Reliance Communications - Weak volume growth leads to subdued results; Sell - Anand Rathi

Key takeaways

Mixed headline figures. Reliance Communications' revenues and EBITDA were broadly in-line with (1% of) our estimates; PAT however was 11% lower (higher depreciation/finance costs). Weak volume growth in the wireless business led to a mere 4.9% yoy rise in consolidated revenues; EBITDA was was up 2.6% yoy.

Wireless business in line with expectations. Wireless revenues and EBITDA were each up 2% qoq (in line with our expectations). Wireless minutes were up a mere 0.5% qoq (we expected 0.9%), possibly on measures to raise realizations. Notably, ARPM was up 1.6% to 43.9 paise (a bit higher than our estimated 42.8 paise). RCom carried 22.5bn MB of data traffic in 3Q; this compares with 15.9bn MB/8.4bn MB in case of Bharti/Idea in 2Q. RCom had the first-mover advantage in data transmission, as its hi-speed data offerings (on the CDMA/EVDO networks) preceded GSM operators' 3G launch by 12-18 months.

Global enterprise business subdued. The segment's EBITDA was largely flat, qoq and yoy, paralleling our estimates. The segment's capex in the quarter/ ytd was Rs.2.2bn/Rs.6.2bn, higher than that in its wireless business (Rs.1.6bn/Rs.5bn).

Outlook continues to be challenging. We expect the outlook for RCom to be challenging, given the weak growth profile and high balance-sheet leverage (net debt-to-annualized 4Q EBITDA was 5.6x). While the company has initiated raising tariffs, sustainability and actual pass-through to consumers are challenging, as market-share losses continue.

Our take: The stock trades at 7x FY14e EV/EBITDA, broadly within the similar range of Bharti and Idea, despite the weaker business growth profile and higher financial risk. We retain our Sell rating. Risks: Meaningful and early revival in wireless tariffs in India, and significant corporate events (fund raising, monetization of assets/business, M&A).

Source : Equity Bulls

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