India

Earnings Update DBS Cholamandalam Securities Ltd

07 May 2009

Reliance Communications Ltd. Marketperformer

Sensex: 12117

Q4 FY09 performance review

CMP: Rs 240 Target Price: 275

¾

Reliance Communications had a net addition of 11.3 million subscribers in the quarter.

¾

The Average Revenue per User (ARPU) declined by 11% to Rs 224 from Rs 251 in the previous quarter.

¾

The Minutes of Usage (MoU) declined by 9% to 372 minutes against 410 minutes in the previous quarter.

¾

Revenues grew by 2.22% QoQ and 9% YoY to Rs 5798 crore.

¾

The EBITDA margins fell by 222 bps to 35.48% from 37.70% in the previous quarter.

¾

Net profit was at Rs 1454 crore, up by 3.12% QoQ.

¾

The wireless segment grew by 2%.

44366/9859

¾

The global business segment grew by 12%.

66.12 33.88 4162 Telecom

¾

The broadband business segment grew by 8%.

ANALYST Ramasubramaniam P [email protected]

Background: The business of Reliance Communications is organized into three strategic business units: Wireless, Global, and Broadband. In wireless business it offers CDMA and GSM based wireless services. Reliance Communication is the only service provider to offer services in both CDMA and GSM platform on a pan India basis. The Global segment offers national and international long distance network services on an integrated platform. Broadband services provide national and international private leased circuits, broadband internet access and IT infrastructure services. Reliance Infratel Limited (a subsidiary of RCL) owns, operates, and develops telecom infrastructure.

AT A GLANCE Issued Equity Capital (Cr. shrs)

206.40

Mkt. Cap (Rs.in Crs/US$m) Shareholding Pattern Promoters (%) Free Float (%) Avg. Daily Vol.(‘000) Sector: Bloomberg/Reuters Code:

RCOM IN / RLCM.BO

Going Forward ¾

The company made a capex of Rs 19,000 crore in FY09 which is significantly lower than its guidance of Rs 25,000 crore.

¾

The company has also significantly lowered its capex guidance for FY10 at Rs 10,000 crore versus Rs 15,000 earlier.

¾

Reliance Infratel has about 48,000 towers with a tenancy ratio of 1.6x.

FORECASTS AND VALUATION FY Mar(Rs. Crore)

Turnover

2008 A

2009 A

2010 E

20606

22234

27447

EBITDA

7810

8581

10979

Pre-tax Profit

7076

6135

6362

Net Profit

5403

5907

5543

Net Pft (Pre Ex.)

4026

5907

5543

EPS (Rs)

19.51

28.62

26.86

DPS (Rs)

0.75

0.52

0.54

140.63

166.50

193.35

BV Per Share (Rs) PE (X)

11.74

8.85

8.53

Net Div Yield (%)

0.33%

0.23%

0.23%

1.63

1.38

1.18

P/BV (X) Debt/Equity ROE (%)

0.89

1.00

0.93

15.50%

16.84%

14.93%

Outlook & Valuation At current market price the company is quoting at 7.3x its FY10E EV/EBITDA. We recommend a Marketperformer rating on the stock with a target price of Rs 275.

Reliance Communication’s consolidated revenues for quarter ended March 2008 stood at Rs 5,798 crore, up by 2.22% from the previous quarter while net profit for the quarter was Rs 1,454 crore up by 3.12% sequentially. For the full year the revenues grew by 8% to Rs 22,235 crore and net profit was up by at Rs 5,908 crore Subscriber growth not reflected in revenue growth Reliance communications revenues for the quarter grew by little over 2% QoQ and 9% YoY. The growth was primarily driven by its global and broadband segments. The healthy growth in global segment was due to growth in enterprise demand from both existing and new customers in Q4, and the company believes that this trend would continue over the next few quarters as demand continues to be strong. The growth in broadband segment was due to robust addition of access lines (50,000 net adds) and a 3.21% increase in Average Revenue per Line (ARPL).

Segments

Q1 FY09

Q2 FY09

Q3 FY09

Q4 FY09

QoQ

Wireless

4118.68

4335.61

4411.94

4,501.54

2.03%

Global

1525.96

1691.49

1678.31

1,880.29

12.03%

Broadband

560.29

602.28

654.17

707.53

8.16%

Others

62.24

143.65

215.65

243.07

12.72%

Investments

81.5

90.95

102.62

70.13

-31.66%

The wireless segment had a disappointing quarter growing by just 2%. Though the wireless segment added a staggering 11.3 million subscribers in the quarter it was not mirrored in the revenue growth. The revenue growth was muted because of a sharp 11% fall in Average Revenue per User (ARPU) and a 9% decline in Minutes of Use (MoU). The Revenue per Minute (RPM) declined by 1.6%. The primary reason behind the decline in performance indicators was the promotional free minutes offered by the company.

Trend in Key Performance Indicators 500 400 300

0.68

424

423

0.66

410

0.64 271

282

372

251 0.61

200

224 0.60

0.66 0.64 0.62 0.6

100

0.58

0

0.56 Q1 FY09

Q2 FY09 ARPU (Rs)

Q3 FY09 MoU (min)

Q4 FY09 RPM (Rs)

Operating margin dips on higher Network operating expenses The EBITDA margins fell by 222 bps to 35.48% from 37.70% in the previous quarter. The fall in wireless EBITDA margins was primarily due to the increase in network operating expenses which shot up 16% QoQ. The higher Network operation charges were due to its GSM network rollout. The access and license charges also increased by 9.35%. The employee and SG&A expenses dipped by 4% and 1.28% respectively. Expenditure

Q4 FY09

Q3 FY09

% chg

Access charges and license fees

950.6

869.3

9.35%

Network operations

1358.2

1166.6

16.42%

Employees

421.3

438.3

-3.88%

SG&A

1010.4

1023.5

-1.28%

Total Operating Expenditure

3740.5

3497.7

6.94%

Bottomline boosted by net interest income The net profit for the quarter was at 1,454 crore up by 3% QoQ but flat on YoY. The bottomline was boosted by a net interest income of 168 crore earned on account of income earned on cash and forex gains on derivatives. RCOM continues to capitalize fluctuations in long term borrowings. The other income was at Rs 326 crore up by 83% from the previous quarter. If adjusted for one-off amortization of ESOP compensation of Rs 157 crore net profit would be down by 10%.

Outlook and Valuation Reliance Communications GSM launch has resulted and will continue to result in improvement of subscriber market share. However the coming quarters will test Rcom’s ability to convert subscriber growth into actual revenue growth. Also rise in network operating costs for operating dual networks is an area of concern given that the balance sheet is highly leveraged. At current market price the company is quoting at 7.3x its FY10E EV/EBITDA. We recommend a Marketperformer rating on the stock with a target price of Rs 275.

Key Performance Indicators

Broadband

Global

Wireless

Metric

Unit

Q4 FY09

Q3 FY09

Q2 FY09

Q1 FY09

Service areas operational*

Nos

22

22

22

22

Wireless customers

Nos

72,666,192

61,345,132

56,045,885

50,772,888

Wireless market share (All-India)

%

18.80%

18.00%

18.1%

18.0%

Wireless net adds

Nos

11,321,060

5,299,247

5,272,997

4,979,212

Market share – wireless net adds

%

25.60%

16.90%

18.6%

19.3%

Pre-paid % of total wireless customers

%

93.50%

92.40%

91.7%

90.9%

Pre-paid % of wireless net adds

%

99.90%

99.90%

99.1%

98.7%

Wireless ARPU

Rs/Sub

224

251

271

282

Wireless churn

%

0.80%

1%

1.3%

1.4%

Wireless minutes of use (MoU)

Bn Mins

74.8

72.1

67.8

62

Wireless MoU per customer/month

Min/ Sub

372

410

423

424

Wireless revenue per minute (RPM)

Rs/ Min

0.6

0.61

0.64

0.66

Total ILD minutes

Mn Mins

1,983

1,906

1,946

1,726

Total NLD minutes

Mn Mins

9,090

8,576

7,856

6,641

Service areas operational

Nos

18

18

18

18

Towns active (wireline only)

Nos

42

42

42

42

Access lines

Nos

1,385,000

1,335,000

1,259,000

1,147,000

Access line net adds

Nos

50,000

76,000

112,000

117,000

ARPL

Rs/line

1,735

1,681

1,668

1,715

Buildings directly connected Nos 929,600 * Considering Tamil Nadu and Chennai as one combined circle

892,301

857,982

821,638

Note: Definition of ILD minutes includes transit minutes and global calling card minutes. Definition of NLD minutes includes carriage of all ILD minutes originating or terminating in India. Source: Company, CSEC Research

Q4 FY09 Results summary and comments

Particulars (in Rs. Crs)

Q4 FY09

Q3 FY09

QoQ

Q4 FY08

YoY

Revenues

5797.77

5671.82

2.22%

5311.4

9.16%

Expenses

3740.47

3533.53

5.86%

2995

24.89%

EBIDTA

2057.3

2138.29

-3.79%

2316.4

-11.19%

Depreciation

985.6

1006.95

-2.12%

725.2

35.91%

Other Income

325.9

178.42

82.66%

61.1

433.39%

Interest

-167.81

-149.64

12.14%

-8.1

-

PBT

1565.41

1459.40

7.26%

1600.00

-2.16%

Tax

48.55

15.26

-

-27.2

-

0

0

-

0

-

Adjusted PAT

1454.31

1410.31

3.12%

1442.1

0.85%

EBIDTA margin

35.48%

37.70%

43.61%

Tax rate

3.10%

1.05%

-1.70%

Net profit margin

25.08%

24.87%

27.15%

Extraordinary income

Comments

Includes one off amortization of ESOP compensation of Rs 157 crore

Income earned on cash and forex gains on derivatives.

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