>RELIANCE COMMUNICATIONS (MACQUARIE RESEARCH)

Solid 1Q; strong wireless resurgence

Event
■ RCOM reported good 1Q results. EBITDA broadly matched our estimate while the wireless segment was the star of the show after a long time. PAT was 25% ahead of our estimate despite the introduction of the MAT tax rate, led by Rs6.21bn interest income boosted by forex gains. Reiterate Outperform.

Impact
■ Wireless ARPU and MoU were exactly in line with our estimates, while average revenue per minute and EBITDA per minute each came 1 paise ahead of our estimates. Wireless revenues were in line, despite the termination rate cuts.

■ Wireless EBITDA margin came in at 38.6% compared with our estimate of 37.1%, leading to a positive surprise of 4.2% in wireless EBITDA. Wireless EBITDA was up 11.2% QoQ, a significant increase on a sequential basis. This was again the sharpest QoQ growth in wireless EBITDA in the entire sector. Consolidated EBITDA margin was 39.9%, ahead of our estimate of 39.0%.

■ Good: What we liked in the quarter
⇒ The first signs of resurgence in wireless growth are clearly visible, led by GSM – the best sequential growth (6.5% QoQ growth) in wireless revenue in seven quarters. RCOM reported wireless revenue growth of 16.4% YoY vs 19% at Bharti. Adjusted for a termination rate cut, RCOM’s wireless revenue growth of 22.6% YoY compares with Bharti’s 23.5% growth. Such close convergence between Bharti’s and RCOM’s wireless revenue growth has occurred after 12 straight quarters (the last time in June 2006). It also registered the most impressive QoQ growth of 6.5% among Bharti, RCOM, Vodafone and Idea, both before and after adjusting for termination rate cuts.

⇒ Wireless broadband data access, riding on EVDO (3G CDMA), is a new revenue stream that has just been tapped, with significant upside expected in two years.

⇒ Net debt was down (by Rs4.3bn) in 1Q after going up for four quarters. This coincided with the first quarter of positive free cash generation (Rs10.93bn, or US$227m, in 1Q) by RCOM in its listed history.

■ Bad: What we did not like in the quarter
⇒ A change in accounting policy to move to AS11 means RCOM generated significant forex gains in 1Q. Management noted that the return to AS11 was because Section 6 of the Companies Act (which it followed in prior quarters) ceased to exist on 31 March 2009.

Earnings and target price revision
■ No change.

Price catalyst
■ 12-month price target: Rs275.00 based on a DCF methodology.
■ Catalyst: Positive impact of new GSM launch on operating metrics.

Action and recommendation
■ We are maintaining our Outperform rating, based on improving growth outlook, attractive valuation and consensus upgrades.

To see full report: RELIANCE COMMUNICATIONS