Reliance Communications’ (RCOM) Q2FY12 revenue was below
estimates, but the 1.6% QoQ growth in overall minutes compared to 2.0%
decline for Bharti and Idea was a surprise. Though it reported a marginal
surge in RPM, margins still declined. We are revising our earnings down
by 11% and 3% for FY12 and FY13 respectively. It is running aggressive ad
campaigns to improve its brand positioning, but the competition remains
intense. In our view, the management’s confidence on redeeming the
USD1bn FCCB in March 2012 without additional debt hints at probable
tower sale in the next few months. At 5.7x FY13E EV/EBITDA, we see
limited downside hence upgrade to ‘HOLD’.
Wireless operating metrics a surprise
RCOM’s wireless revenue grew 2% QoQ driven by 1.6% QoQ growth in total minutes on
the network and 0.4% QoQ surge in RPM. The growth in total minutes was surprising as
Bharti and Idea reported a decline and Vodafone managed to keep them stable. As per
the management, this was achieved despite the absence of ‘free minutes’. RCOM has
started aggressive advertising campaigns and is probably seeing some early benefits.
Its ARPU declined by 1.9% QoQ in Q2, but might go up due to its focus on better quality
customers. It claims to be increasing the proportion of postpaid customers. RCOM
reported an increase of 0.4% QoQ in RPM and expects it to rise further by about 2.2%
over the next two-three quarters.
Higher SG&A costs dent margin, no forex loss recognised
The company’s wireless margin declined 50bps QoQ primarily due to higher SG&A
costs. RCOM has not recognised any forex loss arising from exchange rate fluctuations
(as per permission granted by Mumbai High Court) as it is likely to take the impact at
the end of the year. It also continues to have no tax incidence.
Outlook and valuations: Towerco sale to be key; Upgrade to ‘HOLD’
RCOM generated free cash flow (post capex) of INR6.4bn in H1FY12. While there are
signs of improvement in the business, for an improvement in ROCE at 3.2%, the sale of
towerco is necessary. At 5.7x FY13E EV/EBITDA, we believe downside is limited and
upgrade the stock to ‘HOLD/Sector Underperformer’ recommendation/rating.
estimates, but the 1.6% QoQ growth in overall minutes compared to 2.0%
decline for Bharti and Idea was a surprise. Though it reported a marginal
surge in RPM, margins still declined. We are revising our earnings down
by 11% and 3% for FY12 and FY13 respectively. It is running aggressive ad
campaigns to improve its brand positioning, but the competition remains
intense. In our view, the management’s confidence on redeeming the
USD1bn FCCB in March 2012 without additional debt hints at probable
tower sale in the next few months. At 5.7x FY13E EV/EBITDA, we see
limited downside hence upgrade to ‘HOLD’.
Wireless operating metrics a surprise
RCOM’s wireless revenue grew 2% QoQ driven by 1.6% QoQ growth in total minutes on
the network and 0.4% QoQ surge in RPM. The growth in total minutes was surprising as
Bharti and Idea reported a decline and Vodafone managed to keep them stable. As per
the management, this was achieved despite the absence of ‘free minutes’. RCOM has
started aggressive advertising campaigns and is probably seeing some early benefits.
Its ARPU declined by 1.9% QoQ in Q2, but might go up due to its focus on better quality
customers. It claims to be increasing the proportion of postpaid customers. RCOM
reported an increase of 0.4% QoQ in RPM and expects it to rise further by about 2.2%
over the next two-three quarters.
Higher SG&A costs dent margin, no forex loss recognised
The company’s wireless margin declined 50bps QoQ primarily due to higher SG&A
costs. RCOM has not recognised any forex loss arising from exchange rate fluctuations
(as per permission granted by Mumbai High Court) as it is likely to take the impact at
the end of the year. It also continues to have no tax incidence.
Outlook and valuations: Towerco sale to be key; Upgrade to ‘HOLD’
RCOM generated free cash flow (post capex) of INR6.4bn in H1FY12. While there are
signs of improvement in the business, for an improvement in ROCE at 3.2%, the sale of
towerco is necessary. At 5.7x FY13E EV/EBITDA, we believe downside is limited and
upgrade the stock to ‘HOLD/Sector Underperformer’ recommendation/rating.
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