Reliance Communications: GSM blues

For the third time this year, the Reliance Communications (RCom) stock closed below the Rs 200 mark on Wednesday. Since January 2008, the stock has come off by about 73 per cent compared to a fall of 57 per cent for the Sensex, a significant underperformance.

With the Rs 19,068 crore RCom expected to roll out its GSM network in 14 circles later this year, the Street is anxious that operating expenses could rise sharply because the operator will be running two networks simultaneously. Currently the telco operates primarily a CDMA network and had a subscriber base of approximately 56 million at the end of September 2008.

Already, the impact of the higher operational costs was felt in the September 2008 quarter with the result that the wireless segment saw a fall in operating profit margins. Probably because it runs a CDMA network, RCom’s operating metrics haven’t been too encouraging over the past three or four quarters.

In the September quarter for instance, RCom’s revenue per minute fell 3 per cent sequentially to Rs 0.64 thanks to the average revenue per user (ARPU) trending downwards. RCom’s arpu was Rs 271 for the September quarter while that for Bharti was higher at Rs 331. Despite that there were no signs of elasticity and the minutes of usage remained more or less flat, compared with the June quarter, at 423 minutes. There are also some concerns regarding RCom’s accounting.

According to a report by a leading brokerage, the net profit for the September 2008 quarter has been aided by some aggressive accounting policy on interest income/expenses, negligible tax provisioning and income of around Rs 96 crore from the settlement of the dispute with Tata Communications over Flag . Analysts are also concerned that the company may be borrowing too much; at an estimated net debt/ operating profit ratio of 1.8 times, for the year to March 2009, they point out that the company may be among the biggest borrowers in the sector.