7 bn, despite the
company not expensing 3G-related charges yet. We cut estimates and maintain our
SELL rating on the stock. TP moves up to Rs95/share on rollover to end-FY2013E
Sharp margin decline takes the sheen away from revenue beat
Before delving into the details, we note that RCOM’s reported financials included impact of a
change in revenue recognition policy in the Global segment. The company has now moved to
recognizing long-term IRU sale revenues upfront versus recognizing the same on a straight-line
basis over the term of the contract earlier. Accounting change (as well as prior-period impact of
the same for 1Q-3QFY11) increased reported revenues by Rs25.5 bn, EBITDA by Rs25.3 bn, and
depreciation by Rs25.3 bn while being neutral below the EBIT line. We discuss adjusted financials
in the remainder of this comment.
RCOM reported a 6.4% qoq and 4.6% yoy increase in consolidated revenues to Rs53.3 bn, 2.4%
ahead of our estimate. However, despite the impressive revenue beat, EBITDA at Rs15.9 bn, down
5% qoq, came in 8.3% below our expectation. EBITDA margin decline of 340 bps qoq was
surprising given the revenue traction, and was driven by a sharp qoq jump in network opex and
SG&A expenses. EBIT at Rs5.7 bn (down 10% qoq) fell 10% short of estimates, despite a rather
surprising qoq decline in depreciation. Net income of Rs1.7 bn (down 65% qoq, 86% yoy) was
41% below our estimate. We also note that the company did not take any of the 3G-related
expenses (amortization/ interest) during the quarter.
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 Mar quarter EBITDA is at 5X, 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 the 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 Rs95 (from Rs90).
Mar 2011 quarter operating performance – key highlights
Wireless segment – revenues grow, EBITDA declines. RCOM’s wireless segment
revenue performance was in line with our expectations. Revenues grew 3.3% qoq and
2.6% yoy to Rs42 bn on the back of 3.2% qoq minutes growth and flat RPM (aided by
robust data revenue growth). However, wireless segment EBITDA declined 2.6% qoq to
Rs11.5 bn as increase in costs led to a 160 bps qoq decline in EBITDA margins. EBITDA
per minute fell a sharp 5.6% qoq.
Wireless business metrics. Total minutes on the network increased 3.2% qoq and 1%
yoy to 94.4 bn. MOU fell 4% qoq to 241, while ARPU was down 4% qoq to Rs107. RPM
was flat qoq at Rs0.442.
Global business. Revenues were flat qoq at Rs19.3 bn on an adjusted basis, while
EBITDA declined 4% to Rs3.8 bn. The company reported strong growth in ILD minutes
carried on the network.
BB segment. Same story – good quarter on revenue growth (+12% qoq to Rs6.9 bn),
but a disappointing one on EBITDA (flat qoq as margins fell 400 bps qoq).
Others segment – good quarter. ‘Others’ segment revenues were up 17% qoq to
Rs3.6 bn; EBITDA loss in this segment came down qoq to Rs949 mn from Rs1.35 bn in
3QFY11.
Capex for the quarter was Rs6.6 bn. The company spent a capex of Rs43 bn in FY2011
and indicated that its ex-3G capex was in line with its Rs30 bn guidance at the beginning
of the year. Capex guidance for FY2012E stands at Rs15 bn – which sounds low, but has
to be viewed in the context of the company’s stretched balance sheet position.
We note that RCOM did not expense any 3G-related interest or spectrum
amortization costs during the quarter. The company has indicated that these costs will
start impacting the P&L only from 1QFY12.
Net debt at end-Mar 2011 stood at Rs320 bn, similar to end-Dec 2010 levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communications (RCOM)
Telecom
Sharp margin decline mars a good quarter on revenue growth. RCOM’s
consolidated EBITDA for 4QFY11 (adjusted for the accounting change in Global
segment) declined 5% qoq despite a healthy 6.4% qoq growth in revenues as margins
fell 340 bps qoq. Net income declined 65% qoq and 86% yoy to Rs1.7 bn, despite the
company not expensing 3G-related charges yet. We cut estimates and maintain our
SELL rating on the stock. TP moves up to Rs95/share on rollover to end-FY2013E
Sharp margin decline takes the sheen away from revenue beat
Before delving into the details, we note that RCOM’s reported financials included impact of a
change in revenue recognition policy in the Global segment. The company has now moved to
recognizing long-term IRU sale revenues upfront versus recognizing the same on a straight-line
basis over the term of the contract earlier. Accounting change (as well as prior-period impact of
the same for 1Q-3QFY11) increased reported revenues by Rs25.5 bn, EBITDA by Rs25.3 bn, and
depreciation by Rs25.3 bn while being neutral below the EBIT line. We discuss adjusted financials
in the remainder of this comment.
RCOM reported a 6.4% qoq and 4.6% yoy increase in consolidated revenues to Rs53.3 bn, 2.4%
ahead of our estimate. However, despite the impressive revenue beat, EBITDA at Rs15.9 bn, down
5% qoq, came in 8.3% below our expectation. EBITDA margin decline of 340 bps qoq was
surprising given the revenue traction, and was driven by a sharp qoq jump in network opex and
SG&A expenses. EBIT at Rs5.7 bn (down 10% qoq) fell 10% short of estimates, despite a rather
surprising qoq decline in depreciation. Net income of Rs1.7 bn (down 65% qoq, 86% yoy) was
41% below our estimate. We also note that the company did not take any of the 3G-related
expenses (amortization/ interest) during the quarter.
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 Mar quarter EBITDA is at 5X, 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 the 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 Rs95 (from Rs90).
Mar 2011 quarter operating performance – key highlights
Wireless segment – revenues grow, EBITDA declines. RCOM’s wireless segment
revenue performance was in line with our expectations. Revenues grew 3.3% qoq and
2.6% yoy to Rs42 bn on the back of 3.2% qoq minutes growth and flat RPM (aided by
robust data revenue growth). However, wireless segment EBITDA declined 2.6% qoq to
Rs11.5 bn as increase in costs led to a 160 bps qoq decline in EBITDA margins. EBITDA
per minute fell a sharp 5.6% qoq.
Wireless business metrics. Total minutes on the network increased 3.2% qoq and 1%
yoy to 94.4 bn. MOU fell 4% qoq to 241, while ARPU was down 4% qoq to Rs107. RPM
was flat qoq at Rs0.442.
Global business. Revenues were flat qoq at Rs19.3 bn on an adjusted basis, while
EBITDA declined 4% to Rs3.8 bn. The company reported strong growth in ILD minutes
carried on the network.
BB segment. Same story – good quarter on revenue growth (+12% qoq to Rs6.9 bn),
but a disappointing one on EBITDA (flat qoq as margins fell 400 bps qoq).
Others segment – good quarter. ‘Others’ segment revenues were up 17% qoq to
Rs3.6 bn; EBITDA loss in this segment came down qoq to Rs949 mn from Rs1.35 bn in
3QFY11.
Capex for the quarter was Rs6.6 bn. The company spent a capex of Rs43 bn in FY2011
and indicated that its ex-3G capex was in line with its Rs30 bn guidance at the beginning
of the year. Capex guidance for FY2012E stands at Rs15 bn – which sounds low, but has
to be viewed in the context of the company’s stretched balance sheet position.
We note that RCOM did not expense any 3G-related interest or spectrum
amortization costs during the quarter. The company has indicated that these costs will
start impacting the P&L only from 1QFY12.
Net debt at end-Mar 2011 stood at Rs320 bn, similar to end-Dec 2010 levels.
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