Reliance Communications (Q1 FY15)

India Infoline News Service | Mumbai | August 19, 2014 14:51 IST

Q1 revenues declined 0.9% qoq vs our estimate for a 1.8% qoq on the back of weakness in global operations whose revenues declined 14.9% qoq and 5.1% yoy.

CMP Rs121, Target Rs105, Downside 13.2%
 
-  Q1 revenues miss estimate but margin, net profit beat forecast
-  Overall revenue decline at -0.9% qoq on the back of qoq fall in global operations sales attributable to accounting of IRU income in Q4; India revenues up 1.5% qoq  
-  EBIDTA margin improved a robust 230bps qoq and ahead of our estimate due to decline in staff and SG&A costs
-  Reported PAT better than expected on EBIDTA beat and lower interest income qoq though partly offset by lower other income
-  Retain SELL on lack of near term catalysts even as recent fund raising to aid balance sheet deleveraging

Result table
(Rs m) Q1 FY15 Q4 FY14 % qoq Q1 FY14 % yoy
Net sales 53,540 54,050 (0.9) 53,150 0.7
Access & license fees (9,972) (10,458) (4.6) (9,620) 3.7
Network opex (17,443) (16,119) 8.2 (17,610) (0.9)
Staff (2,754) (3,073) (10.4) (2,420) 13.8
SG&A (6,432) (8,542) (24.7) (7,455) (13.7)
Operating profit 16,939 15,858 6.8 16,045 5.6
OPM (%) 31.6 29.3 230 bps 30.2 145 bps
Depreciation (9,310) (17,665) (47.3) (8,830) 5.4
Interest (7,674) (9,071) (15.4) (6,870) 11.7
Other income 1,690 2,658 (36.4) 970 74.2
PBT 1,645 (8,220) - 1,315 25.1
Tax (10) 10,258 - (10) -
Minority/Associates (319) 80 - (220) -
Adjusted PAT 1,316 2,118 (37.9) 1,085 21.3
Adj. PAT margin (%) 2.5 3.9 (146) bps 2.0 42 bps
Extra ordinary items - (560) - - -
Reported PAT 1,316 1,558 (15.5) 1,085 21.3
Source: Company, India Infoline Research
Note: Net sales excludes other income
 
Revenue miss but beat on margin and profit
Q1 revenues declined 0.9% qoq vs our estimate for a 1.8% qoq on the back of weakness in global operations whose revenues declined 14.9% qoq and 5.1% yoy. India business saw 1.5% qoq revenue growth and 20bps margin expansion. Voice revenues were up 1.5% qoq while non voice grew at a faster pace of 4.7% qoq. India operations capex stood at Rs3.8bn or 8.1% of gross revenues while total capex was Rs4.1bn. Within global operations, data revenues fell ~24% qoq which the company attributed to the way IRU income is accounted under Indian GAAP (at the end of Q4) which leads to lumpiness in quarterly revenues. Voice revenues increased 13.6% yoy and global business margin rose 60bps qoq.         

Minutes growth remains lackluster 
Voice traffic (total minutes) grew by 0.8% qoq, again much lower than that recorded by peers while overall pricing improved by 1.4% qoq; voice realization inched up by 0.9% qoq. Churn rate too declined significantly by 190bps qoq to 3.6%. Data trends remained encouraging with data volumes (total MBs) growing at ~10% qoq and non voice revenue share on an continuous uptick at 24.1% (up 60bps qoq). 3G customers at 13mn accounted for 45.5% of total data subscribers. 
 
Fund raising to aid BS deleveraging but lacks operational triggers
Recent fund raising through QIP and subsequent promoter fund infusion would cumulatively add to ~Rs61bn and result in ~22% equity dilution. Along with other announced steps like monetization of real estate and  little pressure in terms of renewal spectrum, we believe near term concerns on excess debt have been partially addressed. However, we do not foresee any concomitant improvement in operating metrics which have lagged peers in the past several quarters. Revise estimates to incorporate equity dilution but retain sell with unchanged 9-12mth target of Rs105.       
 
Financial summary
Y/e 31 March (Rs m) FY13 FY14 FY15E FY16E
Revenues 205,610 212,380 228,309 246,916
yoy growth (%) 4.5 3.3 7.5 8.1
Operating profit 59,416 66,430 72,374 79,013
OPM (%) 28.9 31.3 31.7 32.0
Reported PAT 6,707 10,470 4,578 9,777
yoy growth (%) (27.7) 56.1 (56.3) 113.6
EPS (Rs) 3.2 5.1 1.8 3.9
P/E (x) 37.1 23.5 65.6 30.7
P/BV (x) 0.7 0.8 0.8 0.8
EV/EBITDA (x) 10.6 9.4 8.0 6.6
Debt/Equity (x) 1.1 1.2 0.8 0.7
ROE (%) 0.2 3.3 1.3 2.5
ROCE (%) 3.6 4.3 4.1 4.5
Source: Company, India Infoline Research
 

***Note: This is a NSE Chart

 

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