While monetising its tower assets will be a key trigger for RCom, stability in its African operations and ability to maintain margins in the domestic voice business holds the key for the Airtel stock.
The stock of Reliance Communications (Rcom), which reported below-than-expected numbers on Monday, was up 2.17 per cent over plans to sell a controlling stake in its tower arm, Reliance Infratel. The company has been trying to reduce its consolidated debt pile of about Rs 32,000 crore by monetising its tower assets and reducing its interest outgo. Poor operational performance has also not helped matters. On an adjusted basis, the company's net profit was down 55 per cent sequentially in the March quarter, while its Ebitda (earnings before interest, depreciation, tax and amortisation) was down 4.6 per cent over the same period. Its larger peer, Bharti Airtel reported decent numbers. However, these were lower than expected on the operational front with mobile business margins falling 160 basis points sequentially.
While the stake-sale in the tower business will be a positive for the stock, a re-rating will only come about if Rcom can sustain its margins and improve its market share in the coming quarters. For Bharti Airtel, the key challenge is to stabilise its African business and arrest the fall in profitability in its voice segment.
| MUTED PERFORMANCE | ||||
| In Rs crore | Bharti Airtel | Rcom | ||
| Q4,FY11 | FY11 | Q4,FY11* | FY11 | |
| Revenue | 12-Jul | 59,467 | 5,331 | 23,107 |
| % change | 3.2 | 42 | 6.5 | 4.4 |
| Ebidta | 5,449 | 19,966 | 1,592 | 9,081 |
| % change | 9.3 | 19 | -4.6 | 16 |
| Ebidta (%) | 2-Feb | 33.6 | 29.9 | 39.2 |
| Change (bps) | 190 | -650 | -340 | 390 |
| Net profit | 1,400 | 6,046 | 216 | 1,345 |
| % change | 7.4 | -33 | -55 | -71 |
| P/E (x) | - | 23.5 | - | 14.3 |
| % change for the March quarter is sequential comparison, *Adjusted All figures are consolidated Source: Companies, Edelweiss, HSBC | ||||
COMPETITIVE PRESSURES
While the average revenue-per-user has fallen for both Rcom and Bharti, revenues per minute (RPM), another key indicator of revenue growth, is constant for Rcom, but has fallen for Bharti. While Rcom's RPM have been constant at 44 paise for the last four quarters, Bharti has seen its RPMs for the March quarter fall two per cent sequentially (over the December quarter) to 43 paise.
According to Edelweiss analysts, competitive intensity continues due to Mobile Number Portability (MNP) implementation and attractive 3G schemes, which are forcing players such as Bharti to respond. This is reflected in the fall in RPMs (down 3.8 per cent) as well as margins (down 160 bps) in the mobile business witnessed in the March quarter for the company. Though there are only four players in each circle in 3G, if a price war were to ensue, then the RPM, which was supposed to have bottomed out after the 2G tussle, could come under further pressure.
MARGIN WORRIES
Though Ebitda margins for both the companies were lower by 160-188 basis points sequentially, their managements believe they will be able to maintain margins. Syed Safawi, president and CEO, wireless business, Rcom said in a concall that the focus on paid minutes is paying-off, given the fact that RPMs have been constant in the last four quarters and will help maintain margins in 2011-12. The company has indicated that it will take a couple of quarters to get rid of the free minutes on its system. Adjusted for the change in accounting policy (which boosted reported revenues and Ebitda by a little over Rs 2,500 crore), Rcom's margins were down 340 basis points at almost 30 per cent.
Bharti, on the other hand, is banking on its outsourcing strategy and scale benefits in its African operations as well as the decline in competitive intensity in domestic operations (rates) to help it improve its margins.
INVESTMENTS
Bharti will be investing about $3 billion (Rs 13,500), a third of which will be in its African operations, in routine capital expenditure (capex) for 2011-12. That apart, analysts say it will require more funds if it wants to become a pan-India 3G and BWA player, which will curb its free cash flows over the next two years.
Rcom has given a 2011-12 capex guidance of only Rs 1,500 crore and believes peak capex is behind it. The company is targeting a net-debt to Ebitda of three times from the current levels of 3.5. The China Development Bank loan to refinance 3G fees is likely to result in annual savings of Rs 500 crore. However, HSBC analysts say Rcom's cut in capex is an indication of its balance-sheet constraints. It believes the upcoming $1.5 billion FCCB (foreign currency convertible bond) payment due in March next year could limit its ability to spend in the current year and could deepen the network gap between Rcom and other incumbents.
OUTLOOK
While minutes of usage have been quite strong for the sector, subscriber net additions m-o-m at 11.1 mn in April has been the lowest in the last 12 months. While analysts have put this down to stringent subscriber norms, seasonality and high penetration levels of 70 per cent, the continuation of this trend could be a problem area for the players. Analysts believe subscriber growth rate will moderate.
At Rs 374.15, Bharti's stock, however, could do better among the two as the company has a more diversified presence. For Rcom, the key issue remains its high debt, which if cut to comforting levels should ease some of the pressure on the stock.
