RELIANCE COMMUNICATIONS- Outlook remains cautious: Edelweiss

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RELIANCE COMMUNICATIONS
Outlook remains cautious


􀂃 Core business performance broadly in line with estimates
Reliance Communication’s (RCOM) Q2FY11 revenue and EBITDA were marginally
below our and Street’s estimates, but PAT was higher owing to lower net interest
cost (down ~36% Q-o-Q on account of lower derivative losses) and tax writeback
of INR 661 mn. In line with peers, overall minutes were relatively flat Q-o-
Q at 94.6 bn in a seasonally weak quarter, while MoU fell 6.2% Q-o-Q to 276.
ARPU, thus, declined to INR 122, despite stable RPM of INR 0.44. Revenues were
relatively flat across business segments sequentially (+2%), though there was a
~50bps improvement in consolidated EBITDA margin, primarily led by lower
SG&A that declined 10.3% Q-o-Q on account of lower promotional expenses.
Segmental margins improved a tad; wireless, global and broadband segment
margins improved by 21bps, 16bps and 87bps Q-o-Q respectively. Net interest
outgo declined to INR 2.8 bn (from INR 4.4 bn in Q1FY11) owing to lower MTM
losses of ~INR 500 mn vis-à-vis ~INR 2 bn in Q1FY11.


􀂃 Pricing for 3G services likely to be rational
Management emphasised that pricing for 3G services is expected to be rational,
particularly given that there is lesser competition (only 4-5 3G players/circle). It
highlighted that players are likely to focus on product innovation for
differentiation vis-à-vis pricing. Additionally, 3G services are unlikely to be
materially margin dilutive, given the cost optimisation efforts. Management
indicated that is in talks with other telecos for long-term roaming arrangements
in the 9 circles where it has not won a 3G license. Management reiterated its
FY11 capex guidance of INR 30 bn (ex-3G licence fee cost).

􀂃 Outlook and valuations: Cautious; maintain ‘REDUCE’
We remain cautious on the sector and expect MNP implementation and launch of
3G services to dilute profitability for telecos. Besides a tough industry scenario,
for RCOM, balance sheet concerns also remain, given its high debt levels. It
needs to deleverage its balance sheet to be able to focus on growth. We are
cutting our earnings estimates by 9.4% and 9.2% for FY11 and FY12,
respectively, as core business growth remains tepid. At 7.6x FY12 EV/EBITDA,
we maintain our ‘REDUCE’ rating on the stock and rate it ‘Sector
Underperformer’ on relative return basis.