Wednesday, February 15, 2012

>RELIANCE COMMUNICATION: Weak performance compared to peers

Reliance Communication’s (RCom) Q3FY12 results were below our estimates on operational parameters. While revenue was up 7% QoQ at Rs184.8bn, EBITDA at Rs59.3bn was 3.5% below our estimates. Minutes of Usage (MoU) were flat qoq to 219bn min, lower than our estimates. However, operating margin was in line with our estimates at 31.9%. Based on the 9MFY12 performance, we revise our estimate downward for minutes growth and nonwireless business. Accordingly, we downgrade our rating to Sell and bring down the target price to Rs78, implying 7.2x and 5.7x FY13E and FY14E EV/EBITDA respectively.

 Results below our expectation: Q3 result came below expectation. Revenue was flat at Rs50bn against our expectation of Rs52.9bn as minutes of usage remained flat qoq and so too revenue per minute. EBITDA margin came in line with estimates at 31.9%. Reported net profit was down 26% to Rs1.8bn on the back of higher interest and tax expenses during Q3.

 Non-wireless business fails to show growth: The non-wireless business revenue remained flat at Rs22bn on QoQ basis but witnessed 7.4% YoY decline during 9MFY12. EBITDA margin, however, remained flat during the aforesaid period.

 Wireless business shows weak performance compared to its peers: During Q3, the minutes of usage remained flat compared to 7.3% QoQ growth of Idea Cellular and 1%QoQ of Bharti Airtel. Both Idea and Bharti have shown growth in either minutes or revenue per minutes. Also, mobile number portability is not in favour of the company. The management expects growth to revive based on new plans launched such as ‘mera plan’.

 Estimates changed; Downgrade to Sell: We have lowered our revenue estimates for FY12E and FY13E by 2.8% and 4.1% considering lower than expected growth in minutes of usage and decline in revenue for non-wireless business during 9MFY12. Also, we have increased the interest rate assumption for FY14E to factor such increase for the company. At the CMP, the stock trades at 20.6x FY13E EPS, 7.7x EV/EBITDA. We downgrade our rating to Sell on the stock with a revised price target of Rs78 (earlier: Rs84), downside of 16.9% from the CMP. Key trigger for the stock would be stake sale in the tower
business which the company has been exploring.