Mumbai: Asharp drop in taxes and a near doubling of income from financial activities helped Reliance Communications Ltd, or RCom, India’s second largest telecommunication services provider, on Friday to report a 2.7% increase in net profit for the October-December quarter. It gained 5.31 million new subscribers and on 30 December launched its Global System for Mobile (GSM) services—based on a popular technology standard for cellphones—with an aggressive pricing strategy, setting up a potential showdown with rivals in future. The firm offers wireless services using a competing technology standard, Code Division Multiple Access, or CDMA.
The Anil Ambani-owned RCom generated net profits of Rs1,410 crore for the third quarter of fiscal 2009, against Rs1,373 crore for the corresponding period last year. A Mint poll of six brokerages earlier this month had predicted an almost 3% increase in net profit. “The results are below my expectations. Arpus (average revenue per user) have fallen significantly and this fiscal, it has been particularly severe. That is a drag on the numbers,” said Harit Shah, sector analyst with Angel Broking Ltd. who didn’t give out a rating or target price because he wants to review the results more closely. “Let’s see if Arpus become better with GSM roll out. I will not be looking at just the subscriber base but what kind of realizations these subscribers are bringing, how profitable are they.”
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A company official attributed the rise in other income—which grew from Rs98 crore in the corresponding quarter last year to Rs178.42 crore—to savings of Rs63.75 crore generated from a buyback of some of its foreign currency convertible bonds and returns on investment. Other income is an accounting term to describe income not from the core business.
RCom has cut prices to break into new markets. The firm entered the GSM technology market in 14 of a total of 22 circles, with new connections going for as little as Rs25 and free talk time of Rs900 across networks. With the move, RCom stole a march over its rivals, becoming the first provider in the country to offer both GSM and CDMA services.
The rollout has analysts keenly anticipating its performance for the quarter ahead when revenues from the dual service will become known, especially considering RCom’s price-sensitive ways of grabbing market share. Most—including Shah—agree that the Rs25 new connection and Rs900 talk time offer is merely an entry pitch to attract customers and to cross a regulatory threshold of crossing 0.5 million subscribers in either Delhi or Mumbai. That number makes the operator eligible for an additional 1.8 megahertz (MHz) of spectrum, which will push RCom’s total allocated spectrum to 6.2 MHz.
However, RCom’s rivals, particularly Sunil Mittal-controlled Bharti Airtel Ltd, and the India unit of global giant Vodafone, grew faster for the third quarter. Bharti Airtel, India’s largest wireless services provider, announced its results on Thursday, expanding services across rural areas to add 8.2 million users. Vodafone’s subscriber base of 60.4 million at the end of December was shadowing RCom’s 61.4 million.
RCom had revenues of Rs5,850 crore in the third quarter of this fiscal, a rise of 20% from Rs4,874 crore sales in the same quarter a year ago.
The tax payout in this quarter was a mere Rs15.26 crore, less than 10% of the Rs138 crore paid a year ago. “That is on account of a tax shield available to the company,” was the cryptic explanation the RCom official gave, declining to explain the precise nature or purpose of the tax benefit.
Compared with the second quarter of this fiscal year, RCom’s profits declined 8%, as consumers spoke less and chose cheaper plans. And while it added more than 5 million consumers, RCom saw its Arpus dip to Rs251 from Rs271 in the July-September quarter as usage declined to 410 minutes from 423. Arpus typically drop as subscriber base increases.
A 12 January Macquarie Research report by analysts Shubham Mazumdar, Nitin Mohta and Tim Smart, has estimated the RCom GSM rollout will imply a “6%, 7% and 12% decline in Bharti’s total revenues, Ebitda (earnings before interest, tax, depreciation and amortization), earnings and EPS” for the current fiscal and a “17%, 19% and 54% decline in revenues, Ebitda and EPS” for Idea Cellular Ltd, based on their “worst-case analysis”.
“Bharti’s strong subscriber market share position in South Indian states results in lower Arpu dilution impact due to the RCom GSM launch”, the report explains but adds that it “will accentuate the deteriorating financial performance of Idea” as since majority of Idea’s profitable original circles—five of the eight—will see the launch of RCom’s promotional talk time offers.
RCom shares closed at Rs160.15, 4.5% lower on the Bombay Stock Exchange on Friday while the bellwether index Sensex closed 1.58% lower. The results were announced after markets closed for the three-day weekend.
Graphics by Ahmed Raza Khan / Mint
Bloomberg contributed to this story.