Reliance Communications’ (RCom) stock spurted 2.5 per cent after it announced a 78 per cent jump in earnings for the quarter ended March to Rs 332 crore. In addition to the results, RCom’s plans to list its international undersea cable business on the Singapore Stock Exchange, as well as stake sale of tower unit in the latter part of the current financial year, also rubbed off positively on the stock.
The long-awaited sale of the two units will help the company tackle its net debt of Rs 35,839 crore, which continues to be the key concern, believe analysts. They say, unless these materialise and lead to a fall in debt or operational performance improves substantially, the upside for RCom’s stock remains capped. Additionally, a weak rupee is also a concern.
Harit Shah of Nirmal Bang Institutional Equities, who has a ‘hold’ on the stock with a target price of Rs 72, says, “RCom’s net debt remains high at Rs 35,840 crore, with its net debt-Ebitda level at 5.3 times in FY12. Rupee depreciation is a cause for concern in the wake of the company having Rs 27,740 crore of foreign currency loans on its books, which could adversely impact cash flow.”
| MUTED SHOW | |||
| In Rs crore | Q4' FY12 | FY12 | FY13E |
| Revenues | 5,310 | 20,382 | 22,178 |
| % change | 5.1 | -11.8 | 9.0 |
| Ebitda | 1,632 | 6,489 | 7,097 |
| % change | 1.3 | -28.5 | 10.0 |
| Ebitda (%) | 30.7 | 31.8 | 32.0 |
| Change (in bps) | -120 | -750 | 30 |
| Adjusted net profit | 332 | 928 | 966 |
| % change | 78.3 | -31.0 | 4.2 |
| P/E (x) | - | ||
Source: Company, Nirmal Bang Equities
The management, however, believes that while exploring options to sell some of its assets, the company is comfortable on its cash flow situation. Punit Garg, president and chief executive officer, believes with peak capex behind it, the company will be able to generate free cash flow, going ahead. The capex for FY13, which is pegged at Rs 1,500 crore, is likely to be funded from internal accruals, he says. The stock, which has fallen 37 per cent since mid-February, is likely to underperform. At Rs 67, the stock is trading at 11.4 times its FY13 earnings estimates, and is not far from analysts’ one-year target price of around Rs 70.
One-offs drive profit growth
While the company reported a jump of 78 per cent in net profit, accounting for tax adjustments and minority interest write-backs, net profit fell 67 per cent to Rs 84 crore, compared to the December quarter. Revenues at Rs 5,010 crore, up five per cent sequentially, were higher than expectations, Ebitda at Rs 1,632 crore (up 1.1 per cent) and Ebitda margins at 30.7 per cent (down 120 basis points) disappointed. Margins fell due to higher network operating costs, which as a percentage of sales went up about 500 basis points, partly led by year-end maintenance. The management, however, believes that margins are likely to hold steady.
Lagging peers
On the operational front, while its revenues per minute (RPM) have been in line with other players - falling two per cent sequentially - its average revenue per user or ARPU (down one per cent to about Rs 99 per month) has lagged its peers Bharti, Idea and Vodafone, which registered gains of between one and four per cent in the quarter. Says Shah of Nirmal Bang, “Revenues per minute declined 1.7 per cent sequentially as the company attempted to drive revenue through volume growth (minutes of usage (MoU) grew 3.1 per cent sequentially) and the competitive environment ensured RPM stayed at lower levels.”
However, Garg of RCom says the RPM has stabilised, with the fall limited to one per cent over the last eight quarters as compared to a much higher fall for competitors. Analysts say the company is likely to lose out on revenue market share (8.5 per cent currently), to its rivals, as the latter have a better quality of subscribers.
Focus on data
The company is banking on higher data revenue, which form 20 per cent of overall revenues to capture the growth in data business. It plans to expand its current base of 20 million data customers and 3.2 million 3G customers and improve the share of its non-voice business to 40 per cent over the next two to three years. Given that non-voice ARPUs are higher (about five to six times voice ARPUs), a higher share of the same is likely to boost its blended ARPUs and, hence, overall profitability.