Reliance Communications - Continues to lag peers - Phillip Capital

Reliance Communications' reported Q3FY14 numbers were below estimates as the company lagged peers on revenue growth. The company highlighted that its CDMA business has bottomed out and should see growth as the device ecosystem is improving. We maintain a Neutral rating on the company as we believe that the renewed focus will require sustained investments. Below are key highlights of the conference call and the results:

Muted revenue growth trends: Revenue growth lagged expectations as muted trends were seen in the pricing as well as volume growth (minutes). Voice revenue at Rs 34.2bn grew 1.0% QoQ as minutes at 101.9bn was up 0.4% QoQ but declined 1.1% YoY and voice RPM improved 0.3% QoQ to 33.5paise/min. Both minutes as well as RPM growth for RCom was below that of peers. The management indicated that tariffs will continue to rise in the medium term on account of 1/inability of telcos to absorb input cost increases, 2/virtual consolidation of the market, 3/ high spectrum costs.

Non-voice revenue was flat QoQ due to continued decline in non-data VAS and regulatory headwinds. The company mentioned that its data revenue continued to grow at a fast pace. Also with respect to the twin deals with Reliance Jio, the company commented that delivery of towers will happen in the next quarter or so. The overseas business, which comprises enterprise, IT and other services saw muted performance with revenue decline of 4.4% QoQ and sharp 16% QoQ decline in EBIT. Management attributed this reduction to the company raising rates and marking itself to market and has guided for an improvement in Q4FY14.

EBITDA declined 2% QoQ; despite favourable seasonality - RCom's EBITDA was down 2.2% QoQ while growing 11.6% YoY on account of muted revenue trends. Network cost continued to surprise as it declined 5% QoQ and 3% YoY. However, contrary to sluggish volume growth trends, licence and access charges grew 9% QoQ and 6% YoY outpacing minutes growth.

PAT at Rs 1.1bn also below estimates -PAT for the company stood at Rs 1.1bn declining 84% QoQ while growing 3% YoY. The company continues to make negligible tax provisions as it claims to enjoy a tax-holiday under section 80IA.

Change estimates but maintain target price and rating: We incorporate the sluggishness in revenue growth while rolling forward our DCF maintain a target price of Rs 135 and a neutral rating.

Source : Equity Bulls

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