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Research
Buy Reliance Communications - Turnaround seems closer - Elara Capital
Posted On : 2010-08-17 20:03:06( TIMEZONE : IST )
- Reliance Communications
- Rating : Buy
- Target Price : INR210
- Upside : 25%
- CMP : INR168 (as on 13 August 2010)
Topline decline halts, PAT below estimate
For Q1FY11, RCom reported a net-revenue of INR51.0bn (0.3% up qoq) on a consolidated basis with a PAT of INR2.5bn (a sequential decline of 80%). The minor improvement in the topline was achieved after witnessing a sequential decline in the last four quarters. On the other hand, PAT decline was higher due to the notional forex MTM losses of INR2.1bn. The positive surprise was the sequential improvement in EBITDA margins to 31.9% (31.5% in the prior quarter), highlighting the fact that margins are stabilizing and the revenue is inching up, effectively placing RCom for the potential turn-around.
Steady ARPM, minutes on network growth slows
RCom is the only service provider to arrest ARPM (INR0.44) decline on a sequential basis but the growth in minutes on network (1%) disappointed in comparison to other services providers (10-12%). According to the company management, it has removed `free minutes on the network' to a large degree, and has focused on the quality (of minutes). Going forward, growth in minutes on the network should be in parallel with the industry growth. The noteworthy point is despite having low free minutes offering in the market, the company has increased its net subscriber market share to 16.3%, which was hovering for the last three quarters at ~14.5%.
Our View – Maintain Buy with a TP of 210
The EBITDA margin stabilization across segments, a halt to the fall in top-line and ARPM parity with the industry suggest that going forward, upward progress in the minutes on the network would correspondingly yield growth for RCom. The tower business disposition and the possible 26% stake sale would deleverage the company balance sheet, providing financial flexibility. Having won the spectrum in 3G for all metros, the MNP and 3G would help the company acquire post-paid customers, which contributes disproportionally to Industry revenue (4-5% of customers contribute ~25% of the overall industry revenue).
