>RELIANCE COMMUNICATIONS (RELIGARE SECURITIES)

Reliance Communications’ (Rcom’s) Q3FY10 result fell short of our estimates at the revenue and EBITDA level by 6%. However, the company’s PAT, at Rs 11.1bn, stood significantly ahead of the estimated Rs 5.5bn. The variation in PAT stemmed from a finance income of Rs 4.1bn reported by Rcom as against a finance charge of Rs 4bn anticipated by us. We are marginally pruning our FY11 numbers but maintaining our Sell rating on Rcom. Financial transparency, poor operating matrices and capital productivity coupled with weak balance sheet are key reasons for our sell rating.

■ Topline slides 6.9% QoQ: Rcom’s consolidated revenue dropped 6.9% QoQ (decline of Rs 3.6bn) as the Globalcom business plummeted 12.5% QoQ to Rs 19.8bn. The management attributed the decline in this business to rupee appreciation (against US$) and booking of a one-time revenue in Q2FY10. The poor performance of the Globalcom business surprised us negatively as the company’s long-distance minutes grew 23% QoQ to 16.4bn (NLD +22% QoQ, ILD + 30% QoQ). Revenues from the broadband business, however, dipped 8.5% QoQ to Rs 7bn which the management attributed to pricing pressure.

■ EBITDA declines 10.3% QoQ: Rcom’s EBITDA slumped 10.3% QoQ due to a 128bps contraction in the EBITDA margin. This contraction was led by a sharp increase in access charges (up 15.3% QoQ or 199bps) and network costs (up 5% QoQ or 355bps). The drop in margins, however, was restricted by lower SG&A costs (lower 33.6% QoQ or 473bps), which the management attributed to cost optimisation measures like rationalisation of office spaces and outsourcing of contracts / manpower.

■ PAT grows 56.6% QoQ: Despite lower revenues and EBITDA, Rcom’s PAT improved 56.6% QoQ purely due to the booking of finance income. During the quarter, Rcom had a finance income of Rs 4bn against a finance charge of Rs 6.5bn in Q2FY10. Appreciation of the rupee against the US$ also had a positive impact of ~Rs 6.5bn in Q3FY10.

■ Management call highlights: Rcom has trimmed its FY10 capex guidance to Rs 45bn against its earlier estimate of Rs 100bn (Rs 150bn estimated at the beginning of the year); its guidance for FY11 stands at Rs 30bn (excluding 3G). The management has indicated good traction for its new Simply Reliance and SMS plan; however, lowerthan- competition subscribers and poor growth in minutes of usage suggest the contrary.

■ Maintain Sell: We maintain our Sell rating with revised target price of Rs 180 (from Rs160 earlier) due to lower capex assumption and moving forward in terms of time period. We have reduced our FY11 revenue, EBITDA and PAT estimates by 5.5%, 9.7% and 4.6% respectively. The expected in PAT stands lower than in revenue and EBITDA due to the lower capex assumption and thus depreciation.

To read the full report: RCOM