New Delhi: Two firms belonging to Anil Ambani-led Reliance Group reported a slump in annual profit on Monday, reflecting the turbulence that it has had to contend with, which includes being drawn into the investigation of the allotment of the second-generation (2G) telecom spectrum.
Reliance Communications Ltd (R-Com), Reliance Group’s largest entity by revenue and India’s second largest mobile telephony firm by subscribers, saw net profit slide by as much as 71% for the year ended 31 March to Rs 1,346 crore. Profit slumped 65% in the March quarter on a sequential basis to Rs 168.6 crore.
Despite a rationalization in tariffs and steadily increasing data usage in the sector, R-Com’s earnings for the full year hit a four-year low despite a 4.4% growth in revenue to Rs 23,108 crore. Analysts said unless R-Com can do something to reduce debt, profit will remain under pressure.
Two Mumbai-based analysts at multinational brokerages said the drop in earnings was mainly on account of larger-than-expected depreciation, higher tax outgo and interest costs of at least Rs 2,200 crore.
One of the analysts said mobile number portability may also have played a significant role, but that it would be difficult to say what the exact impact was.
“Mounting debt and higher network costs are proving to be a bane for the company,” said V.K. Sharma, head of private broking at HDFC Securities Ltd. R-Com would have to get more clients who pay for services as cheaper minutes of usage would add revenue, but not margins, he said.
R-Com recorded sequential revenue growth of 58% in the March quarter to Rs 7,876 crore. Operating profit margins rose to 52.3% from 33.3% in the quarter ended 31 December.
The key challenge for R-Com was its inability to cut more debt, though it has fallen 1.2% year-on-year to Rs 32,048.5 crore.
The telco tweaked its reporting practice for the quarter by front-loading revenue for its indefeasible right of use (IRU) licences. This means the firm has accounted for revenue it expects to receive from bandwidth capacity sales over the next five years.
An IRU is a contractual agreement between a provider of communications cable services and its client for the exclusive, unrestricted and indefeasible right to use a pre-agreed bandwidth capacity.
The key index of revenue per minute is stable and is in line with the sector, but on absolute terms, the firm’s average revenue per user (Arpu) as well as minutes of usage are approximately half that of rivals Bharti Airtel Ltd and Vodafone, the analyst said.
Arpu fell 23% to Rs 107 over a 12-month period while minutes of usage plunged 24% to 241 from 318 in March.
The firm is in the middle of a realignment of its portfolio, making huge cuts in expenditure.
“We are in the midst of cleaning up the free minutes in the market and had said it would take around four quarters. We have another two quarters to go,” said Syed Safawi, R-Com chief executive.
Its debt service coverage ratio improved to 2.94% from 0.92% in 2010. This is the ratio of earnings before interest and tax to debt interest and principal repayable.
R-Com’s share fell more than 66% from Rs 145 at the beginning of January to Rs 87 in mid-February, before recovering to Rs 101 at the end of the quarter. On Monday, it rose 2.94% to Rs 87.50 on the Bombay Stock Exchange. Earnings were announced after the market closed.
Reliance Capital Ltd (R-Cap), the group’s financial services arm, said net profit for fiscal 2011 fell by one-third to Rs 291.18 crore. Revenue fell 11% to Rs 5,387 crore.
The firm had to make a mandatory, one-time provisioning of Rs.183.70 crore on account of a “change in provisioning norms relating to commercial motor third party pool losses in general insurance, as intimated by the regulator”. The company did not provide separate numbers for the March quarter.
“We’re being cautious about the regions in which we expand our motor insurance business and also we are reducing our exposure to commercial vehicles and focusing more on private cars,” said R-Cap chief executive Sam Ghosh.
Its general insurance business, which has been under pressure, saw losses widen to Rs 310 crore from Rs 90 crore in 2010.
Ghosh also said a number of low-priced health insurance products that R-Cap had been offering were closed in the last fiscal and replaced with “reasonably priced” products.
“With these corrective measures, we expect the general insurance business to break even in 2012, and maybe even post a small profit,” he said. R-Cap rose 2.59% to Rs 500.40 on Monday.
“Investors like R-Cap at present as it may get a banking licence in the future,” Sharma of HDFC Securities said. The company may need to sell one or more of its non-core businesses to bring value to other segments, he added.
Ghosh said R-Cap was looking to shift focus away from its smaller and non-core businesses and focus on the main ones. He hoped the current fiscal will be better, with the life insurance business in the black and segments such as asset management and commercial finance posting 20-70% growth in profit.
Reliance Infrastructure Ltd (R-Infra) and Reliance Power Ltd (R-Power), two other firms of the group, had announced earnings on Friday. R-Power posted its first-ever annual operating profit last fiscal since listing in 2008. Before 2011, the company had no power generating assets in its fold. R-Infra’s revenue and profit growth were healthy when compared on a year-on-year basis at 63.6% and 43.3%, respectively, although earnings remained almost unchanged on a sequential basis.
Sneha Shah in Mumbai contributed to this story