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Business News/ Opinion / Online-views/  Free trial plan hurts RCom stock
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Free trial plan hurts RCom stock

Free trial plan hurts RCom stock

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It’s not that expectations were running low. The markets are concerned about RCom’s aggressive pricing strategy for its recent nationwide GSM rollout as well as its high net-debt position. When the company launched GSM operations in late December, investors were excited and the stock gained by 24% in just five trading sessions. GSM is short for global system for mobile communications, a technology platform for mobile telephony.

Since then, the shares have corrected by 39%. The company is offering its new GSM clients free minutes of usage daily for about three months to enable them to test the quality of service. According to the management, these customers have also been recharging their phones to make calls beyond the free minutes and use value-added and national long-distance services.

But analysts are concerned the free usage policy will be value-destructive, not only for the company’s GSM segment, but also for its CDMA segment as customers are likely to compare schemes and demand similar tariffs. CDMA, or code division multiple access, is a rival mobile technology standard.

Also See Teething Troubles (Graphic)

“We believe the rush to launch GSM with half-baked networks and value-destructive entry-level plans will lead to significant pressure on margins over the next three quarters," HSBC Research says in a report released earlier this month. The foreign brokerage cut its earnings estimate for the next fiscal year based on this.

Meanwhile, RCom’s results for the December quarter raise some concerns as well. Revenues of the wireless division grew by just 1.8%, while profit margin fell by over 100 basis points, leading to a drop in profit on a quarter-on-quarter basis. Average revenue per user fell by a high 7% quarter-on-quarter, as both minutes of usage and the average rate realized per minute fell sequentially. One basis point is one-hundredth of a percentage point.

On a year-on-year basis, the company’s earnings before interest, tax, depreciation and amortization fell by about 2%, a vast difference from the 35% growth Bharti Airtel Ltd reported earlier this week. Besides, the company’s net debt has swelled to Rs18,600 crore and is cause for concern for markets since credit remains tight.

The company tried to calm investors’ nerves by saying the peak of its capital expenditure is behind them and capex in the next fiscal year would be Rs15,000 crore, substantially lower than the Rs25,000 crore it will end up spending in the current fiscal year to March.

Much depends on how the GSM strategy plays out and the company’s ability to capture and retain clients in this space. Current valuations of about six times earnings suggest market expectations are rather low.

Write to us at marktomarket@livemint.com

Graphics by Ahmed Raza Khan / Mint

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Published: 23 Jan 2009, 09:39 PM IST
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