Stock Review: RELIANCE COMMUNICATIONS

The announcement of a 20% raise in wireless tariff may provide some relief for investors of Reliance Communications who have been fretting over the company's poor financial show, quarter after quarter, for the past two years. The country's second largest telecom operator by subscriber base reported a sharp 37% drop in net profit at . 157 crore following a 4% fall in revenue at . 4,314 crore during the June 2011 quarter from a year ago. The company's management has highlighted that the sharp profit fall was largely due to a higher gain in tax account in the year-ago quarter. Though this is true, its operations have indeed suffered due to stiff competition. The revenue trend of the domestic telecom sector over the past two years reveals that Reliance Communications is among the operators who have been hit hard because of the fierce tariff war. Ironically, the race to rock-bottom call rates in turn began after Reliance Communications slashed its tariff sharply in the middle of 2009. Between FY09 and FY11, Reliance Communications' revenues from wireless operations fell by 4.6% whereas those of Bharti Airtel, the largest operator, rose by 11.6% (excluding African operations). Idea Cellular, the third largest listed telecom player by subscriber base, reported a whopping 56% jump in revenue in the same period boosted by its expansion across various telecom circles. Reliance Communications' decision to raise tariffs would play a crucial role in preventing its revenue from falling down further. But its stock is expected to trade at relatively lower valuations compared to its peers until a trend of revival in operations and clarity over legal matters pertaining to the 2G scam emerge.