Reliance Communications Ltd’s (R-Com) results for the quarter ended 31 December are disappointing. The company had done relatively well in the September quarter, growing wireless revenues by 2%, in line with the growth seen by Idea Cellular Ltd and much better compared with the 0.6% drop in Bharti Airtel Ltd’s revenues.
But in the December quarter, its wireless revenues grew by only 0.7% sequentially to Rs 4,447 crore. This is much lower than even Bharti’s growth of 4%. Idea grew revenues at a much higher rate of 8.9%, while Vodafone India Ltd reported a growth of 6.1% in revenues.
In a 17 January note, analysts at Nomura Research had said: “Operationally, some turnaround/stability in (R-Com’s) wireless segment has been evident in the last couple of quarters—it has held wireless pricing steady, there is recovery in revenue growth, and revenue share appears to be stable versus declining previously.” While pricing has remained steady, the company has ended up losing revenue market share in the December quarter because of a mere 1% growth in volumes.
The relatively low revenue growth will lead to cuts in both revenues as well as earnings before interest, tax, depreciation and amortization (Ebitda) estimates. Analysts at
Emkay Global Financial Services Ltd said in a post-results note: “Led by lower than expected results for Q3FY12, we have revised our estimates downwards. The tariff hikes have not shown any signs of improvement in Arpu (average revenue per user) for R-Com, unlike its peers. After showing some signs of revival in wireless revenue in Q2FY12, Q3FY12 again witnessed submissive performance. We have cut our Ebitda estimate for FY12E/13E by 4.4%/4.0%.”
But worse still, interest costs jumped sharply from Rs 227 crore in the September quarter to Rs 378 crore in the December quarter. The company management indicated on a call with analysts that interest costs should now be in this range on a quarterly basis.
After factoring in higher interest costs, Emkay’s earnings per share estimates for FY12 and FY13 have been cut by as much as 29.9% and 29.4%, respectively.
This should lead to a sharp correction in the company’s shares when the markets resume trading on Monday. Investors can take some solace from the fact that R-Com is likely to be cash flow positive for the year ending March for the first time ever. In the nine months till December, it generated cash worth Rs 2,952 crore, higher than its capital expenditure of Rs 1,718 crore.
Still, the free cash flow of Rs 1,234 crore was barely enough to service the interest outgo of Rs 1,202 crore during the period. Needless to say, the company’s net debt of Rs 35,000 crore remains a worry. And it’s as important as ever that the company is able to sell some of its assets, such as the tower business, and use the proceeds to reduce debt.
R-Com shares have risen by 33% this year, much higher than the 12% rise in Idea’s shares and the 2% increase in Bharti’s shares. This is because it managed to raise fresh loans to repay its large foreign currency convertible bond (FCCB) obligation. While the loans from Chinese banks and financial institutions came as a welcome relief, the relatively weak operational performance in the third quarter as well as the jump in financial costs should be seen as a wake-up call for investors.
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Graphic by Yogesh Kumar/Mint