The Street is concerned that profits next year could be under pressure.
RCom may have added five million subscribers in January after it rolled out its GSM network in 2009, but the stock hit a lifetime low on Thursday. Over the past year, RCom has underperformed market leader Bharti by a wide margin—it has lost 74 per cent while Bharti has given up just 25 per cent of its value.
The Street has had come concerns about RCom including the quality of earnings and the high level of borrowings. Analysts estimate that the company’s net debt could go up from around Rs 24,000 crore currently to over Rs 40,000 crore in 2009-10 even though it plans to spend only around Rs 15,000 crore on capital expenditure.
The higher interest and depreciation costs could result in the firm’s net profit coming off from close to Rs 6,000 crore this year, to Rs 4,000 crore in 2009-10.
Recent data from the regulator,TRAI, shows that at 16.7 per cent, RCom lost 50 basis points of revenue share in the December 2008 quarter. Since the subscriber market share dipped by just 10 basis points, it would mean that RCom’s incremental CDMA subscribers were not of very high quality.
On the other hand, Bharti Airtel’s revenues share at 30 per cent, saw an increase of 100 basis points sequentially, while its subscriber market share, at 24.7 per cent, too was up 10 basis points q-o-q.
Since the Street will focus on profitability rather than the number of subscribers, RCom needs to get its GSM game plan right. The introductory offer saw lots of free minutes being given but ultimately subscribers need to start paying enough for the service so that ARPUs (average revenue per user) are profitable.
Of course, telcos do have differing objectives behind subscriber acquisitions and it could make sense to lose out on subscriber revenues for some time so as to acquire spectrum. RCom’s GSM launch is probably focussed on acquiring the next level of spectrum and it should be somewhere close to hitting the target base.
However, over the longer run, it’s the operating margins that are going to determine the course of the stock. Analysts were puzzled that RCom’s January numbers were so strong even though most of its early stage GSM coverage would have been in the metros and bigger towns where other operators already had a presence.
That no operator had reported a slowdown and that the market expanded from 10 million to nearly 16 million subscribers, was surprising.
