We are revising our estimates for Reliance Communications (RCOM) following lower-than-expected 3Q results and the seemingly successful pan India GSM launch in January 2009 (impressive subscriber ramp-up although revenue and profit uplift needs to be monitored).
Our forecasts build in 8 million new GSM users (net of churn) in the 14 new circles in the current quarter. RCOM’s promotional offers should ensure solid subs traction, but we would like to see evidence of a revenue / EBITDA uplift.
The company’s strong sub adds in new GSM circles led by promos will likely pull down gross blended ARPU to Rs228 (down 9.2% q-o-q, 28.1% y-o-y).
This is on the back of a sharp 7.4% q-o-q decline registered in the December 2008 quarter. If we were to exclude new GSM revenue and subs contribution from 14 circles, ARPU would have declined 4% q-o-q and 24% y-o-y in the March 2009 quarter.
Post weak 3Q results and GSM launch, we cut our wireless ARPU estimate by 10% in FY3/10E and ~14% from FY3/11E onwards till FY3/20E.
We now forecast 2-year EBITDA CAGR of 17.5% for FY3/09–11E. The cuts are largely led by sharp cuts in wireless ARPU estimates and lower EBITDA margin forecasts.
Our capex forecasts for FY3/09E (Rs246 billion) and FY3/10E capex (Rs152 billion) are in line with management guidance. We have revised up our wireless capex forecast to account for higher subscriber additions, but cut capex forecasts for Broadband & Fixed Line and Globalcom.
We believe RCOM deserves a 20% discount to Bharti on EV/EBITDA due to a weaker earnings outlook, lower ROE, negative FCF and higher net debt/equity.
We reduce our EPS estimates by 7%, 20% and 23% in FY3/09E, FY3/10E and FY3/11E, respectively, to Rs26.3, Rs25.9 and Rs29.6.
We see limited downside and believe that continued subs and revenue traction from new GSM would incrementally drive stock performance.