Reliance Communications’ growth prospects would improve substantially once it completes its GSM rollout across the country over the next eight months.
India’s second largest wireless telephony services company, Reliance Communications (RCOM) has not been a fancied stock among investors over the last two months.
The company, which in addition to telephony services offers home entertainment, enterprise solutions and retail services to over 55 million users worldwide, has seen its stock price shed 30 per cent from its July peak of Rs 525 and is currently trading at Rs 370 levels.
The dip in its prices was the result of a lacklustre first quarter numbers in the current fiscal. While the company’s topline remained flat q-o-q at Rs 5,229 crore, EBIDTA was down 2.9 per cent to Rs 2,250 crore for the same period. The reason: Integration costs in the global business and a tepid performance in the domestic business.
Integration issues/ARPU decline
The company’s operations, which include voice and data services across global locations, got a boost last quarter with the acquisition of two UK-based businesses.
These are the Vanco Group, a network services provider and eWave which is in the Wimax space with 19 licences in Eastern Europe, Africa and Latin America. Integrating the two companies cost Rs 60-65 crore dragging down the consolidated operating margins. ARPUs were down from Rs 317 to Rs 282 due to a decline in revenues of public calling offices and near stagnant mobile revenues brought on by a cut in STD tariffs.
The company believes that these revenues will move up as the minutes of usage catches up (with a lag effect) and the company expands its network of PCOs in rural areas.
Going ahead, the company plans to increase its ARPUs from its CDMA customer base by completing the rollout of high speed data network on a national basis. The company is also pinning its hopes on its GSM network which it expects to rollout across the country by middle of 2009.
GSM rollout
RCOM is keen to make headway into the GSM space as it represents 80 per cent of the market opportunity with most high end customers using services of GSM operators due to the availability of a variety of handsets.
Currently, RCOM has 8 millions users on its GSM network in 6 circles or service areas and is planning to rollout its network in the rest 14 by launching services at the end of the year and covering the nation over the next one year. While its data services are currently on the CDMA network, the company hopes that with the implementation of Wideband CDMA, a type of 3G cellular network, it will be able to offer data services on GSM networks as well.
The company’s GSM base has grown by 15 per cent in the June quarter to 8 million subscribers while the CDMA base has gone up by 10 per cent on a much larger base of 38 million subscribers.
The company has identified two advantages for its GSM network. The first is the customers it will gain once number portability will be implemented at the end of next year. The second will be the reduction in interconnect charges (access charges and licence fees constitute 17 per cent of revenues) which due to its reach it can now complete on its own network.
| BUSINESS MIX | ||
| Company / Subsidiaries | Business | Services |
| Reliance Communications | Wireless | Mobile (CDMA+GSM), Wireless data, Fixed wireless, PCO |
| Reliance Telecom | Wireless | Mobile (GSM) |
| Reliance Tower | Tower | Multiple tenancy towers, Support systems |
| Reliance Globalcom | Networks | Data and network services through undersea cables, Long distance NLD, ILD) |
| RCIL/Globalcom | Enterprise | Internet Data Centre, Broadband, Leased Line, VPN, WiMax |
| Reliance Big TV | Home Entertainment | DTH, IPTV |
| Reliance Communications | Miscellaneous | Technology services, BPO, Retail |
Value unlocking
Shareholders have an opportunity to cash in on the global business (Reliance Globalcom) as well its tower business (Reliance Infratel) when the company lists the shares of these two companies in the domestic and international bourses.
The company has put both IPOs on hold due to unfavourable market conditions. Its tower business, which now has a portfolio exceeding 36,000 towers, was valued at Rs 27,000 crore (or Rs 131 per share) when the company sold 5 per cent to international institutional investors for Rs 1,400 crore last year.
The company is currently negotiating with telecom partners to have their equipment hooked up on its towers which will ensure steady rentals going ahead. Its only competitor in terms of size is the Indus joint venture (Bharti, Idea and Vodafone, all GSM operators) with a portfolio of over 70,000 towers.
Reliance Globalcom, which has undersea cable infrastructure, global data and network services, national and international long distance calls as part of its operations accounts for a quarter of the group’s revenues.
Investment rationale
The biggest positive for Reliance Communication is the gamut of voice and data services for retail customers and corporates. With size and volume growth the company has improved its EBIDTA margins from 23 per cent in FY06 to about 43 per cent in FY08. While this is expected to stabilise at these levels, net profit margins should drop slightly on account of higher depreciation and tax outgo.
The end of CY 2009 will see the company realise gains from the higher broadband and data revenues boosting ARPUs, and cost savings due to sharing of network costs for a number of services across the Reliance Communications network in India and outside the country.
| ROBUST GROWTH | |||
| Rs crore | FY08 | FY09E | FY10E |
| Net sales | 19,067 | 25,300 | 31,912 |
| EBIDTA | 8,198 | 10,879 | 14,360 |
| Net profit | 5,401 | 5,779 | 7,327 |
| P/E (x) | 20.6 | 13.2 | 10.4 |
| E: Analyst estimates | |||
At the current price and despite a 5 per cent jump on Friday, the stock is available at 13 times its estimated FY09 earnings of Rs 28 and 10.4 times FY10 EPS of Rs 35.5, and can deliver 28-30 per cent returns over the next 12-15 months.
Also, despite RCOM’s growth prospects and revenue visibility, it’s larger and nearest competitor, Bharti Airtel quotes at a premium (17 times its estimated FY09 EPS of about Rs 47), which provides cushion on the downside. The revenue upside from the company's foray into 3G services (yet to get spectrum) and the recent launch to DTH services (BIG TV) will be more clear over the next 15 months.
