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Recommendations India

Reliance Communications 3QFY2014 performance highlights and results update

February 12, 2014, Wednesday, 07:48 GMT | 02:48 EST | 12:18 IST | 14:48 SGT
Contributed by Angel Broking

For 3QFY2014, Reliance Communications (RCom)’s results came a tad below our as well as street estimates. In tandem with its peers, RCom also reported a soft network traffic growth, implying changing industry dynamics of slowing MOU due to free minutes being curtailed. The net debt level of the company continues to be high at 5.5x debt/EBITDA and the company plans to reduce it to <3x over the next 2-3 years, largely by an asset monetization exercise. We maintain our Neutral stance on the stock.
Quarterly performance: RCom reported a top-line of Rs.5,403cr, almost flat qoq. Net revenues from India operations declined by 1.9% qoq to Rs.3,603cr. Overall, voice network traffic grew merely by 0.3% qoq to 101.9bn min, which is subdued considering 3Q is a strong quarter for telecom companies. RCom’s overall EBITDA margin declined by 82bp to 34.2% on account of a decline in revenues and higher off-net calls resulting in an increase in access charges. The PAT came in at Rs.108cr, down 54% qoq, impacted by an 11% qoq jump in interest charges.
Outlook and valuation: During 3QFY2014, the disappointing aspect in the results was poor revenue growth in India. We remain watchful of the company’s plans to further deleverage its balance sheet. RCom expects voice tariffs to increase going further, driven by reduction in discounted minutes. It believes that the inflationary pressures will be passed on to the subscribers and expects average revenue per minute (ARPM) to grow 4-5% over the next four quarters. The Management indicated data as a tactical weapon for the company to attract high value subscribers. Going forward, we expect RCom to post a revenue CAGR of 5.5% over FY2013-15E. RCom’s net debt at the end of December 2013 stood at Rs.40,762cr. The company is striving to reduce the net debt level in its books but we remain skeptic as even the recent deleveraging exercise has not shown any results. The stock is currently trading at 7.5x FY2015E EV/EBITDA and 19.5x FY2105E EPS. We believe the current price factors all positive developments and given the company’s sub-par business fundamentals in comparison to peers, premium valuations remain unjustified in our view. We maintain our Neutral view on the stock.