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Reliance Communications' March quarter performance lagged peers on the operational front, on volumes and revenue parameters. The disappointment for the Street was largely on volumes, where the company recorded growth of 0.4 per cent on a sequential basis to 102 billion minutes, as compared to Bharti's four per cent and Idea's nine per cent. As the company had raised its tariffs in April, volume growth could be at risk.
Citi Research's Gaurav Malhotra and Arthur Pineda say the anemic minutes growth in the March quarter continues to highlight the relatively inferior subscriber quality base, compared to GSM incumbents. There has been a five per cent sequential fall in customer base as the company cleaned up its inactive subscribers.
The other key metric, revenue per minute, was down 1.5 per cent as compared to a flattish trend for Bharti. The management has indicated that this metric should improve given price rises taken in April. The CDMA segment which form 25-30 per cent of India revenues after seeing a declining trend has also bottomed out and this should look up given that the device ecosystem (common chip for GSM and CDMA) is improving.
As with others, the bright spot has been data volumes, witnessing a healthy trend, growing 21 per cent in the quarter, helping non-voice revenues grow two per cent on a sequential basis. Analysts, however, expected a better performance on this. Rohit Chordia and Shyam M of Kotak Institutional Equities say the reported non-voice revenues have been nearly flat for the past six quarters, despite data volumes rising threefold. While there is pressure on SMS and value-added services revenues across the sector, strong growth in data revenues should have led to better growth in non-voice revenues, they add
The Street will keep an eye on revenues from the company's infrastructure sharing deal with Reliance Jio and reduction in debt.
While any news on this will be a positive, given the lack of consistent performance, most analysts continue to have a sell on the stock. Moreover, the stock is trading at a premium of 25-35 per cent to peers Bharti and Idea, which are in a better shape on cash flows, operational performance and market share. Of the 35 analysts tracking the stock, 21 or 60 per cent have a 'sell', while 10 have a 'hold' rating and four believe the stock is a 'buy'. Given the consensus target price of Rs 117, the current market price, there is little upside from these levels.
The RCom management believes the rate rises will take at least two quarters to play out as special vouchers of different durations will need to expire before these customers are brought on to the new plan. In an environment where price rises could have an impact on volumes, how the company manages to balance the price and volume equations will be key. While the company has done better than Idea in arresting the fall in revenue per minute, it has not been able to match the volume spurt Idea was able to achieve. Given the 6.6 per cent increase in rates to 1.6 paise a second if the company manages to keep its volume growth constant, it should reflect positively on revenues.
Cash flow, debt reduction
The company has indicated a major part of the infra deals are yet to be recognised and will be done in the following quarters. The company had entered into multiple infrastructure deals with RJio for use of fibre network and towers. On the leverage issue, while net debt has come down on a sequential basis by 1.4 per cent, the company's net debt to Ebitda at over five times for FY14 continues to be high. Despite the fall in net debt, interest costs were up 21 per cent. The management has indicated some one-offs, including a security charge for a loan and the rupee refinancing of its dollar loans, were reasons for the increase in interest costs.
