The results of Reliance Communications Ltd, or RCom, for the June quarter were unimpressive, with revenues being at the same level as in the March quarter and operating profit declining by about 3% sequentially.
Bharti Airtel Ltd had reported an 8.5% increase in revenues and profit for the quarter.
This is the second consecutive quarter where Reliance Communications’ performance has lagged that of its main competitor.
Over the past few quarters, Reliance Communications has gone through an exercise of rebalancing its tariff plans, by reducing the number of free minutes that are offered under some plans.
Average minutes of use were as high as 510 a year ago, but much of this was on account of free minutes offered. A large chunk of these minutes used by customers weren’t contributing to revenues. Thanks to the free minutes going out of the system, the average minutes of use has come down to 424 minutes in the last quarter.
As a result of the rebalancing, Reliance’s average realized revenue per minute has been more or less steady through the past year, although tariffs charged to customers have been going down across the industry. The drop in revenue per minute last quarter was mainly owing to a cut in national long-distance tariffs.
But average revenue per user (Arpu) has declined by as much as 25% year-on-year, which is interesting to note. If the drop in average minutes of usage were largely on account of free minutes going out of the system, average revenue shouldn’t have fallen by such a margin. An analyst explains that one of the reasons for this is that the actual tariff charged to customers has come down sharply in the past year (although this is not reflected in revenue per minute data because that includes free minutes). Besides, he reasons that the customers added by the company in the last few quarters would be generating very low Arpu, dragging down overall Arpu.
Reliance and other players which use the code division multiple access, or CDMA, technology have traditionally had lower Arpus compared with the competitors who use the global system for mobile communications, or GSM. This is largely owing to restriction posed by CDMA handsets, which can be used only for the services of one operator.
GSM users have more flexibility and in order to compensate for this disadvantage, CDMA operators offer lower tariffs, normally in the form of free minutes along with a handset purchase.
Notwithstanding the rebalancing, Reliance continues to offer free minutes. Earlier this year, it launched a scheme whereby a caller can make unlimited local calls to other Reliance phones for Rs99 per month and unlimited long-distance and local calls to other Reliance phones for Rs440.
The company’s nationwide rollout of the GSM platform should address this problem. But that will have its own costs, and it remains to be seen if new players will be able to capture meaningful market share in an already crowded market.
New businesses hit ITC’s profit 4.4% in June quarter
Losses from the non-cigarette consumer goods businesses, which are in incubation stage, are responsible for pulling down ITC Ltd’s profit after tax (PAT) for the June quarter by 4.4%—although the company management points out that after adjusting for income-tax refunds ofRs29 crore received in the same quarter of last year, net profit is actually up 1% to Rs749 crore.
Moreover, the March quarter’s 14.2% growth in PAT had been buoyed by higher treasury income, the benefit of which was not available in the June quarter.
Losses before interest and taxes for the non-cigarette consumer goods business, which includes the personal care, foods and lifestyle retailing portfolio, amounted to Rs122 crore in the June quarter, slightly higher than in the March quarter. Gross revenue growth in these businesses also fell compared with the March quarter, which is a worrying sign.
The negative margins in this business have consequently worsened during the quarter. The company says the branded packaged foods business had to cope with the economic slowdown as well as higher input costs, while the personal care business had high promotional costs.
On the other hand, ITC’s cigarette business has done rather well, considering that the huge increase in excise duty on non-filter cigarettes led to ITC discontinuing production.
Considering that the non-filter segment accounted for 12% of total value in ITC’s cigarette business in fiscal 2008, the fact that volumes are down a low 3% year-on-year (y-o-y) is encouraging.
Earnings before interest and taxes (Ebit) in the cigarette business have gone up by 10.5% compared with the March quarter, while margins, too, are higher.
ITC’s other businesses—hotels, paper and packaging, and agribusiness—did well during the June quarter, with y-o-y Ebit rising substantially as well as improvement in margins.
While the deterioration in the overall economic environment could mean that it will take a longer time for ITC’s new businesses to start contributing to the net profit, the June quarter has shown that the cigarette business continues to do well.
That should stand the company in good stead as it continues to invest in its new businesses.
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