Rcom: Mixed quarter with in-line revenues and lower-thanexpected margins; watch for further deals with RIL :JPMorgan

Reliance Communications (RCom) reported a mixed quarter (4QFY13) with
in-line revenues, while EBITDA margins decreased modestly Q/Q (vs. our
expectation of increase). Wireless revenues grew 2.5% Q/Q, while GEBU
(Global & Enterprise) revenue growth at 0.5% Q/Q was below our estimates.
EBITDA margins contracted 30 bps Q/Q. Operating metrics remained mixed.
 Revenue growth was in-line with expectation. Revenues of INR 54.1 billion
(excluding one-off i.e. INR 5.5 billion reversal of provision for business
restructuring) came in-line with our and consensus expectations. Wireless
revenue growth of 2.5% Q/Q was as per our estimate, but GEBU revenues fell
1.5% short of our expectation. RCom registered Y/Y revenue growth of 1.8%
Q/Q in 4QFY13 compared to 12.9% for Idea & 8.4% for Bharti (India & SA).
 EBITDA margins decreased 30 bps Q/Q (excluding reversal of provision
for business restructuring) despite sharp decline in Employee costs (versus
our expectation of modest margin expansion). We expected expansion in
margins due to lower SG&A & expected improvement in ARPMs. Surprisingly,
Employee costs decreased 33% Q/Q marking the lowest absolute quarterly
employee costs since FY06. Wireless and GEBU EBITDA margins remained
broadly flat Q/Q at 26.7% and 23.1%, respectively, below our estimates.
 Mixed operational metrics. Volume/total minutes growth of 2.3% Q/Q was
primarily driven by increase in MoUs. ARPMs remained broadly flat Q/Q
despite increase in tariffs in Sep-12 quarter. Notably, Tariff hikes impact
ARPMs for 2-3 quarters after the hike because of incremental shift of existing
customers to higher tariffs. RCom has again announced to increase tariffs by
about 20-30% in May-13. We need to see increase in ARPMs in the coming
quarters to see the effectiveness of these tariff increases.
 The highlight of the quarter was RCom’s agreement with Reliance Jio
(RIL) to share its inter-city optic fiber network. RCom suggested that this is
the first step in a series of a ‘comprehensive framework of business cooperation’ between the two companies. Notably, further large deals with
Reliance Jio are a key risk to our UW rating on RCom’s stock. See our note,
"Signs optic fiber network sharing deal with Reliance Industries; needs much
more to relieve balance sheet stress” dated April 2nd, 2013.
 Investment view. We have UW rating on RCom’s stock as it continues to lose
subscriber & revenue market share and leverage remains uncomfortably high.
However, further sizable asset sharing deals with RIL and asset monetization
remain key risks to our UW rating.

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