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Reliance Communication Ltd. — Some
improvement, but lagging peers
Estimate Change
Rationality returns, but lagging peers; retain Underperform
We maintain our Underperform rating for Reliance Com (RCom) and PO at
Rs95/sh. Displaying profit focus and a shift from its historically contrarian stance
on many industry issues, RCom has announced tariff hikes similar to other GSM
majors. This reinforces our expectation of uplift in industry EBITDA margins over
the next 2-3 qtrs. However, we expect RCom’s earnings upside to lag other
majors, both on timing and magnitude, due to much weaker subscriber quality.
We think RCom’s valuations will remain at a discount to peers owing to much
lower RoE.
FY12 EBITDA trimmed; FY13 raised by ~5%
In 1Q FY12, RCom’s EBITDA was flat YoY & QoQ as wireless EBITDA grew 2%
QoQ, lagging peers, and the global enterprise unit’s EBITDA contracted QoQ.
Factoring 1Q trends, we have trimmed FY12 EBITDA by ~2%, largely due to
lower revenues in global enterprise. Material impact of recent tariff hikes will likely
become visible only by 4Q FY12, and this drives the 4.5% EBITDA upgrade for
FY13.
Free cash high on agenda; likely in FY12 but unsustainable
RCom’s net debt has been flattish for the last 3 quarters, with net debt/annualized
EBITDA at ~5x. Along with results the Co reiterated readiness to redeem US$1bn
of foreign currency bonds in Mar ’12. We believe the Co is focused on meeting its
commitments and will generate free cash in FY12 owing to sharp capex cutback
(-60% YoY). Longer term, FY12 capex/sales of ~8% looks unsustainably low.
Mgt. call highlights – price stability; Infratel stake sale; 3G
On its post results call, RCom’s top mgt. said it expects tariff stability going
forward as the industry should focus on EBITDA mkt. share rather than revenue
share. Due diligence for stake sale in the tower arm (R-Infratel) is on. The Co has
2mn 3G subs (1% of sub base) & expects the 3G ecosystem to evolve in 3-4 qtrs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communication Ltd. — Some
improvement, but lagging peers
Estimate Change
Rationality returns, but lagging peers; retain Underperform
We maintain our Underperform rating for Reliance Com (RCom) and PO at
Rs95/sh. Displaying profit focus and a shift from its historically contrarian stance
on many industry issues, RCom has announced tariff hikes similar to other GSM
majors. This reinforces our expectation of uplift in industry EBITDA margins over
the next 2-3 qtrs. However, we expect RCom’s earnings upside to lag other
majors, both on timing and magnitude, due to much weaker subscriber quality.
We think RCom’s valuations will remain at a discount to peers owing to much
lower RoE.
FY12 EBITDA trimmed; FY13 raised by ~5%
In 1Q FY12, RCom’s EBITDA was flat YoY & QoQ as wireless EBITDA grew 2%
QoQ, lagging peers, and the global enterprise unit’s EBITDA contracted QoQ.
Factoring 1Q trends, we have trimmed FY12 EBITDA by ~2%, largely due to
lower revenues in global enterprise. Material impact of recent tariff hikes will likely
become visible only by 4Q FY12, and this drives the 4.5% EBITDA upgrade for
FY13.
Free cash high on agenda; likely in FY12 but unsustainable
RCom’s net debt has been flattish for the last 3 quarters, with net debt/annualized
EBITDA at ~5x. Along with results the Co reiterated readiness to redeem US$1bn
of foreign currency bonds in Mar ’12. We believe the Co is focused on meeting its
commitments and will generate free cash in FY12 owing to sharp capex cutback
(-60% YoY). Longer term, FY12 capex/sales of ~8% looks unsustainably low.
Mgt. call highlights – price stability; Infratel stake sale; 3G
On its post results call, RCom’s top mgt. said it expects tariff stability going
forward as the industry should focus on EBITDA mkt. share rather than revenue
share. Due diligence for stake sale in the tower arm (R-Infratel) is on. The Co has
2mn 3G subs (1% of sub base) & expects the 3G ecosystem to evolve in 3-4 qtrs.
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