Reliance Communication-Disappointment continues, REDUCE:: Emkay

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Reliance Communication

Disappointment continues, Downgrade to REDUCE

REDUCE

CMP: Rs154                                        Target Price: Rs135

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n     Q2FY11 EBIDTA grew by 1.7% QoQ to Rs16.6bn (below est of Rs17.6bn), PAT of Rs4.45bn led by lower interest expense

n     ARPU falls 6.2% QoQ to Rs122 purely on MOU decline as RPM remains stable. Wireless traffic growth absent

n     Cut EBIDTA and EPS estimates by 1.8% /3.5% and 14% /16.3% for FY11E /12E respectively

n     Cut target price to Rs135 (from Rs180) and rating to REDUCE from HOLD earlier. Valuations expensive at 9.2x and 8.8x EV/EBIDTA  for FY11E and FY12E respectively

Revenue & EBIDTA stable, interest on increased net-debt hit profitability

RCOM’s Q2FY11 revenues were flat at Rs51.2bn, in-line with industry trend affected by

seasonally weak quarter. We highlight RCOM’s revenues have remained flat for last 3

quarters with decline in MOU and stable realization (RPM). EBIDTA grew by 1.7% QoQ

to Rs16.6bn (below our estimate of Rs17.6bn). S, G & A expense fell 10% QoQ, which

helped improve margins by 50bps. Although PAT of Rs4.45bn was above our estimate

of Rs2.2bn, the same was entirely driven by lower interest expenses. Interest expense

decreased by 36.4% QoQ to Rs2.8bn, v/s our estimate of Rs5.1bn. Lower than

expected interest expenses during the quarter

Wireless ARPU falls by sharp 6.2% to Rs122

In line with industry trend owing to seasonality, the wireless revenues remained stable

during Q2FY11. However, the RPM also was stable v/s slight declines witnessed in

case of peers Bhart & Idea. ARPU fell by 6.2% to Rs122, entirely impacted by MOU

drop. Wireless traffic remained stable yet again at 94.5bn.

EBIDTA & EPS estimates cut by 1.8%/3.5% and 14%/16.3% for FY11E/12E

With continued disappointment on operating performance front, we have cut our

revenue and EBIDTA estimates by 2.3% /3.9% and 1.8% /3.5% for FY11E /12E.

Factoring higher interest expenses on the large debt of Rs292bn as of Q2FY11 (which

we estimate would increase to Rs316bn by FY11) we have cut our EPS estimate by

14% /16.3% for FY11E /12E to Rs9.7 /9.1.

Downgrade to REDUCE with target price of Rs135 (from Rs180)

Considering below estimated operating performance and continued deteriorating trend

in wireless business, we have cut our earnings estimate by 14-16%. Although capex for

the company has reduced sharply (Rs30bn for FY11E), lack of profitability improvement

given the industry headwinds, and cost of servicing large debt (Rs292bn in Q2FY11)

would continue to let RCOM remain FCF –ve.

We cut our rating on RCOM from HOLD to REDUCE with reduced target price of Rs135

(from Rs180 earlier). At CMP of Rs154, the stock trades at 9.2x and 8.8x EV/EBIDTA

and 15.9x and 17x our revised EPS for FY11E and FY12E respectively. High debt on

books (net-debt/ EBIDTA at 4.6x FY11E) remains prime risk especially given the

recovery in revenue and profitability of the company.