Reliance Communications stock rating: Sell

May 12 2014, 13:21 IST
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Reliance Communications management, during recent interactions, highlighted the company’s initiatives/strategies to compete better in the market. (In pic. Anil Ambani) Reliance Communications management, during recent interactions, highlighted the company’s initiatives/strategies to compete better in the market. (In pic. Anil Ambani)
SummaryWaiting to see impact from Reliance Communications-Reliance Jio Infocomm deals: Nomura

Anil Ambani-led Reliance Communications' FY14 performance doesn’t give us many reasons to cheer – its wireless KPIs (key performance indicators) continue to lag peers’, gearing remains high at 5x (times) net debt/Ebitda, and we are still waiting to see any significant impact from the Reliance Communications Ltd-Reliance Jio Infocomm deals on financials. Moreover, its results continue to have one-offs, which make a comparative analysis difficult.

For the core wireless business, while the Q4 voice RPM (revenue per minute) decline of 1.5% quarter-on-quarter was in line with peers’ (-3.5% for Idea and flat for Bharti), traffic growth of 400m minutes was much weaker than peers\' 10-12 bn. Its subscriber base shrunk by 6m (loss of 12m in FY) vs. expansion of 7m for peers. Reliance Communications now has three infrastructure-sharing deals with Reliance-Jio–for inter-and intra-city fibre, and its 45k towers. It is not clear at this stage when we would start to see a meaningful contribution to revenue and cash flows; however, the potential remains strong, in our view. Maintain Neutral.

Q4FY14 highlights and FY15F guidance

* Though Q4 consolidated revenue growth was decent at 5% q-o-q to Rs 57 bn, Ebitda grew by just 0.5% to R18.5 bn. Margins fell 150bp (basis point) to 32.7%. Reported NPAT (net profit after tax) of R1.56 bn was up 44% q-o-q but down 48% y-o-y.

* In India, revenue was flat q-o-q at Rs 46 bn, and Ebitda rose 3% q-o-q to R16.6 bn, with 35.7% margins, up 105bp q-o-q.

* In Global, revenue was up 16% q-o-q to Rs 12.6 bn, but Ebitda was down 19% q-o-q and 60% y-o-y to Rs 1.9 bn. Margins declined 660bp q-o-q to 15.3%.

* Data subscriber rose 1.2m to 37m, of which 13m are on 3G.

* FY revenue grew 2%, Ebitda grew 8%, while reported NPAT grew 56%.

* FY15F (forecast) capex guidance is for Rs 20 bn vs. R15 bn in FY14.

Above or below expectations?

* Q4 revenue was 3% ahead of consensus and Ebitda was in line. Reported NPAT was 40% below consensus, driven by much higher-than-expected D&A (depreciation and amortisation) and interest.

* There wasn’t any significant revenue booking from the R-Jio deals for the quarter (we had assumed Rs 3 bn contribution)—India revenues rose only marginally.

* However, Global operations recorded a sharp 16% revenue growth, which led to the

beat vs. consensus on consolidated revenues.

* Q4 revenue grew 5% q-o-q,

Ebitda was flat (32.7% margins, down 150bp),

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