The stock fails to inspire confidence, as the company has not shed light on its debt reduction plan.
It may seem impossible, but Reliance Communication has actually managed to disappoint the Street with worse-than-expected numbers. In the third quarter, the company posted a 2.2 per cent quarter-on-quarter fall in revenues at Rs 5,040 crore, which adds up to a year-on-year fall of 5.8 per cent. The company attributes this to a drop in network traffic due to weeding out of free minutes that were being consumed by numerous users. Even as the company maintains that the CDMA business is doing fine, a consistent decline in revenues, despite the company operating a GSM network, is a matter of concern.
The total number of minutes used in the third quarter stands at 91.5 billion, down 3.3 per cent quarterly. Such a poor show in a seasonally strong quarter has worried analysts. Earnings before interest, taxes, depreciation and amortisation stand at Rs 1,668 crore, clocking an eight per cent fall, compared to Rs 1,812 crore in the third quarter of FY10. This quarter, the debt went up by Rs 3,250 crore, taking the net debt to Rs 32,400 crore.
The company has no clear answers on how it intends to deal with the debt, as all attempts to raise money through equity have failed so far. Also, the company’s revenue per minute is resilient at 44 paisa.
After soft-launching its 3G services in mid-December 2010, the company has conveyed that it expects data services to pick up significantly in phases, starting with major cities and eventually percolating to rural areas. However, according to Edelweiss Capital, the company chose to launch its mobile services on the CDMA platform initially for similar reasons.
Analysts’ interaction with industry peers indicates data margins at current pricing will be lower than voice margins. In the US, too, operators have been reducing speeds for customers who are intense data users and withdrawing unlimited plans. Hence, it will be interesting to see margin trends for RCom, given its stated intent to focus on data.
While the company’s focus on 3G may be encouraging, the Street believes it needs to be offered to the “right” customer segment and not to the existing customers (average revenue per user of Rs 111). The stock has crashed significantly, but most broking firms have revised down earnings forecast for FY12, owing to the current metrics.
Even as the book value is Rs 183, the stock is trading at a near 50 per cent discount to the book value at Rs 97. The only thing that will inspire confidence in the stock is infusion of funds. Analysts are also concerned about the foreign currency convertible bonds which are likely to come up for redemption in 2012.
