Reliance Communications - Operating performance in-line; but interest expense drags PAT - PhillipCapital

Reliance Communications' reported Q2FY13 numbers were good on the operating front, however interest expenses lead to a sharper than expected PAT decline. The key takeaways of the results and conference call are as follows:

Wireless revenue declines marginally: Wireless revenues declined by 2.3% QoQ but flat YoY as wireless traffic dipped by 2.4% QoQ to 102.5bn and ARPM improved marginally by to 43.2p. We believe that during this quarter, the company's performance was in-line with that of the sector. RCom's non-voice revenue continues to improve and now contributes 20.8% of the total revenues; significantly higher than the industry average. The company has raised voice tariffs from 1.2p/s to 1.5p/s and expects the same to start reflecting in improved ARPMs by Q4FY13.

Global and Other business segments also declines sequentially: The Global and Enterprise business unit reported a QoQ decline of 0.8%. The Others business segment which includes technology and digital retail businesses reported revenue decline of -10% QoQ and 23% YoY.

EBIDTA margins continue to improve QoQ: While revenue declined QoQ, the company managed to improve EBITDA margins by 50bps QoQ on account of continuing decline in network expenses. The company attributed the network cost decline to increased integration of BTS' with the electricity grids in Northern and Central India.

PAT below estimates dragged by higher interest costs: PAT stood at Rs 1.04bn significantly below estimates due to high interest costs. The company mentioned that the interest cost was higher due to one-time fee of Rs 400mn.

Maintain estimates and rating: We marginally tweak our estimates incorporating lower than expected cost structure and a tepid revenue growth outlook. We value the company on a DCF basis assigning a target of Rs 50. We note that this target price doesn't incorporate any one-time regulatory charges and reiterate that we believe that it will be infeasible for the company to retain its entire CDMA spectrum. We maintain our Sell recommendation on the stock.

Source : Equity Bulls

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