Reliance Communications stock rating: Sell

Updated: May 12 2014, 18:51pm hrs
Reliance CommunicationsReliance Communications management, during recent interactions, highlighted the company?s initiatives/strategies to compete better in the market. (In pic. Anil Ambani)
Anil Ambani-led Reliance Communications' FY14 performance doesnt 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-Jiofor 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 wasnt 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), and NPAT grew 44% to Rs 1.6 bn.

* FY revenue growth is 2%, Ebitda 8%, and reported NPAT 56%.

What does the result mean

* Investors interest in Reliance Communications, we note, has been lower than that in Bharti/Idea, and these results wont add much relief on this front--in the core wireless segment, trends are lagging peers, and in the global business, Ebitda declined 19% q-o-q.

* Reliance Communicationss flat revenue and 3% q-o-q Ebitda growth of the India business is behind the 3-8% q-o-q growth for Bharti and Idea.

* Its voice RPM fell 1.5% q-o-q and minutes were largely flatin contrast, Bharti reported 4% q-o-q minutes growth and flat voice RPM, and Idea reported 9% q-o-q minutes growth but a 3.5% drop in voice RPM.

* In Global, revenue growth was strong at 16% q-q, but Ebitda was down 19%. Margins of 15% are one of the weakest in the past several quarters.

* The Reliance Communications management, during recent interactions, highlighted the companys initiatives/strategies to compete better in the market, but there appears to be limited impact of those on the numbers so far. Steps taken to address concerns on gearing havent helped (still high at 5x)we would wait to see some improvement in operating trends on the back of initiatives/ strategies.