1. 4QFY2010 Result Update I Telecom
May 18, 2010
Reliance Communications ACCUMULATE
CMP Rs145
Performance Highlights Target Price Rs155
Reliance Communications’ (RCOM) 4QFY2010 performance failed to meet Investment Period 12 Months
our expectations on the core operations front. Wireless revenue grew 1.7%
qoq (down 9% yoy), which was lower than the industry average in the Stock Info
quarter. The company has crossed the 100mn subscriber milestone during
Sector Telecom
the quarter. Global business grew by 2.3% qoq (7.8% yoy), whereas
broadband segment sales declined by 3.5% qoq (3.9% yoy). Profit after tax, Market Cap (Rs cr) 29,928
however, grew by 10.1% sequentially (down 16% yoy), largely on account of
Beta 1.2
higher interest earned (up 99% qoq). We recommend an Accumulate on the
stock. 52 WK High / Low 359/140
Mediocre growth across businesses: RCOM recorded a growth of 1.7% qoq Avg. Daily Volume 22,47,928
in the Top-line during 4QFY2010 to Rs5,093cr, mainly due to a strong Face Value (Rs) 5
subscriber growth of 9.2% qoq to 102.4mn and total traffic growth of 5%
qoq. The growth in the Minutes of Usage (MoU) was lower than the industry BSE Sensex 16,876
minute growth of ~10%, however it managed to restrict the decline in the Nifty 5,066
Revenue per Minute (RPM) at Rs0.44 (down by Rs0.01), which is
commendable. Global business segment revenue grew by 2.3% qoq, led by a Reuters Code RLCM.BO
13.8% growth in the Long Distance minutes. However, Broadband revenues
Bloomberg Code RCOM.IN
declined 3.5% qoq, despite significant addition in the number of Access lines.
RCOM recorded a contraction of 260bp qoq (decline of 400bp yoy) in its Shareholding Pattern (%)
EBITDA Margin, mainly due to higher Network Operation Costs. However,
higher interest earned resulted in a bottom-line growth of 10.1% qoq. Promoters 67.6
MF/Banks/Indian FIs 12.2
Outlook and Valuation: Going forward, we expect RCOM to post a 7% CAGR
in its Top-line over FY2010-12E, while the Bottom-line is expected to record a FII/NRIs/OCBs 9.0
compounded de-growth of 12%. We have factored in a 21% CAGR in the Indian Public 11.2
mobile subscriber base over FY2010-12E, while also modeling for a 12%
compounded fall in the RPM. We have valued the stock at Rs155 per share, Abs. (%) 3m 1yr 3yr
at 8.5x of its FY2012E earnings, and at a 40% discount to our target multiple
Sensex 3.4 18.1 18.0
for Bharti (Historical discount during FY2008-10 of 30%). The higher discount
to Bharti is justified in view of the latter’s superior operating performance
R Com (13.4) (49.2) (70.8)
(ARPU/RPM/MoU), higher ROE and lower leverage position. We recommend
an Accumulate on the stock, with a Target Price of Rs155.
Key Financials (Consolidated)
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 22251 21496 22412 24592
% chg 18.2 (3.4) 4.3 9.7
Net Profit 6045 4777 3674 3698
% chg 46.4 (21.0) (23.1) 0.7
FDEPS (Rs) 28.0 22.1 17.0 17.1
EBITDA Margin (%) 38.7 34.0 31.5 30.0
P/E (x) 5.2 6.5 8.5 8.5 Rahul Jain
P/BV (x) 0.7 0.8 0.7 0.7 Tel: 022 – 4040 3800 Ext: 345
RoE (%) 14.3 12.4 8.7 8.1 E-mail: Rahul.j@angeltrade.com
RoCE (%) 6.9 5.5 4.9 4.7
Vibha Salvi
EV/EBIDTA (x) 6.7 6.8 7.2 6.6
Tel: 022 – 4040 3800 Ext: 329
ARPUs (Rs/user/month) 244 158 154 146
E-mail: vibhas.salvi@angeltrade.com
Source: Company, Angel Research
1
Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539
2. Reliance Communications I 4QFY2010 Result Update
Exhibit 1: 4QFY2010 Consolidated Financial Performance
Y/E March (Rs cr) 4QFY10 4QFY09 % chg 3QFY10 % chg FY2010 FY2009 % chg
(yoy) (qoq)
Net Revenues 5,093 5,798 (12.2) 5,310 (4.1) 21,496 22,251 (3.4)
Operating Expenditure 3,491 3,741 (6.7) 3,497 (0.2) 14,312 13,517 5.9
Operating Profit (EBITDA) 1,602 2,057 (22.1) 1,813 (11.6) 7,185 8,733 (17.7)
Finance Charges (Net) (813) (494) (408) (1,822) (1,078)
Depreciation & Amortisation 1,085 1,143 (5.1) 833 30.2 3,747 3,608 3.8
ESOP amortisation 1 (157) (100.9) 22 (93.4) 37 7 401.6
Income before Income Taxes 1,329 1,565 (15.1) 1,365 (2.6) 5,223 6,197 (15.7)
Tax 192 49 296.1 200 (4.0) 445 (52)
Minority Interest (83) 65 (227.4) 56 (247.4) 119 205 (41.9)
Share of Associates - (2) 1 (100.0) 3 (2)
Net Income 1,220 1,454 (16.1) 1,108 10.1 4,655 6,045 (23.0)
Diluted EPS (Rs) 5.4 6.8 (19.4) 5.2 5.6 21.6 28.1 (22.9)
EBITDA Margin (%) 31.5 35.5 34.1 33.4 39.3
Net Profit Margin (%) 23.9 25.1 20.9 21.7 27.2
Mobile ARPUs (Rs/user/month) 139.0 224.0 (37.9) 149.0 (6.7) 158.0 244.0 (35.2)
Source: Company, Angel Research
De-growth in Broadband and Global businesses drags the Top-line
RCOM recorded a small growth of 1.7% qoq (decline of 9% yoy) in its wire line
revenues, led by strong subscriber growth of 9.2% and traffic growth of 5% qoq. The
RPM declined by Rs0.01 (2.2% qoq) to Rs0.44, which was lower compared to the
industry average, since RCOM was one of the first operators to reduce tariffs
through the launch of its ‘Simply Reliance’ plans. The MoU per subscriber declined
by 3.6% qoq to 318 minutes. RCOM’s wireless market share reached to 17.7%, with
a total subscriber count of 102mn. The Churn ratio expanded to 2.8% from 2% in
3QFY2010, highlighting the increased competitive intensity. Although the traffic
growth was below the industry average, the company managed to restrict the fall in
the RPM to a mere 2% qoq. We believe that the recent launch of its unlimited
(monthly and daily cap applicable) plan, under the new ‘Simply Reliance’ plan
would boost its traffic growth in the coming period.
The company recorded a 2.3% qoq growth (7.8% yoy growth) in its Global business,
mainly due to the NLD minutes’ traffic growth of 18% qoq, which was supported by
a reduction in the call charges. ILD traffic, however, declined by 6% qoq. The
Broadband Business revenues declined by 3.5% qoq (fall of 3.9% yoy), on account
of a 5.5% qoq fall in the Average Revenue per line (ARPL) per month to Rs1,551.
The company added a net 15,000 Access lines during the quarter, taking the total
Access line count to 1.46mn.
The intersegment revenue witnessed a 16% qoq growth, on account of an increase
in NLD Traffic and on-net traffic.
Exhibit 2: Segment-wise Revenue Break-up
4QFY10 4QFY09 3QFY10 % chg % chg
Rs cr Rs cr Rs cr Yoy qoq
Wireless 4,090 4,502 4,023 (9.1) 1.7
Global 2,028 1,880 1,982 7.8 2.3
Broadband 680 708 705 (3.9) (3.5)
Others* 285 313 316 (10.0)
Gross Revenues 7,082 7,403 7,025 (4.3) 0.8
Less: Inter-segment
1,989 1,605 1,715 24.0 16.0
Revenues
Net Revenues 5,093 5,798 5,310 (12.2) (4.1)
Note:* includes Reliance Big TV and network operating revenues
May 18, 2010 2
3. Reliance Communications I 4QFY2010 Result Update
Margins decline on higher Network Expenses and Access Charges
RCOM recorded a contraction of 260bp yoy (decline of 400bp qoq) in its EBITDA
Margin, mainly due to higher Network Operation Costs, which spiked by 200bp qoq
(up 650bp yoy). The access charges were also up 190bp qoq (up 120bp yoy), and
SG&A expenses grew by 16.8% qoq; however, a reduction of 20bp qoq in staff costs
restricted a further erosion in the margins during the quarter. EBIDTA per minute
(EPM) declined by 7% or Rs0.01 at Rs0.13. The company’s cost per minute remained
flat at Rs0.31, resulting in a decline in the margin spread. Going forward, we
believe that the company would continue to face margin pressures on account of its
recent plan launch, which offers free bundled minutes to R2R as well as to other
service providers. This would cap the revenue realisation per subscriber, but would
cause a variable rise in the operating cost (positively correlated to a growth in
traffic).
Higher Interest earned supports Bottom-line
The company recorded a 99% growth in Interest earned during the quarter to
Rs813cr, which arrested the impact of the decline in the operating margins.
Depreciation costs grew by 30% qoq, as the company charged certain assets for
impairment (one-time expense) during the quarter, which would normalise in the
coming quarter at the 3QFY2010 run-rate. The tax rate remained flat at 14.5%, but
the losses in subsidiaries (Minority Interest) stood at Rs83cr as against the profits of
Rs56cr in 3QFY2010. The PAT for the quarter stood at Rs1,220cr, up 10.1% qoq
(down 16.1% yoy). Going forward, the profitability would come under pressure as
the increased leverage (capex of Rs3,000cr and 3G requirements) would dent the
net interest earnings in the coming quarters.
Exhibit 3: Wireless Business operating metrics
% chg % chg
4QFY10 3QFY09 3QFY10
yoy qoq
Gross revenues (Rs cr) 4,090 4,502 4,023 (9.1) 1.7
Mobile subscriber base (Mn) 102.4 72.7 93.8 40.9 9.2
Mobile ARPUs (Rs/user/month) 139 224 149 (37.9) (6.7)
Total minutes of usage (Mn) 93,500 74,800 89,000 25.0 5.1
Revenues per minute (Rs) 0.44 0.60 0.45 (27.3) (3.2)
MoUs per user per month 318 372 330 (14.5) (3.6)
EBITDA (Rs cr) 1,182 1,663 1,254 (28.9) (5.8)
EBITDA Margins (%) 28.9 36.9 31.2 (8.1) (2.3)
EBITDA/minute (Rs) 0.13 0.22 0.14 (43.2) (10.4)
EBIT (Rs cr) 761 902 848 (15.7) (10.3)
EBIT Margins (%) 18.6 20.0 21.1 (1.4) (2.5)
Source: Company, Angel Research, Margin change is in Bps
Exhibit 4: Global Business operating metrics
% chg % chg
4QFY10 3QFY09 3QFY10
yoy qoq
Gross revenues (Rs cr) 2,028 1,880 1,982 7.8 2.3
Total minutes of usage (Mn) 18,742 11,073 16,466 69.3 13.8
Revenues per minute (Rs) 1.08 1.70 1.20 (36.3) (10.1)
EBITDA (Rs cr) 356 503 419 (29.3) (15.2)
EBITDA Margins (%) 17.5 26.7 21.2 (9.2) (3.6)
EBITDA/minute (Rs) 0.19 0.45 0.25 (58.2) (25.5)
EBIT (Rs cr) 132 286 181 (54.0) (27.1)
EBIT Margins (%) 6.5 15.2 9.1 (8.7) (2.6)
Source: Company, Angel Research, Margin change is in Bps
May 18, 2010 3
4. Reliance Communications I 4QFY2010 Result Update
Exhibit 5: Broadband Business operating metrics
% chg % chg
4QFY10 3QFY09 3QFY10
yoy qoq
Gross revenues (Rs cr) 680 708 705 (3.9) (3.5)
Access lines ('000) 1,469 1,385 1,455 6.1 1.0
ARPLs (Rs/line/month) 1,661 1,680 1,654 (1.1) 0.5
Buildings directly
1,029,327 929,600 1,018,732 10.7 1.0
connected
EBITDA (Rs cr) 253 316 275 (20.1) (8.3)
EBITDA Margins (%) 37.2 44.7 39.1 (16.8) (5.0)
EBIT (Rs cr) 135 209 158 (35.3) (14.3)
EBIT Margins (%) 19.9 29.5 22.4 (9.6) (2.5)
Source: Company, Angel Research, Margin change is in Bps
Exhibit 6: RCOM v/s Peers - Mobility Business metrics
4QFY10 3QFY09 3QFY10
Mobile subscriber base (Mn)
Bharti Airtel 127.6 93.9 118.9
RCOM 102.4 72.7 93.8
Idea 63.8 38.9 52.3
% Inc/Dec over Bharti (19.7) (22.6) (21.1)
% Inc/Dec over Idea 60.5 86.8 79.3
Wireless/Mobile Business Revenues (Rs cr)
Bharti Airtel 8,198 8,222 7,962
RCOM 4,090 4,502 4,023
Idea 3,312 2,936 3,123
% Inc/Dec over Bharti (50.1) (45.2) (49.5)
% Inc/Dec over Idea 23.5 53.3 28.8
Wireless/Mobile Business ARPUs (Rs/user/month)
Bharti Airtel 220 305 230
RCOM 139 224 149
Idea 185 255 200
% Inc/Dec over Bharti (36.8) (26.6) (35.2)
% Inc/Dec over Idea (24.9) (12.2) (25.5)
Wireless/Mobile Business total MoUs (Mn minutes)
Bharti Airtel 172,797 130,669 153,241
RCOM 93,500 74,800 89,000
Idea 68,275 44,224 57,841
% Inc/Dec over Bharti (45.9) (42.8) (41.9)
% Inc/Dec over Idea 36.9 69.1 53.9
Wireless/Mobile Business MoUs (Minutes/customer/month)
Bharti Airtel 468 485 446
RCOM 318 372 330
Idea 398 402 389
% Inc/Dec over Bharti (32.1) (23.3) (26.0)
% Inc/Dec over Idea (20.1) (7.5) (15.2)
Wireless/Mobile Business RPMs (Rs)
Bharti Airtel 0.47 0.63 0.52
RCOM 0.44 0.60 0.45
Idea 0.47 0.63 0.51
% Inc/Dec over Bharti (7.8) (4.4) (13.0)
% Inc/Dec over Idea (6.9) (4.5) (11.4)
Source: Company, Angel Research
May 18, 2010 4
5. Reliance Communications I 4QFY2010 Result Update
Outlook and Valuation
Going forward, we expect the recurring revenues of the Global business to show an
increasing trend, led by traffic growth in the NLD and ILD voice businesses. In the
Wireless segment, the company has already incurred huge investments in the past,
which includes the capex on the GSM network setup in the last one year, and it is
likely to spend an estimated amount in upward of over $2bn for the 3G spectrum in
FY2011E. The increased capex requirement would further strain the interest burden
in FY2012E. Wireless revenues are likely to grow at a modest rate of about 4%, as
the growth in the traffic would be curbed by lower per minute realisations.
RCOM’s passive infrastructure sharing agreement with Etisalat DB is also expected
to book revenues in FY2011E, which is expected to improve Reliance Infratel’s
revenues, tenancy ratio and profitability, going forward. The company has 50,000
towers, with a tenancy ratio of ~1.75x (best in the industry). The company has been
sharing infrastructure with all the major domestic as well as new players. The
company’s plans regarding Reliance Infratel’s IPO listing are under consideration,
through which the company plans to dilute a 10% stake in Reliance Infratel.
However, taking cognisance of the current capital market dynamics, the company
intends to wait for the right time to take this step.
Going forward, we expect RCOM to post a 7% CAGR in its Top-line over FY2010-
12E, while the Bottom-line is expected to record a compounded de-growth of 12%.
We have factored in a 21% CAGR in the mobile subscriber base over FY2010-12E,
while also modeling for a 12% compounded fall in the RPM. At the CMP, the stock is
trading at a P/E of 8x on its FY2012E EPS, and an EV/EBITDA of 6.6x its FY2012E
EBITDA. Although the valuations appear attractive, we believe that the likely
headwinds in terms of intense price war, mobile number portability, and costly
spectrum charges would hamper profitability, while increasing the capital intensity in
the sector. Hence, in view of the increased uncertainty, we are downgrading our
earnings estimates for FY2011E and FY2012E.
We have valued the stock at Rs155 per share, at 8.5x of its FY2012E earnings, and
at a 40% discount to our target multiple for Bharti (Historical discount during
FY2008-10 of 30%). The higher discount to Bharti is justified in view of the latter’s
superior operating performance (ARPU/RPM/MoU), higher ROE and lower leverage
position. We recommend an Accumulate on the stock, with a Target Price of Rs155.
Exhibit 7: One year forward P/E Band
1000
900
800
700
Share Price (Rs)
600
500 28x
400
22x
300
16x
200
100 10x
0
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Aug-06
Aug-07
Aug-08
Aug-09
Dec-06
Dec-07
Dec-08
Dec-09
Source: Company, Angel Research
May 18, 2010 5
10. Reliance Communications I 4QFY2010 Result Update
Research Team Tel: 022-4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Reliance Communication
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies’ Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel and its Group companies.
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Tel : (022) 3952 4568 / 4040 3800
Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE:
INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946
Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM /
CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302
May 18, 2010 10