Stock Review: RCOM

 

 

   Reliance Communications, the country's second biggest listed telecom company by revenues, has been under pressure on, both, the operating and regulatory fronts for the last few quarters. Barring a few extraordinary items that boosted profits, the company's overall performance in the March 2011 quarter was lacklustre.

Lower minutes of usage per user, flat revenue per minute and relatively higher debt exposure are expected to weigh heavy on its future performance. The expansion of 3G services may offer some support to its otherwise ailing business. But this largely depends on how well the company differentiates its 3G offerings in a highly-competitive market. The market will also wait for more clarity on the alleged involvement of some of the company's top officials in the 2G scam. Given these factors, the company's stock performance is likely to remain subdued in the coming quarters.

BUSINESS

Reliance Communications (RCOM) earns nearly two-thirds of its revenues by offering wireless services on CDMA and GSM platforms using 2G and 3G technologies. Its global segment, which contributes 28% to the top line, provides national and international long distance voice, data and video services. The company's broadband division, which has a 9% revenue share, focuses on enterprise telephony and IT infrastructure domains.

At the end of March 2011, the company had 13.6 million customers across all business segments, a rise of 33% over last year.

CHALLENGES

The company is among the telecom operators worst-hit by the fierce competition in the 2G segment. It operates at the lowest average revenue per user of 107 compared with peers like Bharti Airtel (ARPU of 194), and Idea Cellular ( 161). Also, minutes of usage per subscriber (MOU) at 241 are much lower than Bharti's 449 minutes and Idea's 397 minutes. These factors have adversely impacted the company's financials over the last six quarters relative to the performance of its peers.

A lower share of active subscribers is another issue that RCOM needs to tackle. According to data from the Telecom Regulatory Authority of India (TRAI), a little over two-thirds of RCOM's subscriber base is currently active. The proportion is over 90% for Bharti and Idea.

Apart from operating woes, the company has a huge gross debt of over 37,376 crore on its books. This has increased its quarterly interest outgo, putting further pressure on its net margin.

Regulatory issues related to the government's probe into the 2G scam will continue to cast a shadow on the company's performance, and impact investor sentiment till the final verdict is out.

OPPORTUNITIES

To its credit, RCOM has been able to stabilise its per minute revenue at 44 paise in the last few quarters as opposed to a steeper 8-18% drop in revenue per minute for Bharti and Idea. The stable per minute rate on its network puts the company in a better position to take advantage of higher subscriber penetration.
The company has also aggressively launched its 3G services across 13 circles where it has won licences after paying fees worth 8,585 crore. These include highdensity metro areas such as Delhi, Kolkata, and Mumbai.

FINANCIALS AND VALUATIONS

RCOM's sales grew by 4.4% to 23,108 crore in FY11, but net profit eroded by more than two-thirds to 1,346 crore. The company's stock currently trades at a trailing 12 month P/E of seven, which is relatively lower than the P/E range of 23-26 for Bharti and Idea. However, upward movement in its stock is likely to be limited until the company reports a sharp turnaround in operations and regulatory issues are resolved.