Stock Review: RELIANCE COMMUNICATIONS

No relief seems to be in sight for investors of Reliance Communications, India's second-largest listed telecom operator. Its revenue declined for the sixth consecutive time in the December 2010 quarter on falling network utilisation.
In the coming quarters, the completion of the GSM rollout and stabilising per-minute revenue may offer some cushion to margins. But what would hold the key to its growth is the extent to which the company can leverage its existing network and the success of its 3G services.

In the December 2010 quarter, the company's net revenue dropped 3% to . 4,865 crore sequentially, following a 9% drop in the wireless MoU. This was despite the 7.1% increase in the company's total subscriber base. On the positive side, average revenue per minute was stable at 44 paise per minute from the previous quarter's level.

The company reduced the number of free minutes on the network from the past quarter. It plans to use the freed minutes for data services on CDMA platform. Even though, this led to a marginal drop in the wire-less revenue during the quarter on sequential basis, it will help in improving the quality of revenue in the coming quarters.

The company witnessed a 5% growth in the global segment on the back of a decent growth recorded in the ILD and NLD minutes during the same period. Better operational efficiency in the global business led to a marginal jump of 90 basis points to 33.3% in the company's EBIDTA margin for the quarter against the previous quarter.

Since RCOM's GSM rollout is over, network operating costs are expected to lower in the coming quarters resulting in easing out of the pressure on the company's operating margin. Moreover, settling of the promo-tional costs at the current levels is likely to improve the operating margin in the coming quarters.
Also, the business restructuring is likely to stabilise the falling MoUs in the coming quarters. However, given the high debt on the books and the legal inquiry pertaining to a probable higher-than-prescribed holding in Swan Telecom poses a challenging situation.

At the current market price of . 100.7, the company trades at nearly 8.9 times the earnings for the trailing twelve months. Though its valuation is the cheapest among its peers, its stock price may remain rangebound in the absence of a major growth trigger.