CMP Rs120, Target Rs110, Downside 8.3%
Rcom FY13 annual report highlights key wireless industry trends such as 1) weakened competitive intensity 2) higher tariffs (Q1 FY14 rev/min up 4.5% qoq) and perhaps the most important 3) data and wireless broadband growth wherein in broadband penetration is <1% in contrast to voice penetration of >70%. On the other hand, financial metrics remained lackluster in FY13 on the back of subpar EBIDTA/profit growth and overleveraged balance sheet; return ratios (RoE, RoCE) below 5% for the third successive year and operating CF declined yoy due to spike in working capital requirements. Although leverage concerns remain an overhang, the maturity profile of long term debt (FC loans + debentures) provides some comfort with more than 50% of LT debt scheduled for repayment in the six year period starting from FY17. Stock performance has been shaped by ongoing news flow around debt reduction which we expect to be a persistent theme in the near term. We upgrade the stock to Market Performer with unchanged 9-12 target price of Rs110; Bharti and Idea continue to be our preferred picks.
Data to lead the next big growth opportunity
Rcom expects data and broadband services would lead the next big growth opportunity for telcos, after voice led exponential rise. According to various estimates, data opportunity can grow 7x to Rs350bn in next 4-5 years driven by evolving content ecosystem and affordable smart phone prices.
Financial metrics remain lackluster but upgrade to MP on recent correction
Rcom FY13 financial metrics continued to disappoint with sub par return ratios and marginally lower EBIDTA margin. We, however, believe that the slew of recent measures along with improved sector dynamics would help reduce leverage over next 2-3 years. Stock has corrected from its recent highs which brings it within our Market Performer rating though still expensive especially considering the favourable risk reward in case of Bharti and Idea.