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Research
Reliance Communications - Muted performance, signs of bottoming out in key parameters - Buy - Elara Capital
Posted On : 2010-05-26 12:01:52( TIMEZONE : IST )
- Rating : Buy
- Target Price : INR200
- Upside : 41%
- CMP : INR142 (as on 17 May 2010)
Top-line growth below expectations, PAT in-line
In Q4FY10, RCom reported, on a consolidated basis, a net revenue of INR50.9bn (negative 4% QoQ), PAT of INR12.2bn (EPS of INR5.7, QoQ jump of 10%) and a full year dividend of INR0.85 per share. The negative surprise was the sequential decline in EBITDA margins across segments, and on consolidated basis, a dip of 270bps - higher than the industry (decline) average of ~150bps.
Key parameters declining, may be close to bottom
On a sequential basis, APRU declined by 7% to INR139, which is in-line with the industry and RPM declined by 2%, which is less than industry decline of ~10%. The bottoming of RPM suggests that going forward growth in the minutes on the network will correspondingly result in wireless segment top-line growth, suggesting a turn-around of the business line (assuming no further cuts in tariffs). Minutes on the network showed a growth of 25% YoY.
Non-wireless business holding ground
RCom's non-wireless business (Globalcom and Broadband) showed a stable revenue on QoQ basis (YoY growth of 20%) and posted on combined basis an EBITDA of INR6.1bn with a margin of 22.4%. Non-wireless business of RCom is the silver lining in an otherwise subdued performance. We estimate the non-wireless business to maintain a growth rate of 10% going forward on an annualized basis.
Highlights of the call: Lower capex, better tenancy ratio
The management has guided a lower capex for the next year at INR30bn (excluding 3G) and mentioned a higher tenancy for its tower business at 1.75 (from 1.66 in the prior quarter). Further, the management reiterated that the irrationality still prevails in the telecom sector and that they would be prudent in taking more debt but felt at ease with the 3-3.5x net debt/EBITDA.
Our view – Maintain Buy
The more than expected decline in EBITDA margins on a consolidated basis would warrant a change in the Target Price (under review) but should not be enough to change our Buy recommendation. Since, the 3G spectrum bid is central to arrive at a Target Price, we will review the same once the details are out.
