Stock Market Result Update on Reliance Communication for 1QFY2012

Stock Market Result Update on Reliance Communication for 1QFY2012 with a Neutral recommendation.

For 1QFY2012, Reliance Communication (RCOM) reported a mixed performance, with lower-than-expected sales and PAT, but better-than-expected OPM. During the quarter, RCOM hiked voice tariffs on both on-net and off-net calls in 19 circles on GSM; and on CDMA, tariffs on only off-net calls were raised. Due to lack of triggers except the monetisation of its Infratel business, which can cut down debt by more than half, we remain Neutral on the stock.

Weak revenue growth: RCOM reported revenue of `4,940cr, up mere 0.2% qoq, primarily on the back of tumbling MOU and flat ARPM. MOU fell by 3.3% qoq to 233min. However, partial impact of the hike in ARPM and stable VAS share helped the ARPM to remain steady at `0.44/min. Management mentioned that it will take one more quarter for free minutes to be out of the system and full impact of the increase in ARPM will flow through by 3QFY2012.

EBITDA margin slips: Overall EBITDA margin improved by 827bp qoq (after adjusting for one-off revenue and EBITDA in 4QFY2011) to 32.4% due to stable operational parameters such as ARPM as well as lower network expenses and SGA expense rationalisation. EPM for the quarter stood flat at `0.12/min.

Outlook and valuation: Going forward, we expect RCOM’s mobile segment to record a 15.0% CAGR in its subscriber base over FY2011–13E and ARPM to inch up to `0.46/min by FY2013. Management maintained its capex guidance of only `1,500cr for FY2012. There is a US$1bn FCCB due to be repaid in April 2012, which is expected to be refinanced. Management maintained that it is actively looking to monetise its 50,000 towers, which would help it to deleverage by more than 50% – this can provide an upside risk to our fair value. At the CMP, the stock is trading at 4.8x FY2013E EBITDA, at par with its intrinsic value of `79. Thus, we maintain our Neutral view on the stock.