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Reliance Communication Ltd. — Relatively good 2Q but long road ahead
Estimate Change: In-line 2Q results; wireless performance better than peers
Reliance Communications’ EBITDA in 2Q FY11 fell 18% YoY & was up 2% QoQ;
operating performance was in line with our expectations. 2Q wireless margin and
KPI were mostly better than peers. Wireless margins were up 20bps QoQ vs
~70bps QoQ decline for Bharti. RCom’s MoU/sub fell 6% QoQ in line with the 5%
drop for Bharti. RCom’s revenue per minute (rpm) was flat vs 1% drop for Bharti.
Subs quality, 3G upside are worries; Maintain underperform
Despite better-than-peers 2Q performance, we maintain our underperform rating
on RCom due to 5 key reasons: 1) traffic growth will likely be weaker than others
due to poor subscriber quality (MoU/sub to continue to decline regardless of
seasonality); 2) restricted 3G footprint vs peers could drag 3G upside; 3) stock
valuations at ~9x FY12E-EV/EBITDA seem rich, 4) potential non-execution of the
tower-sharing contract with Etisalat could hurt long-term value and 5) netdebt/
EBITDA at ~4x FY12E implies low balance-sheet flexibility.
Factoring 2Q, we have trimmed FY11 EBITDA by 2% & cut FY12 EBITDA by 8%.
The cuts to FY12E reflect lower subscriber additions and traffic assumptions in
wireless, and weaker revenues in the Global segment. We forecast FY12E
EBITDA growth at ~5% YoY helped primarily by wireless subscriber growth. We
assume recent cost savings will sustain but risk to margins is on the downside.
Mgt. highlights: quality focus; MNP & 3G as game-changers
On its results call, RCom said its focus on improving quality of operations has
paid off. The Co sees mobile number portability & 3G as game-changers. RCom
will undertake phased 3G launch from end-CY10. The Co expects 3G tariffs to be
rational. RCom sees no regulatory risk from recent political developments.
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