Reliance Communications Ltd (RCom) posted disappointing Q1FY09 results because of the flat wireless and global businesses.
Though tariff cutting in Q1CY08 has been rampant in the industry, the contrasting decline in MOU for the fifth consecutive quarter (by ~22%) to 424 min indicates that the new customers are from the lower end.
Also, subscribers have shown a weak response to the CDMA technology. We downgrade MOU estimates from 437 to 411 minutes for FY09 and expect a drop of 8.4% over FY08-10E. The drastic drop in realization per minute (ARR) of 9.8% q-o-q was higher than our estimate of Rs0.72; hence, we revise our estimates downwards by 2%.
The aggressive capex plan of about $10-11 billion for FY08-09 has used up the huge liquid funds available with the company. This will reduce the interest earnings and hit the bottom line.
We have downgraded our PAT margin estimate to 20.3% for FY10E. Based on RCom’s sequential weak performance in the wireless and global businesses, we have revised our target price, based on SOTP valuation, to Rs457.