Reliance Communicateions’ scrip has jumped 14 per cent over the last week on reports it is close to selling its tower unit, Reliance Infratel, and the likely listing of its international subsidiary, Flag Telecom. The company has been exploring options for some time now to bring down its debt, which currently stands at Rs 34,600 crore (net). If the tower deal and Flag’s listing comes through it could fetch the company about Rs 20,000-25,000 crore and help bring down its debt to manageable levels. While this is a positive, the company has to focus on improving its operational parameters, especially flat growth in revenues, a fall in profits and lower average revenue per user (ARPU) numbers.
At Rs 104.30, the stock is trading at 17.3 times its FY13 estimates. Most analysts have pegged its target price between Rs 80-86, which is 16-25 per cent lower than the current price. Analysts at Citi, though, have a target price of Rs 117 with a ‘buy’ rating on the stock. Experts say if the company manages to pull off its fund raising plans and improves its revenue market share, earnings estimates as well as its stock valuations could be revised upwards.
Sluggish performance
Last Friday (February 10) post market hours, the company reported a muted operational performance for the December quarter with disappointing overall revenue growth, traffic (minutes of usage) growth as well as average revenue per minute (ARPM) in a seasonally strong December quarter. This is evident from the contrast in its performance with other telecom players. Naveen Kulkarni and Vivekanand Subbaraman of MF Global say total minutes growth for RCom was one per cent higher compared to the September quarter, much lower than Vodafone’s 4.3 per cent and Idea Cellular’s 7.4 per cent. ARPM growth (0.3 per cent) too was lower than Bharti Airtel (3.5 per cent), Vodafone (2.3 per cent) and Idea Cellular (1.5 per cent).
The management, however, said while overall minutes are likely to grow, going forward, the focus continues to be on paid minutes. The company has been cutting out free minutes from its network over the last few quarters, which has helped keep ARPM steady at 44-45 paise (see chart). Further, the company indicated that tariff hikes undertaken in the September quarter will play out over the next few quarters.
While the company has managed to marginally improve its Ebidta margins to 31.9 per cent by reining in sales and general administration costs as well as employee costs, higher margins are likely to come from revenue growth given the scope for further cost reduction is limited, feel MF Global analysts.
While operational parameters need to improve, analysts say higher debt and interest costs are eating into profits. Stagnant revenues and a jump in interest costs have led to a drop in net profit in the current fiscal. Reducing its debt, thus, will be key. IIFL analysts, in a recent report say, while the lack of traction in wireless revenues in a seasonally-strong quarter is a concern, leverage continues to be the key overhang on the stock. A reduction in debt by Rs 22,500 crore will lead to a fall in interest costs by more than half, thereby leading to an improvement in the bottomline, say analysts.
Nevertheless, there are signs of improvement. Punit Garg, President, Reliance Communications, said in an investor’s call that FY12 will be the first full year of being free-cash-flow-(FCF) positive (indicating it will have a surplus after meeting capex and other business needs). Given all major projects have been implemented and peak capex is behind it, future requirements will be incremental, believes Garg. The company says capex for the current fiscal is likely to be Rs 1,500 crore and remain low for FY13. Goldman Sachs analysts, however, estimate the company will generate negative FCF of Rs 425 crore for FY12 but will have a positive FCF of Rs 2,307 crore for FY13.
Higher data revenues, but ARPMs stable
Given the strong CDMA base and 3G expansion, non-voice revenue as a percentage of overall revenues at 20 per cent is the highest in the sector. The management has highlighted that it plans to double the same on the back of wireless data growth to 40 per cent in two to three years. Currently, the company has 2.8 million active 3G subscribers with ARPU of 3G at Rs 500- 600, compared to overall ARPUs of Rs 100. However, even with these, its ARPM hasn’t seen a meaningful increase, leaving the Street disappointed.
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Despite increasing the tariffs in the September quarter, RCom did not see an increase in ARPM in the past two quarters, compared to peers, says Ashish Aggarwal of Tata Securities. And, despite a high share of non-voice revenues (20 per cent of wireless) versus peers, RCom’s blended ARPMs are in line with the industry, he says.
Outlook
While any move to meaningfully reduce its debt will be positive, it is imperative that RCom improves its operational performance. While the cancellation of 122 licences is a boost for incumbents, RCom has a tough challenge from the likes of pan-India players, such as Bharti, Idea and Vodafone, which means it may not be easy for the company to arrest its declining revenue market share.