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Reliance Communications 3QFY14 results update

February 10, 2014, Monday, 15:38 GMT | 10:38 EST | 20:08 IST | 22:38 SGT
Contributed by Nirmal Bang


Reliance Communications’ (RCOM) 3QFY14 revenue stood at Rs54bn, up 0.2% QoQ and 1.9% YoY. A disappointing aspect was poor revenue growth in India, up by a mere 0.3% QoQ and 3.2% YoY, at Rs46.4bn, below our estimate of Rs47.0bn. Given the change in the telecommunications major’s segmental disclosures in 2QFY14, we do not have metrics for the pure wireless India business and therefore it is not directly comparable with peers. Nonetheless, India voice revenue grew 1% QoQ, with minutes of usage (MoU) up 0.4% QoQ and voice revenue/minute (RPM) up 0.6% QoQ. India non-voice revenue was flat, while data volume growth was decent, at 11% QoQ (85% YoY), although well below peers like Bharti Airtel, or BAL (16% QoQ and 97% YoY) and Idea Cellular, or ICL (19% QoQ and 108% YoY). Global revenue declined 4.4% QoQ, with voice revenue down by a steep 15.8% QoQ, thereby pulling down overall revenue growth. RCOM’s EBITDA margin fell 82bps QoQ at 34.2%, owing to lower margins of India business. Adjusted net profit declined 53.7% QoQ on lower margins and higher interest costs, while reported net profit plunged 83.9% QoQ. Net profit was 54.3%/56.3% below our/Bloomberg consensus estimates, respectively. Debt level remains elevated. We have retained our Hold rating on RCOM with a revised target price of Rs133 (Rs145 earlier), rolling over our valuation to FY16E earnings and reducing EV-EBITDA multiple to 5.75x (7.00x earlier).
 
India revenue growth poor in a seasonally strong quarter: RCOM’s 3QFY14 top-line rose just 0.2% QoQ and 1.9% YoY, below our/Bloomberg consensus estimates by 1.5%/3.2%, respectively. India revenue grew by a mere 0.3% QoQ, at Rs46.4bn, below our estimate of Rs47.0bn. Voice revenue rose 1% % QoQ, with MoU up 0.4% QoQ and voice RPM up 0.6% QoQ. Non-voice revenue was flat. MoU growth was below peers like BAL and  ICL. Data volume growth stood at 11% QoQ (85% YoY), well below peers like BAL (16% QoQ and 97% YoY) and ICL (19% QoQ and 108% YoY). Global revenue declined 4.4% QoQ, with voice revenue down by a significant 15.8% QoQ.
 
Margins decline on lower India margins, higher interest costs batter net profit: EBITDA margin fell 82bps QoQ at 34.2%, on lower India margins. Adjusted net profit declined 53.7% QoQ on lower margins and higher interest costs, while reported net profit plunged 83.9% QoQ. Net profit was 54.3%/56.3% below our/Bloomberg consensus estimates, respectively.
 
Debt remains high, retain Hold rating on RCOM: RCOM’s net debt-EBITDA level remains elevated at 5.5x. Debt reduction efforts have not materialised so far. Aggressive accounting policies are also a negative, with provision write-backs being credited to the income statement in two of the past four quarters. On the positive side, regulatory issues seem to be stabilising. Any stake sale to a strategic investor in the newly formed property arm could also improve leverage. We have retained our Hold rating on RCOM with a revised target price of Rs133 (Rs145 earlier), rolling over our valuation to FY16E earnings and reducing our EV-EBITDA multiple to 5.75x (7.00x earlier).