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RCom June quarter earnings leave analysts perplexed

RCom June quarter earnings leave analysts perplexed
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First Published: Sat, Aug 01 2009. 12 47 AM IST

Updated: Sat, Aug 01 2009. 12 47 AM IST
When Reliance Communications Ltd’s investor relations team threw open its earnings conference call for questions, it requested analysts to restrict their queries to broad strategic ones rather than nitty-gritty about the June quarter results.
But there were too many pressing, unanswered questions about the firm’s results statement and so it turned out that the majority of the questions were related to finances.
First up: “How is it that the company has reported a net interest income of Rs620.5 crore despite having a net debt of Rs22,163 crore?” Thanks to the rupee appreciation, the liability related to the firm’s overseas loans has come down in rupee terms.
These notional gains—the amount of which was not disclosed—have been offset against actual interest costs in the profit and loss account statement, resulting in a net interest income. For the year ended 31 March, when the rupee had depreciated sharply, notional losses related to the firm’s overseas loans had been adjusted in the balance sheet.
The firm also continues to have a CWIP on its balance sheet. Ahmed Raza Khan
The change in accounting policy and the high net interest income resulted in a net profit of Rs1,637 crore, much higher than the consensus profit estimate of Rs1,190 crore, based on a poll of 18 analysts by Bloomberg news agency.
With a net debt of at least Rs20,000 crore, few analysts had factored in interest income. Lack of clarity on accounting policy—especially on finance income—has been cited as one of the reasons for Citigroup Inc.’s decision to value the firm at a 15% discount compared with rival Bharti Airtel Ltd.
But for the surprise interest income, the firm wouldn’t have exceeded profit expectations. To be sure, at the operating profit level, the reported profit of Rs2,453 crore is almost exactly in line with the consensus estimate by analysts.
Even the reported depreciation seems to be relatively low. Although the capitalized fixed assets on the balance sheet have been rising in the past two quarters, depreciation has hardly risen commensurately. In the June quarter, depreciation fell marginally compared with the March quarter.
The firm also continues to have a high capital work-in-progress (CWIP) on its balance sheet of at least Rs10,000 crore. According to an analyst with a foreign brokerage, who declined to be named, almost all of the company’s projects have been commissioned and it’s surprising that CWIP continues to be as high.
Needless to say, once this amount is capitalized on the balance sheet, depreciation charges would rise and reported profit decline.
The firm also has rather high current liabilities of at least Rs22,400 crore—almost the same size as its debt.
There were some surprises on the business front, too, with minutes carried on the company’s wireless network rising by at least 11% quarter-on-quarter, on the back of a mere 3.7% growth in the March quarter. Bharti, despite adding more customers last quarter, reported a 7.7% increase in minutes carried on its mobile network.
Perhaps Reliance Communications has been more aggressive, offering customers attractive tariffs and free minutes in order to gain market share, having recently launched its nationwide operations on the global system for mobile communications technology platform.
But then, that doesn’t tie in with the fact that the average revenue per minute of traffic rose last quarter, after adjusting for the drop in revenues owing to the withdrawal of mobile termination charges by the government. Termination charges are what one cellphone firm charges another for completing a call between networks.
All told, there are few reasons to upgrade the stock, though the positive surprise in the growth in wireless business could lead to better sentiment for the stock. The fact that the firm has recently been able to find a tenant for its passive infrastructure services in Etisalat DB Telecom Pvt. Ltd is also a positive.
But considering that the stock has more than doubled from its lows in March, the upside may be limited unless there are some fresh triggers.
Write to us at marktomarket@livemint.com
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First Published: Sat, Aug 01 2009. 12 47 AM IST