Stock Review: Reliance Communications (RCom)

Operational parameters reflect seasonal pressures in the recently concluded quarter

Reliance Communications (RCom), like its peers, showed easing of rate pressure in wireless telecom, with revenue per minute staying flat for a consecutive quarter at 44 paise.

It also mirrored the sector's seasonality, with network minutes staying flat and minutes of usage per subscriber down seven per cent sequentially, to 276 minutes. Thus, despite a six per cent increase in the number of subscribers, average revenue per user (Arpu) fell 6.6 per cent sequentially to `122.

Both wireless and broadband segments reported flat revenue growth and a marginal rise in earnings before interest, tax, depreciation and amortisation margins of 20 and 10 basis points, respectively.

The management hinted it was looking to launch 3G services in a phased manner from the end of the year, but would ensure quality of minutes and revenue per minute, indicating an intention to have sustainable rates. However, the outlook for post-paid rates after the implementation of mobile number portability looks more turbulent, as rates in the higher Arpu segment may come under pressure.

Net debt has increased 708 crore sequentially to nearly `30,000 crore during the September quarter, while the net debt to equity ratio has moved up to 0.77. The 3G loans will mature over the next couple of months. Also, about $200 million in convertible bonds is due for repayment in May 2011. This is in addition to the $900-million foreign currency convertible bonds due in February 2012. The company indicated it might continue to look for opportunities to monetise the tower assets, although there was nothing concrete. Reports suggest it is looking to raise $500 million overseas through its subsidiary, Flag Telecom.

At `161.8, the stock trades at 15x2011-12 earnings per share estimates. Although analysts believe most sectoral issues have been priced in, there are enough uncertainties to advocate caution.